When making the move from your primary residence, most homeowners make the obvious decision to sell their current home. But it begs the questions: is selling always the best option? Would renting out your property be a wise investment? There are many factors to consider when analyzing this hefty decision, such as your current financial and housing situation, the real estate and rental markets where you live, and several other.
As plan your next move, consider how renting it instead of selling it might benefit you. To determine what choice is the best one for you and your current situation, ask yourself these important questions:
Will renting be profitable?
This is arguably the biggest, most important question to answer before you move on to other factors involved in your decision, and the variables that will influence your profit (or loss) can be complicated, so make sure you spend plenty of time figuring out what a realistic profit would look like and whether you can make it happen.
If you’re still paying a mortgage on your primary residence (and you probably are), then you’ll need to make sure you can cover your mortgage with the rent price you’d like to charge. You’ll also have to pay for insurance on the home — and this is likely going to be more expensive if you rent it out than straight homeowners’ insurance would be, so price insurance costs for a rental with your insurance agent. Property taxes and HOA fees will still need to be paid, too, so include those in the monthly expenses.
And then there are a number of other costs involved with renting a house that you’ll want to add to your balance sheet before you can know for sure whether this will be a profitable step to take or whether you’d be losing money every month. There will likely be repairs you have to make here and there to the property — that’s only to be expected. If you don’t want to deal with the ins and outs of being a landlord yourself (screening tenants, scheduling repairs, and so on), then you’ll want to hire a property manager, and that can cost up to 10% of the monthly rental income. It’s unlikely that your home will be occupied constantly, so consider the cost of vacancies, and you’ll also need to pay to market the house when it is vacant so you can attract new tenants. Finally, if you want to do any rental reference checks or credit checks on tenants, you’ll need to accommodate those costs into your calculations, too.
Once you’ve added up all the expenses and done some research on fair-market rental prices for your area, you can determine whether or not you’d be making a profit every month or year, or whether renting would cost you more money than it would make you.
Do you need a lump sum from a sale sooner rather than later?
When you have debts that need to be paid or you can’t afford the mortgage on your home anymore, it probably makes more sense to sell the property instead of trying to rent it out. Take a look at your current financial situation to determine how critical those funds would be for your future; also consider the fact that ideally, renting your home will produce a profit every month that you can collect as long as you have tenants willing to pay the rent price.
If you’re really not sure whether it would be more financially viable to rent or sell your house, talk to a financial advisor about it. Maybe you can set up a payment plan for some of those debts and use the rental profit to pay them off over time, or maybe you could use the cash from a sale to make some smart investments and retire sooner. Nobody knows your financial situation as you do, so do some assessing of where you are and where you want to be, and then figure out whether renting or selling would get you closer to that goal.
Are you potentially planning to move back in the future?
Another important factor to consider is whether you’d want to move back into your house eventually. If you’re moving out of the area, but there’s a chance you might want to return at some point, then keeping the house and renting it out will probably ultimately be cheaper for you long-term than selling your house and then trying to find something comparable a few months or years down the road.
Maybe you’re not sure if you want to move back or not — that’s fine! If it’s even a remote possibility, though, sometimes it’s nice to have a backup plan for housing, especially if you’re heading off to a new adventure and you aren’t sure how things are going to go. Obviously, you don’t want to plan to fail, but knowing that you have a safety net if you need one and can get back into your old digs without buying them back might be worth quite a bit when push comes to shove.
And if you’re upgrading or downsizing, then this lens looks slightly different. Maybe you’re not sure you’ll enjoy moving into a condo or a smaller home and there’s a strong possibility you might want your old space back. Or maybe you’re not certain that the upkeep and cleaning that a larger space requires is going to work out well for you. It’s even possible that you’re not certain your current household configuration is going to last all that long — if you have kids who are about to fly the nest in a few years, or (hopefully not!) you’re unclear that your relationship is going to go the distance, then keeping your home and renting it out might be a good decision long-term.
Can you afford to upgrade your home before it hits the market?
Homes that sell the most quickly and for the highest prices in any market are always the nicest, most updated homes available for buyers. If your home doesn’t measure up to the neighbors in terms of the appliances and updates, and if you really don’t have the money or the interest in fixing or renovating your house so that it’s going to capture top dollar for you on the real estate market, then renting might be a good choice for you.
Tenants are typically a lot less selective than buyers when it comes to the brand of appliance used in the kitchen, the wear and tear on the carpeting in the bedroom, or the landscaping in the front or back yards. So if you know your house isn’t exactly the definition of move-in-ready — especially compared to other homes on the market in your area — consider renting it for the time being and wait until you can make those upgrades before you sell it.
Do you want to live a landlord life?
If you don’t want to hire a property manager, it’s important to ask yourself whether you’d feel comfortable or would enjoy being a landlord. You might need to have some difficult conversations with any tenants who haven’t paid rent. You will almost certainly have to arrange for repairs to be made to the house, usually at the most inconvenient time possible — sewer mains and electrical systems tend to fail when it’s most expensive to fix them, like after 5 p.m., on weekends, or on holidays. Finding and screening tenants can be time-consuming. And tenants usually aren’t going to treat your property the same way you would if you lived there, so if the thought of your precious floors or countertops getting dinged or scratched (or worse) makes you shudder, realize it’s one of the possible downsides of being a landlord.
After thinking about it, if you decide you really don’t want to live a landlord life, then you’ll know that you either should sell your house or hire a property manager to handle it.
What does your local real estate market look like?
There’s no single indication that you should sell or rent depending on the real estate market’s current activity, but it can definitely help inform your decision. Maybe the market’s been on an upswing for several years and it’s looking likely that prices are going to drop in the future — in that case, it might make sense to sell now, while your house is at its peak value for the time being. But if you owe more on your mortgage than the house is worth, it might be wiser to play a long game and rent it out until the market catches up to your debt or vice versa. If prices look like they’re going to continue to rise in the future, then renting, for now, might be your best bet; you can plan on selling and making a bigger profit a few years down the road.
Talk to a real estate agent about where they see the market going, and if you can, try to make sure you’re getting opinions from someone who’s worked in real estate through several market cycles. Nobody can predict the future, but an experienced agent knows the warning signs of a seller’s market or a buyer’s market, and they can give you an educated opinion about what to expect for at least the next year, if not further.
How about the rental market?
Some rental markets are healthier than others, and if yours isn’t looking all that robust, then now might be a good time to sell instead of count on the rental market improving. On the other hand, if the rental market looks strong and there are indications that it’s only going to get stronger — low unemployment and plenty of job opportunities in your area, for example — then renting might be the best way to handle your departure from your house.
This is another area where an experienced real estate agent or a property manager can give you some insight into how you should approach your decision. Get some estimates on rent for your house and ask their opinions about whether it would be more likely to increase or decrease in the future so that you can weigh that along with other factors as you figure out what to do.
Can you afford capital gains tax if you sell later?
If you sell a home that you own but haven’t been living in for the past two years, then you’ll have to pay capital gains tax on any profit you make from the sale. This could wind up being a significant amount of money, and it can be a nasty surprise for homeowners who were hoping to pocket the entire profit. Think about whether or not your finances can handle the capital gains hit if you sell your house as a landlord or investor instead of as a resident.
If you rent your home, do you plan to buy or rent the next one?
Spoiler alert: When you leave this house, you’re going to have to find somewhere else to live. If you’re planning on renting a house wherever you go, then it might make sense to in turn rent your house out to someone — but if you want to buy a house wherever you land, then it’s entirely possible you might need the proceeds from the sale of your current house to pay the down payment on your new abode. If you don’t have a down payment saved up separately from your home’s equity, you could end up paying mortgage insurance on one house while renting out another, and ultimately it might not make very much financial sense to rent your current house and buy a new one. Think about your plans after you leave your current house and what it would mean to sell or rent your current home before you move on.
Can you take an unexpected hit on your savings?
Renting a house that you own includes lots of surprises, most of them not so pleasant. Can you afford to replace a water main if it breaks, handle a month or two of mortgage payments if the place is vacant, and replace the carpet and paint the walls in between tenants? Remember, most tenants aren’t going to be as careful with a house they’re renting as they would with a home that they own, so you should plan on doing at least some minor cosmetic repairs and upgrades after tenants leave to make sure the place is in decent condition for incoming renters.
Nobody can tell you whether selling or renting your current home makes more sense — it’s really going to depend on you and your current situation. Think through these questions before you arrive at a decision, and you’ll be able to make an educated choice about what to do that works well for you long-term.