Have you come to the point when you no longer wish to live at the same spot? Or you want to try out something new that suits your needs better? If you’ve been troubling yourself with the idea to relocate, upgrade, or downsize, then you must have hundreds of questions that worry you. The first and foremost being ‘Should I sell or rent my house?’
As with the other crucial life decisions, there is no easy answer. The biggest concern is what to do with the current property after you move. Would you be better off retaining the old spot or does selling make more sense?
Though renting will generate monthly cash flow to set aside or pay off your mortgage, it also brings certain risks and tax burdens. Selling comes as an easier way out accompanied by a massive cash inflow. However, the house will likely be worth much more in the future.
Table of Contents
- 1 Planning To Sell Your Home?
- 2 Thinking Of Renting Your Home? Things To Consider
- 3 Renting Vs. Selling
- 4 Final Thoughts
- 4.0.1 Should I sell or rent my house? is a puzzle whose solution always bears certain risks. Choosing the right investment is never straightforward, and you must take into consideration various factors. As long as the value of properties appreciates and you keep your place rented, that means you pursue the right strategy.
- 5 FAQ
Planning To Sell Your Home?
First and foremost, if you decide to sell your house, you’ll have more funds to spend on your next home. Of course, selling is way easier than renting in the long-run. You just move on without looking back and tangling in a far-fetching scheme.
If you want to avoid the hassle of bad tenants, unexpected repairs, and vacant months, selling would be the best option. Many people have tight schedules and not enough nerves to dedicate to renting a house. Admit it, this a business that requires landlords to spend a lot of energy and time.
Determine Your Home’s Value Now
One of the top aspects that must be considered is the current value of the house. Don’t rely heavily on real estate sites since they might provide subjective estimates with inaccurate figures. Consulting the current listing prices of homes in the neighborhood might be helpful, but they don’t always give entirely relevant data.
When your intentions to sell the house are serious, your best shot is to hire an experienced real estate agent. This person does comparative market analysis for your home. When the analysis is complete, you can consult it and list the house for an average price depending on its current condition.
After having estimated the value of the property, ask the agent to give you an estimated net proceeds worksheet to review the closing costs. This worksheet should also contain the realtor’s fee and related transaction costs. With all taxes and fees included, plan to part with up to 10% of the selling price.
Keeping The Right Property
A friend once asked me ‘Can I sell my house and still live in it rent-free?’ The truth lies in the home reversion scheme. This might involve a company that buys your house or part of it, and you usually get about 30% to 60% of the estimated market value of the property.
The lump-sum you get depends on whether you continue to live in the house for free or you freeze the sale of the house until your death or move into care. You should be aware that home reversion plans are highly risky so take sound financial advice before you accept such a project. It is usually more appropriate for older adults because they get a higher amount of the house’s market value. So, the answer to ‘Can I sell my house and still live in it rent-free?’ is definitely yes.
Thinking Of Renting Your Home? Things To Consider
Having the right rental in your hands can be worth gold if you manage it the right way. It will make you extra money even after you settle all expenses associated with it.
Another upside is the chance to settle your mortgage over time and still keep the property on you. Additionally, you’ll be able to exploit some tax advantages. Making an income and securing capital growth over time is the smartest combination. Especially if you’re ready to invest some precious time and energy in letting the house in.
Finding decent tenants will do wonders for your budget. Not only will they pay the rent on time, but they will also take great care of your house. You can always hand over the work of running the property to a qualified agent who will take responsibility for things.
Possible Renting Income
Is renting a house worth it? Well, enjoying a steady income for an extended period will make you financially stable and independent. When you get the monthly rent, you can instantly cover your mortgage and this way earn equity in your house. When you have finished paying off the mortgage, the lease will become a pure income. This is particularly suitable if you have covered a certain amount of the mortgage or you’re halfway through it.
Renting out your house will surely diversify your sources of income and investments. This is a smart move if you want to reduce the financial risks that come with the time. Meaning, if you remain jobless at a certain period, you can count on the rent. Once you retire, you can also consider selling the real estate you own.
Never underestimate the potential expenses you might incur when renting your house. If you’ve been wondering ‘is renting a house worth it?’, we have the solution for your concern. Here are the expenses you’ll have to consider:
- Mortgage. This is your most significant expenditure. Take into account the principal payments and also the interest amount.
- Insurance. This will protect your property if tenants damage something or if they suffer an injury while in it. Bear in mind that landlord insurance keeps increasing each year, and it is usually 20% more expensive than the regular homeowner’s insurance.
- Taxes. Though it can depend on the area you’re located, you’ll pay about 2% of the estimated value of the rented property each year.
- Maintenance and repairs. This is a must, and the landlord should bear the cost. Consider repairs of the windows, walls, and major appliances.
- Temporary vacancies. Don’t expect full occupancy the entire time. When one tenant leaves, you might have difficulties finding another, plus you’ll have to refresh the paint of the walls and do some thorough cleaning.
- HOA fees. This cost is not mandatory. It can apply if the house is part of an association.
- Management fees. If you have a property manager or firm, this can cost you up to 10% of the monthly rent. Also, expect to pay $200 for the annual tax return.
Only after calculating such costs and comparing it with the amount of the rent you’ll be able to see if renting makes sense.
Tax Deductions For Rental Properties
While renting a house, some experts consider it similar to running a business. If you want to generate profit in the business world, revenue must exceed the total expenses. The good thing is that renting costs are tax-deductible. This means, the tax income you pay on received rents goes down, and the earned cash increases.
In short, there are ways to deduct expenses that stack up during the renting period. Deductions can be made on bills such as insurance, council tax, and redecoration, to name a few. So, let’s say the gross income from renting is $50,000 for the entire year. You spent about $35,000 on various expenses related to the rent. As a result, only $15,000 will be subject to tax assessment, and the rest is deducted.
To make the deduction plausible and legal, always seek professional advice on depreciation or deducting losses. It is a complicated matter with multiple aspects, so never take tax decisions on your own. Anyways, don’t overlook it if the rent covers about 80% of immediate costs.
The first thing to do is to investigate the real estate market and check the current postings nearby to find out if it is worth renting a house out. Consider online marketplaces like Rentometer, where you can also calculate the rent value of your home. Chat with a local real estate agent to consult on several things while renting. Make sure you are aware of the renting trends in the vicinity.
If your region has been experiencing increases in rental prices for several years in a row, this means it is likely that rental revenue will rise in the future. There are services like Rent Jungle that show you the exact rent trends and predict possible increases in the future.
Don’t forget that you’re doing business here and your profit must always outpace any rental expenses you might have. Sometimes profitability won’t come straight from the beginning, but following long-term trends can be beneficial and financially supportive.
How To Calculate Profitability
To be on the safe side, use a rental calculator to track your income and expenses. It will provide insight into detailed long-term profitability so you can easily decide whether renting is a prudent idea. What you need to do is insert data on rent price, mortgage, taxes, payments, insurance, related fees, and renting period.
The calculator will give you a detailed summary of possible cash flow, and it will also consider minor variable costs. Those include property management, maintenance, listing costs, and vacancies. Another great thing about this calculator is that it predicts the future value of the property.
Don’t forget the average inflation rate of 2.5% and the cumulative inflation of approximately 110% either. The time value of money is not a constant variable. The tendency is that money will be worth less in the future. For instance, $1 million in 2020 will equal $2.097.568 in 2050.
Renting Vs. Selling
Is it worth renting a house out? This is a callous decision to make and needs meticulous consideration. By renting, you can buy yourself some time and postpone deciding to sell. Plus, you’ll decide whether this is the right time to sell your house.
Conversely, once you sell your house, there’s no going back. You might notice that with the time the property prices have increased, and you rushed with the sale. Hence, it might be smarter to rent the house for some time and then sell it.
Return On Investment Vs. Sale Price
You must have asked yourself ‘should I sell or rent my house?’ hundreds of times. When in doubt, imagine that you’re selling the property right now. Inspect the current market conditions in great detail. Is the long-term return on investment from renting more appealing and money-generating? How much would you profit, supposing that you lose 10% on various sale expenses and fees?
If the result is insignificant or non-existent, it’s better to keep the property for the time being. Maybe, wait for the real estate market to improve and get a better price for it. If you can make some cash flow in the meantime by renting, that’s another benefit from waiting.
Consider that you’ve had a good return on investment if you make a profit by selling. For instance, if you earn $50,000 by just selling the house, this is a decent return. It is much better than achieving $2,000 per year by renting. The truth is, you can take the first profit and invest in something more profitable.
Consider The Taxes
Some people rent their property in pursuit of its appreciation, considering the market conditions. However, this strategy has certain downsides, mainly related to taxation policies. To make things clear, the house must be regarded as a primary residence if you wish to avoid the capital gains taxes.
If you’ve been renting the house for more than three years, it will no longer be considered a primary residence. Meaning, you’ll be liable for sale tax once you sell it. The capital gains tax can vary from 0% up to 20%, and this is connected to your tax bracket.
On the other hand, don’t neglect the rental income tax. The alleviating circumstance is that you can write off any costs related to renting the house. If you set these costs aside, you’ll be only assessed tax on the profit you generate depending on the rent. For example, if you make a 20% profit of the lease, you’ll pay tax only on those funds.
The best-case scenario is to rent the house most of the time and settle the mortgage along with underlying costs. Provided you’re able to remain on the positive side of the balance, consider renting. Further on, if you have expenses to offset the rental income, taxes will be quite low and insignificant.
Moreover, be prepared for the worst outcome, too. This means you’ll end up paying two mortgages for the rented property and the place where you live. Plus, even vacant properties are subject to many running costs such as maintenance, insurance, and accounting fees.
Only after you have calculated the total expenses and the rent size, you can decide whether renting makes sense. Don’t get tripped up by some minor costs that also add up to the monthly expenditure on the landlord’s behalf.
Is It A Good Time To Sell?
Timing is crucial if you opt to sell your property. As a rule of thumb, prices of real estate grow over time. Some areas might face higher appreciation than others, but most likely, the value of your house will increase in the future. Simply, consider any boosted appreciation as a bonus to the selling price.
Also, have in mind that rents increase over the years, too. So, if you’re not in a rush, keep the house under your ownership and see how the value improves. Add some value to the property by fixing up some things and giving it an authentic character. Adding a bedroom to the place or a lovely garden will increase the rent and force appreciation in short notice.
‘Should I sell or rent my house’ is what comes to mind if you’re planning to invest in a new home. When you’re forced to sell the current house and use the equity as a down payment, the best option is to sell. Often, the only way you can come up with a down payment to buy a new house is to sell the old one.
Alternatively, think whether you’ll manage to put down at least 20% on the next home. You may also be able to take out a home equity loan and use it as a down payment. This way, you’ll get to keep the old property as a rental. Consider refinancing into an investor loan as a plan B, too.
Landlord Or Property Manager?
The faster you realize whether you’re cut out to be a landlord, the better. This is because being a landlord is emotionally draining and requires a lot of time. Landlord’s obligations include showing the property, advertising, regular checks, repairs, maintenance, field calls, and handling emergencies. Above all, if you’re light-hearted and don’t feel like arguing and forcing troublesome tenants out, give up from the start.
Supposing you decide to manage the property yourself and you do it well, you’ll save money on property managers. If you’re able to endure the stress, renting can indeed be a lucrative business. Anyways, forget about “armchair investing”. This can be a 24/7 job with many legal obligations to abide by.
Landlording is a skill, and if you’re willing, you can improve and learn from your mistakes as time goes by. Remember that becoming a landlord doesn’t lead to sudden wealth. Part of the job includes a lot of DIYs and treating tenants like clients. Renting legally and safely is another pillar of the real estate market.
Given the experience, property managers usually choose the right tenants and deal with them regardless of the outcome. So, if you have no idea how to manage a property and you’re busy, a good property manager is inevitable. This is particularly useful if you live far from the property. Be aware that they charge about 10% of the monthly rent on average.
Dealing With Tenants
Though seemingly irrelevant, problematic tenants can turn your renting experience into a complete nightmare. Horror stories of tenants who turn houses into ruins do exist in real life. Certain regions favor the landlords while others put tenant’s rights first. This means, your access to the property, the rent increase, and returning deposits may be regulated by strict rules. These tend to place the interests of tenants over yours.
On top of that, your intention to evict a tenant might be a Sisyphean task. Even if you manage to remove a problematic tenant, the entire procedure can cost you about $3,000. This includes court and attorney fees, possible repairs, lost rent, and cleaning. Moreover, you’ll probably lose the profit you would otherwise generate for several months. Especially if a tenant does significant damage to the house or refuses to pay the rent.
Avoiding the lengthy and hefty eviction process is rule number one. The wisest thing to do is check on the property regularly. Managing the entire renting thing means the landlord must invest a lot of time to choose the right tenants. Never underestimate the power of meticulous background checks and keeping track of the property payments.
The Condition Of Your Home
Whether you decide to sell or rent, the condition of your house will always set the price. Both tenants and buyers require major mechanical and structural items to be in excellent shape. Consequently, selling a home and achieving a better price means the house has to be near perfect. Sprucing the house up requires more money upfront, but it will also get you more money once you sell it.
A newly refurbished house will make your property stand out from the crowd and boost its income prospects. Although you’ll invest more resources in the beginning, it won’t take much to recoup the investment. Renters, on the other hand, can overlook outdated home fixtures since they are aware that they’re only staying there temporarily.
So, if you aren’t planning to invest heavily in the property and most fixtures are outdated, go for a lower price. This way, you’ll be forced to make only minor improvements when the need arises. Even if the house is not in great shape, renting it below the local average will do the trick.
Is The Move Permanent?
Are you moving somewhere else for good, or are you planning to return in a couple of years? Depending on your response to this question, you have two viable outcomes. Consider the other variables, too, as there is no 100% guarantee that your final decision is the right one. Often, we realize that the decision was wrong after several years of ups and downs in the real estate market.
The first scenario is that you’re coming back in a year or two. You’re only transferred to another city or country temporarily. In this case, renting your house is more appropriate. If you sell the property, that means you’ll pay a commission on the sale. Renting the home for less than three years and then selling won’t incur any capital gain tax.
Conversely, if you’re moving permanently, put your cards on selling. Particularly if you’re not coming back, but instead, you plan to invest in real estate on the new location. First, it is much more challenging to run the property from a great distance and keep track of tenants. Second, renting out the property for more than three years and then selling it will mean you’re liable for the capital gain tax.
Should I sell or rent my house? is a puzzle whose solution always bears certain risks. Choosing the right investment is never straightforward, and you must take into consideration various factors. As long as the value of properties appreciates and you keep your place rented, that means you pursue the right strategy.
Yet, if you notice that the rent declines over time and the value of the house fluctuates, then maybe this is not a smart investment. Troublesome tenants should also make you revise your investment decisions. Anyways, consult a reliable financial or real estate advisor before reaching a final decision related to your house.
And what about your new home? Should you buy or build a house? Oh well, that’s a question for another day!
Should I sell my house or rent it out?
To sell or rent depends on what you expect to gain from the move. If you aren’t in a rush for a substantial amount of cash, renting out is a better option because you earn decent money. Plus, there’s a high probability that the value of the house will rise. If you want to avoid the lengthy process of renting and dealing with tenants, consider selling the home. Also, sell if the rent doesn’t cover the expenses and time invested in managing the property.
Can I rent a house that I haven’t paid off?
If you buy a house intending to rent it, you must inform the mortgage lender thereof. The downside to this is that you’ll be charged a higher rate. However, if you buy a house to live in it as a permanent resident and then after a while, you decide to rent it out, things can be less complicated. Again, you’ll have to notify the mortgage lender, but most likely, they won’t raise the rate or deny you. A small fee may be applicable.
Should I sell my house in 2020?
The year 2020 will be marked with the outburst of the vicious Coronavirus Covid-19. This has serious implications on the real estate market. Experts predict that mortgage interest rates will remain steady throughout 2020. Another reason to sell your house this year is the lack of short-term tenants. Alternatively, wait with the sale if you’re not ready to compromise on the price or you’re uncertain about the stability of your job. Many people have remained jobless, and this has decreased the demand for real estate. Selling can also take longer than usual.
Is it a good idea to rent your house?
It may be a wise idea to rent out if the house is near a university campus or a school area. This way, it’ll be way easier to find long-term tenants and keep your options open the entire time. Renting out is also advisable if you feel comfortable with being a landlord who keeps track of payments and home fixtures.
Will renting my house be profitable?
If you’re willing to invest a considerable amount of time and energy, renting might turn into a money-making business. Rentals mainly depend on the condition and location of the property. You must also be aware of over 400 rules that apply to landlords. Profitability depends on whether you’re looking for short or long-term income. Rentals don’t just pay off in the first couple of years. It takes a lot of perseverance and smart moves to make a rented property worthwhile.