Should You Rent or Sell Your House?

Keep Rental or Sell Home

When it’s time to move, should you rent or sell your house?

Real estate is meant to be a long-term investment. Building equity and passive income are why so many people turn to real estate to build wealth. If you can afford to keep your home while purchasing another, do it. Keep your real estate holdings as long as you can. But you’ll need to answer a few more questions.

What is your current purchasing power?

If you were to sell your home and cash out that equity, how much could you afford on a purchase and what type of home could you get? Get a sense of what you can get for the money. If you choose to keep your existing home as a rental, you may not be able to buy that dream house. Understanding what you’re giving up will help inform your decision of whether or not you want to be a landlord.

What is your purchasing power without that equity?

If you keep your existing home, you’ll probably have to compromise in some areas. You may have to ‘make do’ with location, the size of home, or condition. Check out homes at a lower price points to understand what you’ll get for the money. If you’re open to becoming an investor and building wealth in real estate, this compromise won’t be a big deal. But if you are uncomfortable with your purchasing power without that equity, then this approach might not be a good solution for you.

What is your monthly income and expenses?

Run the numbers to understand your potential new financial reality. Know the rental market. Understand how much rent you can get for your current home. Browse rental listings online or ask your real estate agent for rental comps. Will the rent cover the mortgage exactly or will it be even? Could it be a small loss? As you run your numbers, take off 10 percent to account for vacancies, necessary improvements or repairs, and other things.

Can you handle the stress? 

Just like someone who buys a home at the same time they’re selling, someone who keeps their former home as a rental should prepare for stress. Timing it is never easy, and nobody likes to carry two mortgages for too long. Be aware that renters generally search within weeks of their desired move-in date, unlike buyers, who start their home search months before they expect to make a move. Once you have your new home under contract and have removed your contingencies, get your old home on the rental market. It’s better to show it with furniture than empty.

Can you spot the best renters from the deadbeats? 

Becoming a landlord means starting a business. Your tenant will become your customer, and it’s better to have a good customer than a bad one. It’s valuable to have a good and happy tenant paying a little less than market value vs. a cranky or difficult tenant paying market value or more.

You also want a tenant who plans to stay. Turnover means wear and tear and potential lost rental income. If you’re moving out of the area, consider hiring a property manager. The manager can deal with repairs or tenant complaints, collect the rent, and enforce the terms of the lease. Property managers have teams of handy people and contractors who can get things fixed.

What will your tax impact be?

Owning real estate as an investment opens up a new world of tax issues.  Before you sign on the dotted line, check with your CPA. Be aware that your new rental income is taxable; that improvements and repairs have tax consequences; and that you may lose the homeowner’s tax benefit upon the rental property’s sale. If you’ve lived in the home for two of the past five years, you won’t pay taxes on any gain ($250K for individuals and $500K for married couples) upon the sale. Once you pass this time frame, you’re on the hook for the gain.

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