The outbreak of the coronavirus pandemic sent the U.S. housing market into overdrive, with historically low interest rates, low inventory, and sky-high prices. It also left many Americans wondering if they would be better suited in a different home or a different location as people spent more time at home during the lockdowns and time of social distancing.
If you’ve been thinking about moving on from your current property, you might find yourself wondering: should I sell or rent my house?
There are some serious pros and cons to both options, and the answer ultimately depends on the property, your financial situation, and your personal circumstances.
Let’s take a look at what you need to know to help you decide whether renting out your home or selling it is the best option.
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Pros of Renting Out Your Home
Renting out your home presents a number of appealing benefits. This can be particularly advantageous in areas where property values are appreciating, as it offers the dual benefit of generating rental income while still holding onto an asset that is increasing in value.
Moreover, having tenants can also help in covering the maintenance costs and property taxes, effectively reducing the financial burden on the owner.When it comes to formalizing the rental arrangement, a residential lease agreement is important. For a comprehensive understanding, having a residential lease agreement example in mind can provide valuable insights into the typical structure and clauses included in such agreements, aiding homeowners in creating a fair and enforceable contract.
Understanding the strategic benefits of renting out your home and the critical role of a detailed residential lease agreement naturally leads us to explore further the motives behind choosing to rent over selling.
Let’s take a look at some of the reasons that might compel you to rent rather than sell your home.
Positive Cash Flow and Income
If you are seriously considering renting out your house, you should analyze the realistic rental value of your home. There are a number of tools online for the specific purpose.
Your location and the nature of the property are major factors that influence the rental value of your home. You should determine what annual cash yield would be necessary in order to make it worth the trouble and potential risks.
Some people make being a landlord their full-time job. With enough rental properties with enough cash flow, rental income can eventually start to look like a decent yearly salary. However, with more properties comes a lot more responsibility, a lot more tenants to screen, and a lot more time and energy.
Lets You Wait Out a Bad Market
If you think your house will appreciate over time but it’s not the best time to sell now, renting lets you wait for the market to turn up. This means you can have the mortgage covered and even make some cash flow until the market is more favorable.
Build Equity
The longer you hold your house, the more equity you have when you go to sell it. Renting is a way to build equity while having the mortgage covered by your tenants.
If the amount of rental income you make is more than the financing cost and expenses of the property, it means that the mortgage is being paid by the tenant’s rental payment. Every month that the property is rented out, the principal balance on the loan is lowered.
This is one of the reasons that people find the idea of renting out their home so appealing, as they are able to build equity without even having to cover the mortgage or the cost of interest themselves.
Gives You More Options
Another more qualitative consideration regarding the decision between selling or renting out your home is that the renting route can leave you with more options. For example, if you are unsure of whether or not you want to eventually move back to the property, keeping the house as a rental leaves this option open.
Some people choose to go the route of renting their home out as a short-term rental. This is appealing to some homeowners because it means that they have a lot more flexibility in how they use the home. Maybe you want to spend the school year at your property but you travel during the summer, and renting your home as a short-term rental can make this possible.
That being said, not all homes are suited to being short-term rentals. On top of that, renting to short-term tenants and using services such as Airbnb can create their own nest of headaches. Even though there are some benefits to having short-term tenants over long-term tenants, that doesn’t mean it’s inherently less risky to rent your home out this way.
The location of your property will help you determine whether it’s even worth considering renting it as a short-term rental. You’ll want to take a serious look at the local market and consider whether it is a vacation area, college town, large metropolis, or another type of location where there are frequent short-term visitors.
Use of Low-Cost Leverage
There are three ways that you financially can benefit from renting out your home. The first is income, the second is building equity, and the third is the availability of low-cost leverage.
Unlike other asset classes, real estate has very easy access to debt financing. For years, mortgage rates have been historically low. You enhance your equity returns when you use a lower cost of capital financing.
When you keep your house as a rental, you are basically having another party pay the low-cost leverage for you while the principal amortization works for you over time.
Cons of Renting Out Your Home
Renting out your home isn’t all sunshine and roses. There are some very real downsides to keeping your house as a rental rather than selling, so let’s take a look at what some of those are.
Could Interfere With Your Ability to Qualify For a Mortgage Elsewhere
It could end up limiting your ability to get a mortgage somewhere else if you choose to rent out your home. Whether or not this is an issue for you depends on your personal financial situation.
If you apply for a new mortgage, they will evaluate your assets and income flexibility and run a credit report to determine your risk as a borrower.
You can most likely be approved for a second mortgage if you have 3 to 6 months’ worth of reserves saved up. You can also tell your new mortgage provider about the future rental income, as well as providing a letter of explanation and the lease for your rental.
Being a Landlord Can Be Annoying and Time-Consuming
This particular disadvantage of renting out your home is probably the most important thing to consider. While renting out your home can be an appealing option because of its perception as passive income, you will want to seriously think about how much work and headache it can be to be a landlord.
As a landlord, you will need to hold showings and pick tenants, set up rent collection, answer the phone at all times of the day, learn handyman skills, and much more. You can hire out some or all of this work, which can significantly cut down on the time-cost for you but not the risk of having tenants. It also cuts into your cash flow, which may or may not be a deal-breaker.
Some of the responsibilities of landlords include:
- Screening tenants
- Tenant communication
- Collecting rent
- Advertising vacancies
- Showing the property
- Executing leases and collecting deposits
- Coordinating repairs and maintenance
Screening tenants is an essential part of being a landlord. This can mean the difference between whether you have a positive or a nightmarish experience as a landlord.
You might find that one rental property isn’t too much work and that it’s worth the little work you do put into it. However, if you plan on building up your collection of rental properties, it’s important to understand that this will start requiring a substantial amount of work.
Hiring a property manager typically costs either a percentage of the rental income or a flat monthly fee.
Renting Out Your Home Is High-Risk
Not only is being a landlord a job that can be quite demanding and sometimes stressful, but it also poses high risks. You don’t have to search too far to find nightmare stories of bad tenants on the internet that lead to the financial ruin of these landlords.
Late rent and evictions can seriously reduce how much money the property brings in for you. Dealing with evictions can be costly and stressful, and the tenant might leave your property in need of serious cleaning and repair once you finally do get them out.
The wrong tenant or another unfortunate rental situation can leave a landlord financially ruined. There are things you can do to avoid and prevent this outcome, but you cannot completely escape these high risks of being a landlord.
You also are at risk for legal issues if you don’t comply with the landlord-tenant laws of your state or if your tenant gets injured on your property.
Maintenance and Repairs
If you sell your home, you never have to worry about mowing the lawn again or about that faucet that always dripped a little bit. When you rent out your home, all of its issues are still yours to deal with even though you are no longer living there.
Properties undergo normal wear and tear and damage can also be caused by tenants. There are a number of unexpected expenses that can occur that can catch you by surprise. Some examples of this type of circumstance include:
- The HVAC system breaking in the middle of summer or dead of winter
- The roof is in need of repair or replacement sooner than you expected
- The property is flooded by a burst pipe
- The tenants trash the property on their way out
In order to deal with this type of unexpected expense, you will want to set a portion of the income you make from the rentals aside each month. You will also want to be ready to coordinate with tenants, repair people, plumbers, or contractors to fix the issue, whatever it is.
(Are you wondering about selling your house as-is without making any repairs? Check out this article.)
Vacancy
Vacancy can lead to a financial burden fairly quickly. You are still responsible for the costs of maintaining the property and paying the mortgage even when no one is living there, and this can really start to cut into your ROI for the year.
Pros of Selling a Home
With property prices where they are at a national level, there’s a reasonable argument for selling your home now. Here are some of the reasons why selling your house might be the better option.
Frees Up Capital
When you sell your home, you can free up a significant amount of capital. Through both repayment of your mortgage as well as price appreciation, there’s a good chance that you have recognized some gains in your equity. When selling a home, you are making that capital liquid again so that it can be invested in other ways.
Fewer Taxes
The sale of your house is excluded from capital gains tax up to $200,000 in gains if you have lived in your home for two out of the previous five years. This can be a huge financial boon, as capital gains tax can really eat into the profits from selling a home.
Cons of Selling a Home
Selling a house can be stressful, time-consuming, and expensive. While it might be the best financial option, that doesn’t mean it isn’t a hassle.
You Might Need to Update Your Home
Almost all homes require some update before you list them for sale. On top of that, the buyer who makes an offer on your home will likely also ask for some improvement for updates. If you aren’t willing to do updates, you will likely have to reduce your expected sales price.
The Sales Process Can Be a Disaster
It’s easy to assume that your house will sell immediately. Unfortunately, this rarely happens. There are a number of things that can go wrong during the sales process, including being unwilling to make updates, having unrealistic expectations with the sale price, or having an incompetent realtor.
You Could Take a Loss
It’s possible that selling your home will only give you a minimal gain or even a loss. If you bought your house when the market was high and you live in a place where the values of homes are going down, it’s possible that you won’t recoup how much you invested in the home.
Should I Sell or Rent My House?
At the end of the day, whether or not you sell your house or rent your house has to do with your own particular circumstance. While the financial aspect of things is essential to consider, you don’t want to forget to ask yourself how you feel about it more subjectively. If you simply don’t want to deal with tenants or if you’re on the fence about one day moving back to your property, these factors are very reasonable to take into consideration.
Will the Property Produce Positive Cash Flow?
One of the first things you will want to look at when you are thinking about renting a home is the math. You’ll want to determine if the property will produce positive cash flow before you start putting up “for rent” signs.
What you need to determine is whether the property will produce a monthly profit or a loss when you factor in the rental income minus all of the expenses that are associated with the property. These include things like:
- Taxes
- Insurance
- Mortgage
- Management
- Utilities
- Repairs
- Vacancy
- HOA fees
After you run the numbers, determine whether or not the outcome is suitable for your need. If it is going to result in a loss, selling might be the better option.
What’s Your ROI?
The next question you’ll want to ask how much you would profit if you sold the house right now. This assumes that you will lose around 10% to closing costs, agencies, and other expenses associated with the sale.
If the answer is that you would make very little or nothing at all, holding onto the property might be more advantageous. You can then wait for the market to improve as time goes on.
On the other hand, if you will make a profit by selling, you will want to determine the return on investment. For example, if you could make $200,000 in profit when you sell a property but the same property would make $2000 a year in cash flow, that means you’re getting a 1% ROI. There are other types of investing that can give you a higher return, meaning that selling and reinvesting elsewhere might be the better financial option.
Is It a Good Rental Property?
Not all properties are as well suited to being rental properties as others. There are a number of things you will want to consider when choosing whether or not to rent out your home. Some of these include:
- The neighborhood: This determines your vacancy rate, rental income, and types of tenants you attract
- Property taxes: You’ll want to know how much to allocate to property taxes each year
- Amenities: Properties closer to more desirable amenities will attract more renters
- Schools: If you’re renting out a family-sized home, consider the quality of the local schools
- Natural disasters: You’ll need insurance, but you might also want additional flooding, earthquake, or natural disaster insurance depending on the location of the property
- Number of listings and vacancies: Having a rental property in a place with high vacancies is not ideal, as it can cause rents to drop and mean you’ll hold more vacancy
- Crime: Crime is a major factor in the rental income, vacancy rate, and types of tenants you attract
- Job market: Analyze the local job market and economy
- Future development: A lot of construction means that an area is growing, but new developments can also hurt the price of properties around it
- Average rents: Do your research about how much you can realistically charge for rent
Single-family dwellings can be a good first rental property for new landlords. They tend to attract families or couples that are longer-term renters.
Predicting the Future of the Market
No one really knows what’s going to happen in the rental and real estate market in the years to come, but people sure to try to guess.
On a more localized basis, you can look at the growth of your city to get a general sense. Are homes being left abandoned or are they being fixed up? Are businesses leaving the area or moving in?
There’s never any certainty what will happen, and the coronavirus pandemic was a reminder of how unexpected occurrences can alter the shape of the market drastically.
In any case, it’s worth trying to make your best-educated guess about how your property will gain or lose value over time. If it seems like your neighborhood is heading downhill, selling before prices drop might be a good idea. If your area has been improving, renting the property and holding it as prices increase makes more sense.
Do You Really Want to Be a Landlord?
You will want to be honest with yourself: do you really want to be a landlord? While some people have uneventful and profitable businesses as landlords, many others find it to be a demanding life that isn’t worth the hassle or risk. Some tenants will be an absolute dream, but others will inevitably require a significant amount of patience and time.
Is It Time to Sell Your Home?
If you’re starting to answer “Should I sell or rent my house?” with a confident “sell!” then it’s time to start thinking about the method you want to use to sell your home. While you can hire a real estate agent and list it on the open market, this process can be stressful, time-consuming, and a major headache.
Luckily, that’s not the only way. If you want to sell your house fast with the least hassle possible, you might consider selling your house for cash. You can get no-obligation cash offers from trusted iBuyers right here!
