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Is It a Good Idea to Rent Out My Home?

Real estate agent/financial advisor talking to a client in front of a house
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Renting out your house is a great way to dip your toes into real estate investing. But depending on the rental market in your area, you may not be able to earn enough income to cover your mortgage and expenses. This guide will help you figure out if renting out your house will be a profitable venture for you or if you should consider selling instead.

Should I sell or rent my house?

If you’re ready to upgrade your house, relocate for a new job, or move closer to family, you may be wondering, should I rent out my house or sell it? Whether it’s better to sell your home now or rent it out and wait for it to appreciate depends on several factors.

Here’s a more in-depth look at when it’s better to sell or rent.

When you should consider renting out your house:

If the real estate market in your area is slow and you think you’ll lose money by selling your home, renting it out may be best. That way, you’ll be able to cover your mortgage costs and potentially earn some extra income while waiting for the market to bounce back.

It could also make sense to rent if you think that you may want to move back into your home at some point in the future. Just make sure that the math works out, and you won’t be losing money by converting your property to a rental.

Renting: pros and cons

Renting out your house allows you to build equity while your tenants pay your mortgage for you. But being a landlord and managing a property can be stressful, especially if you live far away. Here are some of the pros and cons of renting out your house to help you decide if it’s the right move.

Pros of renting out your home: Cons of renting out your home:
  • Renting your home can give you extra cash flow and income.
  • You can deduct rental expenses on your taxes.
  • If real estate in your area is appreciating, you could make more money by renting your home now and selling later.
  • If you want to move back into your home in the future, you can.
  • Managing your property can be a hassle, especially if you live far away.
  • You could lose money if your expenses outweigh your rental income.
  • You may lose tax benefits (like mortgage interest deduction) and pay capital gains tax when you sell.
  • It may be difficult to qualify for a second mortgage.
  • Learning how to rent your house and keep up with changing tenant laws can be complicated.

When it’s a good time to sell your home:

If the math works out and you’ll make a profit by selling your home, consider listing it. You’ll have more money available to make a down payment on your next place or meet other financial goals. You also won’t have to deal with the hassle of managing your property, which is a big plus for many.

Additionally, it may also make sense to sell if a recession is looming, and property values are expected to fall. You may have to sell or rent your home for a lower price during a downturn, making it harder to buy a new property or cover your mortgage costs.

Selling: pros and cons

Selling your current property could make it easier to afford your next home. But if the market is down, you could lose money by selling now. Here are some of the pros and cons to help you answer, should I sell or rent my house?

Pros of selling your home: Cons of selling your home:
  • You can use the money from the sale to buy or make a deposit on another home.
  • You won’t have to deal with managing a property.
  • You might be able to avoid capital gains tax if you lived in your home for two of the five years leading up to the sale.
  • If the market is expected to decline, you could make more money by selling now.
  • You could take a loss if you sell in a down market.
  • Your house may sit on the market for a while, which could be a problem if you need to relocate soon.
  • You won’t be able to return to your home if you decide to move back.
  • You’ll miss out on rental income.

Rent or sell: how to decide in 3 steps

Step 1: Figure out whether renting or selling will be more profitable in the short and long run.

When deciding to rent or sell, you should figure out which option will be the most profitable over the short and long term. To do this, you’ll need to estimate the return you’ll get from renting your home versus selling it.

To calculate your potential rental income, do some research, and find comparable properties that are listed for rent to get an idea of how much you can charge. Then, make sure to subtract the cost of your mortgage, repairs, insurance, and property management fees. Zillow recommends setting aside 1% of your property value per year for these expenses. Also, don’t forget to account for vacancies. Vacancy rates can vary widely depending on the demand of your property. Ask other property managers or real estate investors who operate in your area.

If renting out your house will put you in the red, it may make more sense to sell it. You can figure out if you’ll make a profit by subtracting your remaining mortgage balance and estimated sales costs from your home’s current value. As a seller, you’ll usually pay between 6% and 10% in closing costs and make a few buyer concessions like home repairs.

Keep in mind that these calculations will give you an idea of which option is more profitable in the short term, but not in the long run. Renting out your house may not produce much of a return now because you have a mortgage. But once it’s paid off, you’ll get significantly more cash flow each month. Consider the long-term benefits and drawbacks of each option before you make your decision.

Step 2: Decide which option makes the most financial sense for you.

Depending on your financial situation, the most profitable option may not be the best one for you. Your calculations may show that becoming a landlord will pay off in the long run. But if you need the money from your home sale to make a deposit on your new place, you may be better off selling. Assessing your current finances and future goals can help you make the right choice.

Step 3: Think about your lifestyle.

Although deciding whether to rent or sell your home is mainly a financial decision, you should also consider your lifestyle before you make the final call. If you don’t think you’d enjoy being a landlord or juggling two mortgages, it may be worth it to sell your home at a slight loss. On the other hand, if you could see yourself moving back into your house in a few years, it could make sense to hold onto it.

The bottom line

Both renting and selling can be smart financial moves under the right circumstances. Before you make your decision, run the numbers to figure out which option will be the most profitable and suit your financial situation the best.

Frequently asked questions

Should I rent out my house? 

If renting your home will cover your mortgage and expenses, it may be a smart financial move. Renting can allow you to build equity and earn a little extra income on the side.

When’s a good time to sell my house? 

If you can sell your home for more than what you paid for it, then it may be a good time to list it.

Is it better to flip or rent? 

Flipping can allow you to make a large profit quickly and skip the hassle of managing a rental. But run the numbers to make sure it will give you a higher return on your investment than renting.

Should I sell my rental property in 2020? 

Despite the recession, home prices continue to climb, so it may be a good time to sell. To find out, you can get your home appraised or even interview a few real estate brokers for their take on the market and your home’s value.

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