You've finished paying off your current home or have worked had to make it beautiful. Now you want to move to a new home. The question: Should you rent or sell your house?
It’s not an easy choice and is one of the biggest financial decisions you might make. Both options come with their own set of pros and cons.
To help you make the best decision for your situation, we’ve put together this comprehensive guide that covers everything from financial considerations to the ins and outs of being a landlord.
Why This Dilemma Happens
There are numerous reasons why you might be stuck in the dilemma of renting out or selling your house:
- You finished paying off your house
- Your house underwent big renovations
- You want to move but take advantage of your asset
- You want to move but might come back in a few years
- You want passive income to reach financial goals
- You are adapting to lifestyle changes
- You are responding to current market trends
It's a difficult choice to make, especially if you've never been a landlord or otherwise managed a property before. Before you make a final decision, you should fully understand its scope.
Evaluating Your Financial Situation
Before making the decision to sell or rent your home, make sure to evaluate your financial situation and goals. Consider the following:
- Your property's mortgage payments
- Property taxes
- Capital gains taxes
- Potential implications of owning two homes
- Any other financial obligations or life goals that may impact your decision
We'll discuss these more below.
Mortgage Payments vs. Rental Income
If you decide to keep your house and rent it out, you need to make sure that your rental income is profitable in the face of your mortgage payments.
For example, suppose your house is worth $250,000 and has a mortgage payment of $1,250 per month. Property taxes and insurance add up to $400 per month.
If you rent the house out for $2,500 per month ($30,000 per year), you're left with a cash flow of $850 per month.
While this may sound immediately appealing, you should also consider additional costs like maintenance, management fees, the cost of vacancies, and other operating expenses.
In the end, you want to make sure that you have a positive cash flow that covers mortgage payments and other property-related expenses while still giving you a profit that'll make it all worthwhile.
Property taxes are fees charged based on the value of your real estate. These taxes are determined by local governments and serve as the main source of revenue for state and local services like schools, roads, and police.
When deciding whether to rent or sell your home, take into account the cost of property taxes, as they can add up over time and impact your overall financial situation. Remember that your property taxes will change if a house is no longer your primary residence as well.
Capital Gains Taxes
Capital gains taxes are another critical financial factor to consider when deciding whether to rent or sell your home. Here are some key points to keep in mind:
- If you’ve been living in your home for two of the past five years, you won’t have to pay any capital gains taxes
- For married couples filing jointly, up to $500,000 in capital gains can be tax-free
- Singles can have up to $250,000 in tax-free capital gains
Be sure to check with your state's laws and procedures for capital gains tax in case your circumstances differ.
In general, knowing the tax implications of selling your home in terms of property tax and capital gains tax can help you make a more informed decision and plan for any potential tax liabilities.
Implications of Owning Two Homes
Owning two homes, including your primary residence, can be a financial burden due to the extra costs associated with it. This is especially troublesome if one house is not fully paid yet and you end up with two mortgages.
However, there are some financial benefits, such as tax deductions on mortgage interest, property taxes, and rental expenses.
Be sure to thoroughly analyze your expenses and weigh the pros and cons of owning two homes while keeping your financial goals and personal circumstances in mind.
Impact of Other Financial Obligations, Loans, or Life Goals
It’s crucial to evaluate your overall financial situation and consider whether you have the necessary cash reserves and discretionary income to handle the costs of renting out a property, such as maintenance, tenant management, and legal obligations.
If you have other major financial obligations like student loans that may impact your ability to manage a rental property or afford two homes, or if you need money for the down payment of your next home, then selling might be the safest option.
If you plan on growing your family or a business and see that you can afford a rental home while making a profit, or if you have some kind of personal attachment to your current house that makes you want to hold onto it, then renting might be best.
There's no wrong option, but it all depends on your specific circumstances and life goals.
Understanding the Costs of Selling or Renting
In addition to assessing your financial situation, you should familiarize yourself with the costs associated with renting or selling a home.
By understanding these costs, you can make a more informed decision about whether renting or selling your home is the best choice for you.
Costs of Renting Out a Home
Renting out a home comes with various costs, such as:
- Property management fees (5-10% of the gross rent)
- Repairs and maintenance
- Property taxes
- Homeowners' association fees
- Vacancy and tenant turnover costs
- Marketing costs
You also might have a one-time commission fee for a realtor, but this is usually much less when renting than when selling.
If you don't want to hire a property manager, you can reduce some management costs by adopting property management software instead.
Costs of Selling a Home
When selling a house, you have other costs to consider:
- Real estate agent fees
- Closing costs
Generally speaking, these costs amount to 9-10% of the sale price for home sellers.
If you have any remaining special assessments in your community, you might need to finish paying it off in full when you sell your home as well. However, this varies depending on your contract with the potential buyer as well as the rules of your homeowners' association.
Assessing Local Housing Market Conditions
Analyzing local housing market conditions is another crucial step in making an informed decision about whether to rent or sell your home.
By researching market factors, you can gain a better understanding of the overall market and make a well-informed decision.
Rental Demand in Your Area
Evaluating the rental demand in your area is crucial when deciding whether to rent or sell your property. The following factors can influence rental demand:
- Job growth
- New developments
- Urban areas
- Luxury areas
- Areas around colleges
- Up-and-coming neighborhoods
By researching the local housing market, you can gain insight into what other properties are charging in rent and what vacancy rates look like as well.
When in doubt, consider consulting with a local agent or property management company for expert advice to better understand rental demand and other market factors in your area.
Seller's Market vs. Buyer's Market
Understanding the difference between a seller’s market and a buyer’s market is essential when deciding whether to sell or rent your home.
In a seller’s market, there’s more demand for properties than there are properties available, causing prices to rise and buyers to compete for homes. The competition can lead to the home selling for well over asking price. This is good for sellers looking to make a big profit. Because of the high demand in this market, potential buyers sometimes waive contingencies and inspections, which can make for a smoother and quicker transaction than average as well.
In a buyer’s market, there’s an abundance of housing on the market and not many buyers, leading to lower prices and less competition. Sellers make less of a profit in a buyer's market, and buyers do not usually waive contingencies or inspections.
Both of these markets have different effects on interest rates as well, so be sure to research their current trends when making your final decision.
Home Value Appreciation Potential
Deciding whether to rent or sell your property requires considering the potential for home value appreciation. Home value appreciation is the increase in a property’s value over time, which can result in a profit when it’s sold or more income from monthly rent.
Factors such as local housing market conditions, the type of rental, and the property’s appeal to renters can all influence its appreciation potential.
Recession Risks and Implications
In addition to market conditions, you should consider the risks and implications of a recession on your decision to sell or rent your property. A recession can lead to:
- An economic slowdown
- Higher unemployment rates
- Reduced consumer spending
- High interest rates
- High labor and energy costs
- Decreased asset prices
- High debt levels
All of these factors and others can influence your income and stability in some capacity whether you're renting or selling your home. Considering them can help inform your decision based on the current economic climate and your comfort for risk.
Determining the Type of Rental and Pros and Cons for Each
Another crucial step in making your decision is determining the type of rental you’d like to offer: long-term or short-term. Each option comes with its own set of pros and cons, and understanding these can help you make the best choice for your property and financial situation.
Long-term rentals offer more stability, less turnover, and more predictable income, making them a popular choice for many landlords.
However, long-term rentals may not allow you to adjust the rent as frequently as short-term rentals, and you may need to invest more in property maintenance and upkeep.
Despite these drawbacks, long-term rentals can be a reliable source of income and a more manageable option for many property owners.
Short-term rentals, on the other hand, can provide increased rental income, more flexibility, and the ability to attract a wider variety of tenants. If you have any plans to come back to your current home in a few years or even just a few months, a short-term rental might offer more flexibility to do so.
However, they require more frequent maintenance, have a higher turnover rate, and necessitate more tenant screening. Additionally, short-term rentals may cause issues such as noise and traffic in the neighborhood.
Short-term rentals are also sometimes not allowed in certain cities or communities. Be sure to check with your local laws and regulations when looking into rental homes.
Weighing Landlord Responsibilities
As a landlord, there are several responsibilities you must consider, including maintenance, tenant management, and legal obligations. Understanding these responsibilities and the time and effort required to fulfill them is essential in determining whether renting your property is the right choice for you and preparing you to do so:
- Maintenance and repairs: As a landlord, it’s your responsibility to ensure the rental property is livable and to address necessary repairs. If the repairs are caused by the tenant’s misuse or carelessness, then it’s the tenant’s responsibility. However, the exact repair responsibilities and deadlines can vary depending on your state’s laws.
- Tenant management: Tenant management is another crucial responsibility for landlords. This includes screening tenants, handling any issues that arise, and ensuring the living environment is safe and inhabitable.
- Legal obligations: As a landlord, you must adhere to legal obligations that protect both you and your tenants. This includes staying up to date with all applicable laws and regulations related to tenant rights, health and safety, and fair housing. Additionally, you must provide tenants with a written lease agreement that clearly outlines the terms of the rental agreement.
Evaluating Property Appeal for Renters
One final step in making your decision is evaluating the appeal of your property for potential renters.
By assessing your property’s appeal, you can better determine whether renting or selling is the right choice for you and your financial goals.
Location and Accessibility
Renters typically prefer properties located in desirable areas that are easily accessible and safe. Here are some factors that positively influence the desirability of a property in terms of location and accessibility:
- Single-floor layouts
- Accessible entrances
- First floor
- Distance to highways, schools, hospitals, and shopping centers
Some of factors are especially important for renters with disabilities as well.
Property Features and Amenities
The features and amenities of your property also play a significant role in its appeal to renters. Some of the most sought-after amenities include the following:
- Plenty of parking
- Outdoor spaces
- Community gyms
- In-unit washer and dryer
- Air conditioning
- Storage space
- Hard flooring
When deciding whether to sell or rent your home, determine if your house offers appealing amenities and add some to enhance its competitiveness in the rental market.
Rental Property Competition
You should always assess the competition in the rental market in your area. This involves researching comparable properties, their rental prices, and the overall demand for rentals in your location.
Understanding the competition can help you make a more informed decision about whether to rent or sell your property, as well as assist you in setting a competitive rental price if you decide to rent.
Consulting with Real Estate Professionals
To further assist in making an informed decision, consider consulting with real estate professionals like agents and property management companies. These experts can provide valuable insights into your local housing market, help you weigh the pros and cons of renting or selling, and offer guidance on managing a rental property.
Real Estate Agent Insights
Real estate agents have extensive local market knowledge, professional contacts, and negotiation skills that can be incredibly helpful to property owners. They can do the following:
- Offer advice on real estate investments, development, buying, and selling
- Help with advertising
- Facilitate bargaining
- Handle legal paperwork
- Find renters
Consulting with a real estate agent can save you time and energy, ensuring you make the best decision for your property and financial situation.
Property Management Company Expertise
Property management companies specialize in managing rental properties and can offer expertise in the following areas:
- Reducing vacancy rates
- Screening tenants
- Collecting rent
- Lowering repair and maintenance costs
- Providing access to qualified maintenance staff
- Ensuring compliance with state and local laws
Hiring a property management company can help streamline the process of renting out your property and alleviate some of the stress and time-consuming tasks associated with being a landlord. Their expertise can be invaluable in making the right decision for your property.
Using Property Management Software
Should you decide to rent, utilizing property management software like DoorLoop can help you streamline the process. These tools automate processes like tenant screening, rent collection, and maintenance requests, making it easier to manage your rental property efficiently. They also mitigate management costs and can help keep you organized with accounting.
By incorporating property management software into your strategy, you can save time and resources, allowing you to focus on other aspects of your financial goals and personal life.
In conclusion, deciding whether to rent or sell your property is a complex decision that involves evaluating your financial situation, understanding the costs associated with renting or selling, assessing local housing market conditions, and weighing the responsibilities of being a landlord.
By taking the time to research and consult with real estate professionals, you can make an informed decision that best aligns with your financial goals and personal circumstances.
Remember, the choice you make today can have a lasting impact on your financial future, so choose wisely and always keep your best interests at heart.