After closing on my first house and moving all my stuff in, I told everyone I knew I was done. I was going to live in the home forever.
Of course, I spoke too soon, and life intervened. A few short years later, the idea of staying here for the rest of my life is no longer appealing. As I plan for my next steps, I need to figure out which move is best: selling my starter home or renting it out.
Sound familiar? Which one you choose depends on the market, your temperament, and what you hope to get out of your investment. Only you can choose whether to sell your house or rent it out, but understanding the considerations can make deciding easier.
Should I Sell My House or Rent It Out?
There are benefits and risks associated with either option. Selling your home relieves you of any burdens associated with homeownership but keeps you from earning income from the property and can lead to seller’s remorse. Renting it creates a steady income stream but introduces you to the hassles of property management.
To decide which is best for you, weigh the reasons to sell against the reasons to rent.
Reasons to Sell Your House
If you’re ready to move onward and upward, selling your house can be the way to go. It can give you the cash you need to buy your next primary residence, help you avoid the hassle tenants can sometimes be, and protect you from negative market conditions. If you’re in one of these situations, it may be better to sell than rent.
1. It’s a Seller’s Market
In a seller’s market, there are more home buyers than available homes. You have what everyone wants: a home. And some buyers are willing to go to great lengths to get it. In a seller’s market, it’s not uncommon to get offers for more than the asking price. It’s also not uncommon for people to agree to buy the home without a home inspection.
Bidding wars are common during seller’s markets, which can be both good and bad for the seller. If buyers push the sale price of your home up, there’s the risk it will be more than the appraised value, which can make things complicated if the buyer is using a mortgage. An otherwise good offer could fall through when the buyer loses the mortgage.
If houses are in high demand in your area and you’re ready to move on, putting your home up for sale is the way to go.
2. You Need the Cash Now
Owning a home lets you build equity, but if you keep all that equity locked up in your house, it doesn’t do you much good. If you plan to buy a new home, you need cash for your down payment.
You aren’t obligated to use the proceeds from your home sale to buy your next property. You can use the cash to pay for your child’s education, a hefty medical bill, or a move abroad.
Selling your home converts your property’s equity into cash and lets you make your next move easily.
3. You Don’t Want the Hassle of Being a Rental Property Owner
Being a rental property owner isn’t for everyone. Although rental income is often described as “passive income,” renting your property can involve a lot of work. You have to find and screen tenants, collect monthly rent, and keep up with property repairs.
And if you’re not a people person, dealing with tenants and marketing your property is a nightmare.
Plus, many property owners have negative cash flow, particularly when they’re first getting started. A home that seemed perfect when you lived in it can suddenly need a bunch of repairs before it’s ready for the rental market.
Sure, you can hire a property management company, but then you have to pay it to do the work for you.
If you’d rather skip all that, sell your home.
4. The Property Needs a Lot of Work
Homes need ongoing maintenance and care to remain habitable. An older home might need so many repairs the cost of fixing it up for a tenant outweighs any benefits.
Similarly, you might decide you just don’t want to deal with the hassle of fixing up your old home or making extensive repairs. You can put the house on the market and offer buyers a credit to handle any repairs. Another option is to sell the house as-is to someone who wants to get a bargain on a fixer-upper.
5. You Can’t Cover the Costs of Maintenance or Property Taxes
Maintenance and upkeep cost money. Even small things, like annual air-conditioning and heating unit inspections or hiring a landscaper, can eat into any profits you get.
There’s also the issue of property taxes. Depending on your location, your home’s taxes might be a significant burden, and increasing property values mean they’re only going to get higher. If the monthly rent your home could bring in doesn’t cover the mortgage payment, property taxes, and maintenance costs, selling is your best bet.
6. You’re Going Through a Major Life Change
Change is part of life. But major life changes can leave little time or patience for dealing with renter screening, maintenance, and paperwork. Even when the change is good, such as the birth of a child, you may not be up to the challenge. The last thing you want is to deal with the needs of a new baby or child and the needs of tenants. If the change is bad, it’s bound to be worse.
For example, after a divorce, it’s often easier to sell any shared property rather than rent it out. That’s particularly true if you and your ex struggled to agree on anything. Once the house sells, you can split the sale proceeds and go your separate ways.
So if any major life event could distract you from your duties as a property owner or vice versa, it’s often better to sell the house.
7. You Don’t Like Being a Homeowner
While there’s a lot of pressure to get on the property ladder and achieve the dream of owning a home, plenty of people realize they don’t like it once they’ve done it.
Homeownership brings a lot of little surprises, some of which are fine and others of which are downright nightmarish, such as heating systems that quit on the coldest day of the year or pipes that burst.
If anything, turning your primary residence into an investment property by letting renters move in will amplify all the annoyances of owning a home.
It’s OK to dislike owning rental property. If that’s the case, contact a real estate agent and get them to list your home ASAP.
Reasons to Rent Out Your House
You want to move, but you’re not ready to sell your current home. Renting it out can give you a steady income stream and let you take advantage of increasing home values. Rising rental prices can also help you maximize the profit you get from your property.
Renting your property is the best move under the right circumstances.
1. The Housing Market Is Weak
A buyer’s market is the opposite of a seller’s market. In a buyer’s market, there are more homes for sale than people who want to buy them. Sale prices tend to dip, and properties linger on the market for weeks or months. Sellers often have to go to great lengths to find buyers and get market value for their properties.
Mortgage interest rates also influence the strength of the current market. When rates are high, fewer people are interested in borrowing. When lenders are choosier about who they approve, the housing marketing can take a dip, as there are fewer qualified buyers out there.
In those cases, people often choose to rent rather than buy, which means more competition for rental homes.
If that’s the market you’re in, it may benefit you to rent your property out, at least until you enter a seller’s market.
2. Rental Demand Is High in Your Area
In some markets, there are more renters than owners, and demand for rental properties remains high. For example, if your home is near a university or college, there are almost always students or visiting professors to rent to.
Another way to gauge rental demand is to compare the cost of renting to the cost of buying a home in your local market. When the median home prices in an area are 15 times more than the median monthly rent, more people can afford to rent than buy. But if the sale price is less than 15 times higher than monthly rents, there are likely to be more buyers.
If the home prices in your area lead you to believe there are more renters, becoming a rental property owner could be the way to go.
3. You Want Rental Income
Provided you find a steady, reliable tenant, renting your home gives you a source of steady income.
You can use the proceeds to pay down your mortgage balance and keep up with property taxes. If you’ve already paid off the mortgage, you can save the income you get from tenants or use it to cover your other costs of living.
4. You’re Ready to Be a Rental Property Owner
There’s more to being a rental property owner than collecting monthly rent checks. If you feel you understand all the intricacies of renting property and those intricacies don’t strike fear into your heart, then renting your home is a good move.
If you’re the person who’s always ready to smile at others, even when they’re being annoying, or who enjoys problem-solving, the challenges of being a rental property owner can be appealing.
One sure sign you’re ready to rent your property is if you feel emotionally disconnected from it. That can be tough with your first home, as you put a lot of effort into making it your own. But once you make that separation and start to look at your property as a house rather than a home, you’re going to feel more comfortable letting others rent it — of course, you also have to be ready to put in the work.
5. You Want to Own Investment Property
Building wealth means diversifying your assets, and owning investment property is one way to add diversification to your portfolio. Hanging on to your home and renting it out means you can take advantage of any increases in its property value.
6. You Own More Than You Could Sell It For
If you still have a mortgage on your property when you sell, you use the proceeds from the sale to pay off the home loan. But if you’re upside down on your mortgage, meaning you owe more than the home’s worth, the sale proceeds won’t fully pay off your loan.
You have a few options in that situation. You can use savings to make up the difference if you have it. Another choice is to arrange for a short sale, meaning the bank agrees to let you sell the property for less than you owe on the mortgage. Sometimes, they may even forgive the remaining balance.
But a short sale can ding your credit score and lead to a hefty income tax bill — if the lender agrees to it in the first place.
Renting out your home is often the best option when you owe more than the house is worth. You can use the rental income to pay down the mortgage and buy yourself some time. Ideally, within a year or so, the value of your home will have increased and the mortgage balance dropped, so selling might be an option.
7. You Plan to Return to the Home Eventually
Life can take you in many different directions, but sometimes, you return to your roots. In that case, you want to have a home waiting for you when your adventures conclude.
Renting your property works if you get a short-term job assignment in another area or want to live abroad for a while.
But if you don’t plan to be gone long, listing it as a short-term rental on Airbnb is a better option. You don’t have to worry about coordinating your return home with the end of a tenant’s lease.
8. You Want to Continue to Build Equity
Seller’s remorse exists, and it’s usually triggered by parting ways with an asset before it hits peak value. Your home’s value might have gone up since you bought, but there’s the chance it will continue to climb the longer you hold onto the property.
Renting the home gives you a steady income stream and lets you maximize your investment by letting equity build up.
9. You Haven’t Lived in the Home Very Long
Selling your home too soon after purchasing it, especially if you make a profit from the sale, can mean a hefty tax bill. If you sell your home less than a year after buying it, you’ll have to pay short-term capital gains tax, which is the same as your usual income tax rate.
Hang on to your home for more than a year, and it qualifies for long-term capital gains, which are usually 15%. But there’s also an exception for homeowners who lived in their homes for at least two out of the last five years. If that describes you, you can exempt up to $250,000 of profits from the tax if you’re filing single or up to $500,000 if you file a joint return.
If you need to move after owning your home for less than a year, renting it out can mean a lower tax bill, especially if you move back into the property later.
Sell vs. Rent: How to Decide
In the end, whether you rent your home or sell it is all about math. If you owe a lot on your mortgage and the rental price you ask for won’t cover your monthly loan payment, you’re better off selling. The same is true if rental prices won’t cover maintenance, taxes, and property management fees.
But if you can ask for a monthly rent that’s way more than your monthly mortgage payment and you anticipate housing prices in your area to appreciate over time, renting out the property makes good financial sense. Crunch the numbers to see which option leaves you with positive cash flow and more profit in the long run.
Think of your own goals and temperament when deciding to sell or rent too. If you really don’t like dealing with people and prefer to avoid conflict, being a rental property owner isn’t the route to take (unless you can afford to hire a management company). But if you’ve never met a conflict you couldn’t resolve and have no qualms about starting eviction proceedings or dealing with other people’s mess, then renting out your home can be a fulfilling and profitable experience.
Selling and renting both have risks. Bad tenants can wreck a home and leave you scrambling to pay down your mortgage. Selling too early is a home-selling mistake that can mean you miss out on equity.
If you go the rental route, get as much support as possible from a leasing agent and property management company. If you want to sell, talk to a real estate agent in advance to get an idea of how the market is, how to price your home, and what you can do to make the sale go smoothly.