Most of the time, when people buy their first home, they’re not thinking too much about what to do when they move. But as the years go by, different housing options might come to mind.
You’ve probably heard – and seen on TV – that investing in real estate can make you money. Maybe you’re considering grabbing a piece of the action by renting out your current house. Or would it be a savvier money move to sell your house and take the cash?
Will you make more money selling or renting your house?
We’re here to help you figure it all out. We’ll discuss some of the main considerations you should take into account as you think about renting or selling, and we’ll outline some of the pros and cons of each choice.
Rent vs. Sell: What Do I Need To Know?
Renting out your current home or selling it is a big decision. Either way, you’ll have some things to do and considerations to go over.
Whether you decide to rent a home or sell it, either choice comes with big responsibilities. A landlord’s responsibilities never end. A seller can walk away from the home – and its responsibilities – after the sale. Depending on your current lifestyle, and what you envision for your future, a landlord’s responsibilities may or may not be doable.
Here are some important considerations to help you make an informed choice about renting or selling:
Know the responsibilities of being a landlord
Being a landlord will add a lot of to-dos to your list. Are you ready to take on more responsibilities than you already have? The responsibilities include:
- Providing a safe home: You’re required to provide a clean, safe, livable home. This includes providing basics like clean water, hot water, proper ventilation, smoke and carbon monoxide detectors, heat, working plumbing and electrical systems and locks. The home also needs to be compliant with local building codes and be free of critters or bugs.
- Navigating the financials and the rules: You’ll still be responsible for mortgage payments and homeowners insurance. Prepare to get familiar with federal, state and local laws and ordinances. You’ll probably need the assistance of a real estate attorney, who will draw up your property’s rental agreement.
- Pricing the home: A real estate agent can help you figure out a competitive monthly rent. Regardless of whether you’re using an agent, check the local renters’ market to get an idea of what to charge.
- Finding and screening renters: How will you market your home? You may want to hire a real estate agent to advertise your home and show it to potential renters. Typically, you should budget 1 to 1 1/2 months’ rent for this process. You can also use an online listing platform. When it comes to your potential tenants, you (or a service you hire) must check references and determine their ability to pay rent on time and take good care of the property. Familiarize yourself with the Fair Housing Act to learn more about renters’ rights and your rights.
- Preparing your home for renters: Tenants will want everything in working order, clean and repaired before they move in. Sometimes tenants want landlords to change the locks before they move in, too.
- Handling property maintenance: What happens if the roof leaks or the toilet gets clogged? That’s all on you. Plus, the age of your home can have a big impact on the cost of maintaining your property. You’ll need to fix and maintain everything on your own. Doing this can potentially open you up to some liability risks, not to mention the cost of maintenance. You can hire someone or a company to manage the property, but these services will cost you money.
- Utilities: Even if your tenants are paying for utilities, like water and electricity, what about garbage pickup and snow plowing? You’ll have to work out all those details.
Know the challenges of selling your home
There are lots of steps you’ll have to take before you sell your home. But, unlike being a landlord, when you’re selling, you’re pretty much done once the home is sold. Here are some of the responsibilities of selling:
- Getting a real estate agent and attorney: While it isn’t required, consulting with real estate professionals lets you get familiar with your rights and the rights of buyers and helps you avoid surprises and headaches down the road.
- Preparing the home for sale: You’ll need to make sure everything is clean, decluttered and ready to show. Make sure great photos are taken when the house is clean (no one wants to see your dishes or overflowing laundry hamper).
- Making a list of problems or issues: This is important. Depending on the state you live in, you may need to disclose any known past and present issues with the home, including leaks, appliance malfunctions and infestations.
- Pricing the home: A real estate agent will help here, but you’ll need to go through comps (comparable homes in your neighborhood) and their current sale or selling prices.
- Reviewing offers: Weigh your offers with your real estate agent. Be sure to take note of any contingencies (stipulations that need to be met before the sale is finalized). And prioritize buyers with mortgage preapprovals and proof of funds letters.
- Completing any contingency requirements: If you do accept an offer with contingencies that require you to take action, make sure they meet the conditions of the contingency and are completed within the requested time frame.
Understand the tax implications
If you’re renting your home, consult with a tax professional to figure out what expenses you can write off and how to declare your rental income on your tax returns.
If you’re selling the home, your real estate attorney and agent will know how to confirm if you prepaid your property taxes and school taxes – and what you may owe. A tax professional can help you determine what you might be able to write off, like mortgage interest.
Consider the housing market
Whether you’re looking to sell or rent will be influenced by the local housing market. The question you’ll always want to answer is whether you’ll turn a profit.
Whether it’s a buyer’s market or a seller’s market in your area is an indicator of when it’s a good time to rent your home or sell it, and ultimately, whether either decision makes you the money you’d like to get out of the deal. Remember, if you sell your home, you’ll need a place to live. So, you may become a buyer or renter.
Check the market conditions in your area. If you’re looking to rent after selling your home, check the renter’s market by consulting with a real estate agent who is knowledgeable about local rentals.
Considerations in a buyer’s market
Selling your home in a buyer’s market will be more challenging than it would be in a seller’s market. Why? In a buyer’s market, there is a large inventory of available homes and a small pool of interested buyers.
This puts the buyer in a better position to negotiate on prices or add contingencies to an offer. On the flip side, a seller would have to do more to attract buyers, such as lowering the asking price. So, a buyer’s market might be a good time to rent your home so you don’t end up selling it for less than you’d hoped for.
Considerations in a seller’s market
If you’re debating whether to sell or rent, a seller’s market is probably a great time to sell.
A seller’s market has a small inventory of homes and a large group of potential buyers. This creates competition for the few homes that are for sale, resulting in higher prices, and sometimes bidding wars.
Remember the cost of rental maintenance
Maintaining a rental property can cost big bucks. You’ll need easy-to-access cash to pay for all the costs that pop up, like pest removal, lawn mowing or replacing water heaters or HVAC systems.
Maintenance costs will depend on what part of the country you’re in. Plus, the older your home, the more it will potentially cost to maintain.
On average, the annual cost of maintaining a home, including taxes, repairs and utilities, is $9,240. That’s not exactly small change!
Evictions and other potentially uncomfortable situations
If you shy away from confrontation, being a landlord may not be for you.
Evictions are part of being a landlord and so are uncomfortable conversations about things like not parking in front of a neighbor’s driveway and putting the garbage out on time. You also may have to deal with overdue rent and other potential conflicts.
Remember, you can hire someone to manage the property for you, but it will cost money you may not want to spend.
Can I Rent Out My Condo?
If you have a condo, your ability to rent it will depend on your condo association and its rules.
Check your owner’s agreement or talk to your condo’s board and find out what it might take to rent out your condo. There may be guidelines on the minimum number of years you’ve lived in the place or the maximum percentage of rentals and owner-occupied units.
Take a look at past meeting minutes that pertain to rentals. You’ll learn about any past issues, and you’ll learn if there are any plans to enact new restrictions that could impact you and your tenants.
Other properties, like multifamily structures and mobile homes, may have special considerations when it comes to renting. Be sure to check your deed as well as your local municipal office for any renting rules.
Should I Rent Out My House?
Let’s weigh the pros and the cons.
Pros of renting your home
- Building equity: In most cases, the value of real estate goes up after a period of years. Even if you still have a mortgage, your renters are helping you pay it and building equity in your home.
- Creating passive income: The rent you make (minus what it costs to pay the property manager) is essentially passive income. It means you’re making money without much effort on your part.
- Tax benefits: A landlord can usually claim all sorts of expenses, such as mortgage interest, property tax, maintenance costs and depreciation. But you’ll also have to declare your rental income, so make sure you consider this when estimating your expected cash-in-pocket from the rental.
- Waiting out a buyer’s market: If you know you’ll have a tough time selling your home, renting is a good way to buy you time until market conditions begin to favor sellers.
Cons of renting your home
- Lack of investment diversity: If you have all or most of your investment money tied up in your rental property, you’re missing opportunities to invest in a more diversified portfolio. It’s like having all your eggs in one basket. If the basket drops, your eggs are toast. Likewise, a diversified portfolio can protect you from losing a big chunk of investment dollars if something bad happens with your primary investment.
- Landlord hassles: Collecting rent and finding tenants can add up to a significant time and energy commitment that may not be worth the income you’d get from renting. If you’re a party animal and are missing opportunities to socialize because you’ve got to replace leaky faucets and deal with noisy tenants, being a landlord may not be the right fit for your lifestyle.
- Hamper your ability to get another mortgage: If you have a mortgage on the rental property, your remaining debt will be counted in your debt-to-income (DTI) ratio. Depending on this and other factors, your interest rate could be higher for a new mortgage.
- Expenses: You’ll have to pay out-of-pocket for any maintenance costs. You’ll need money on hand to pay for maintenance.
Should I Sell My House?
So, is selling the way to go? If you’re not the landlord type or you’ve got a lot of equity built up in your home, selling may be a good idea. Here are some pros and cons of selling:
Pros of selling your house
- Cashing in on equity: If you’ve built up a lot of equity in your home, selling can free up a lot of cash. If the value of your home has increased significantly since you bought it, you may have quite a wad. The money can be invested in other ways or put toward purchasing a new home.
- Avoiding capital gains tax: If you’ve lived in your home for at least 2 of the past 5 years, you can exclude up to $250,000 in capital gains from your home’s sale ($500,000 if you’re married and filing jointly).
- Freedom, sweet freedom: It depends on your financial situation, but when you’re not tied to a home, you’ve got options. Maybe you’d like to move to a different location, rent short term or buy a different type of home.
Cons of selling your home
- Selling process and fees: Home sales aren’t always smooth. You’ll potentially have to deal with some snafu, like a buyer demanding unexpected things or an inspection issue. Then there is the money (appraisal fees, closing costs, etc.) you’ll have to shell out.
- You could lose money: Depending on the market and the condition of your home, you could end up in a worse financial position by selling your home than if you’d stayed in it or rented it out.
- You can’t change your mind: If you’re hemming and hawing over whether to rent your home and perhaps live in it again sometime in the future, selling pretty much closes that door.
To Rent or To Sell: What’s the Best Move?
There are a lot of factors that go into deciding whether to rent your home or sell it. Perhaps the most important factor is profitability. Crunching numbers will help you decide whether renting out your home is worth the hassle or if selling is a better move.
National Association of Home Builders. “Operating Costs of Owning a Home.” Retrieved January 2021 from https://www.nahb.org/-/media/04F57989FBC74C82BEF51C382C654E54.ashx