When you bought your home, you were ecstatic. You imagined your family living there for several years – possibly even forever. But as your family has grown, finances have changed, and circumstances have evolved, it’s no longer perfect or practical. So you immediately think about doing what anyone in your shoes would do: selling the house so that you can buy a different one.
But is this the right decision?
While 99 percent of homeowners sell their house when buying another one, it’s wise to consider all of your options. More specifically, you should see if putting a “For Rent” sign in the front yard is a better choice.
The Benefits of Renting Over Listing
You didn’t buy the property with the thought of renting it, but it could be a good option for you and your family. Here are some of the reasons keeping your property could be better than selling:
- Future equity. There’s no guarantee that real estate values will increase over the short term, but you can feel pretty good about the fact that they’ll grow over the long term. All you have to do is look at a chart of home values in your market and study the 10-year trends.
- Monthly cash flow. There’s something to be said for putting your cash to use and using it to generate steady monthly cash flow. If the numbers add up – and we’ll touch on that in the next section – you could potentially generate several hundred dollars per month without having to do much of anything.
- Tax benefits. Owning rental properties provides a long list of tax benefits, including the ability to write off mortgage interest/property taxes and depreciate the property. Depending on your tax status and financial situation, this could be worth several thousand dollars a year to you.
- Future flexibility. There’s something advantageous about owning multiple properties. It gives you the future flexibility to move back into the home in several years, let an adult child move into the property, and/or renovate it in the future so that it can serve a new purpose. When you hold onto a property, it affords you options.
Not every homeowner is cut out to be a landlord, but it makes sense for some. You’ll have to be the judge of whether it’s right for you.
Start By Gathering the Numbers
At the end of the day, the numbers have to work. And if you’re meticulous about running the numbers, you’ll get a feel for whether or not it makes sense.
Determine What Your House is Worth
Start by getting a feel for what your home will sell for. There are a couple of ways to do this:
- Quick method: Pull up the major listing sites like Zillow, Trulia, and Realtor. Make a note of their valuations for your property and take the average of the three. You can also filter recently sold homes in your area that meet similar criteria. Study the price per square foot and extrapolate against your property. (Note, these methods aren’t foolproof. We don’t recommend basing your entire decision on this quick method.)
- Thorough method: You can get a pretty decent “ballpark” estimate using the quick method above, but nothing beats a professional opinion. A realtor can run a comparative analysis and give you a more accurate price based on MLS data, comps, and their professional opinion of your market.
Start with the first method and then talk with an agent about getting a listing report as you move further along in the process of comparing the two.
Calculate a Competitive Market Rental Rate
Once you have an idea of how much your house would reasonably sell for, it’s time to estimate the market rental rate for a property like yours. Again, there are multiple options, but a tool like Rentometer.com is a good place to begin. You can also browse current rental listings online to get a feel for what the going rate is in your neighborhood.
Consider the Expenses
You can get a pretty good feel for whether renting or selling makes the most sense by projecting the sale price and comparing it against the market rental rate. However, that’s only half of the equation. You also have to consider expenses.
When renting a property, you’ll need to hire a property manager like Green Residential and anticipate things such as occasional vacancies and turnover costs. Consider what these costs do to your net revenue.
When selling a house, anticipate somewhere between 6-10 percent of the sale price going to pay commissions, fees, and other sales-related expenses. Use this number to calculate the real amount of equity you have in the house.
Plan for the Future
In addition to calculating the possible sale price, rental price, and expenses, you also have to look at the time horizon. If you do decide to rent the house instead of selling it, consider how long you plan on doing it. Is it something you plan to do for one year, five years, or indefinitely? Based on this estimate, you can run the numbers and see if it still makes sense.
Consider the Softer Factors
Math can tell if you’re likely to be profitable, but it can’t tell you whether you’re cut out to be a landlord. Thus, it’s equally important to consider softer factors like your personality, career goals, and financial vision.
Being a landlord comes with a lot of responsibility. And while we recommend hiring a property management company to streamline the time-consuming tasks that are known to eat up time and cause landlords stress, you can’t ignore the fact that it’s your property. At the end of the day, if something goes wrong, it’s going to fall back on you. Think about whether or not you’re comfortable absorbing that pressure.
Making the Right Decision
There’s no right or wrong answer. Some people are better off selling their house and putting the equity from the first house into the next home purchase. Other people may find it more lucrative to lease the house and collect steady monthly cash flow in the form of rent payments. It’s up to you to decide what works for your finances and lifestyle!