To Rent or Sell Your Home? Answer these four big questions.

Whether you’re a homeowner who suddenly needs to relocate, or a multi-property investor, you’re in good company if you’re struggling to decide between selling and renting.

While it might be tempting to immediately turn to a spreadsheet, remember it’s not all about the numbers. It’s important to weigh in your reasons for originally buying the property, your likelihood of living in the house in the future, its current and potential overall effect on your financial situation, as well as many other considerations.

Evaluating a house as an investment and potential rental requires both a monetary and very personal assessment. At the end of the day, the decision is subjective and there is no specific formula for success, as it depends on your unique situation and tolerance for risk.

As you start to evaluate your unique situation and options, consider the following: 

1. If you’re living in the home, why are you moving?

If you’re moving for work-related reasons, and can foresee yourself coming back within a set amount of time, accepting a renter may initially seem like a no-brainer. For example, a military family who has a high likelihood of returning to a particular duty station may want to put in the effort to keep their home for likely future use.

However, if you’re relocating due to non-emergent, personal choices, such as upsizing or downsizing, a desire to upgrade or to address issues with the layout or yard size, try to take a step back to ensure your emotions about your property aren’t clouding your judgement. It’s important to really shift your thinking and reevaluate your property in terms of its potential as a business and financial asset.

In either scenario, if you purchased your home as your personal residence, you might have an emotional attachment to the property, and that can contribute to a rough start to your new role as landlord.

2. Will the property hold up as a rental?

Owners who bought a property as an investment upfront probably already researched its rental potential, but it’s still wise to regularly reevaluate and take changes into consideration. Things like school re-zoning, neighborhood changes, nearby foreclosures, and new safety issues that pop up can quickly change the landscape of your rental opportunity.

Research the overall rental market in your area, scope out the competition, and then take another long, hard look at the home.

If finding a renter seems like it’ll be a breeze, and the dollars seem to work out on paper, then think about how difficult the property will be to manage.

  • Will your HOA allow a renter in the house?

  • Are you going to advertise or will you hire someone to fill the vacancy?

  • Is the maintenance on the home easy, or will it require a lot of work on the landlord or tenant’s part?

  • Are there surfaces, like special flooring or custom details that could be easily damaged and expensive to replace or fix?

  • Will yard debris or other outdoor care, like pool maintenance, need to be included in the lease cost?

If you purchased the home to live in, many maintenance issues that were part of daily life and long-term planning may not be easy to leave to tenants to handle. For example, living in a home with a huge yard or one surrounded by trees may provide you with great privacy, shade and enjoyment. Yet, such features also come with a fair amount of upkeep to protect the integrity of your home. While managing upkeep tasks as a watchful homeowner may be second-nature, these kinds of issues can easily snowball with renters who are not vigilant.

Here’s the part where you should break out your spreadsheet. The big money-related questions that should be looming in your mind include:

3. Can you afford to sell?

Based on your competition, what is a realistic asking price for your home for sale? And how much can you sell your home compared to what you still owe? If you’re underwater and don’t have the cash to get out, renting for a while may be your only logical option. If you expect to make a profit from your sale, double check and be sure it’s a true profit after you pay real estate agent fees, capital gains, closing costs and inspection-mandated repairs – it’ll likely be 8-11% of your sale price!

Consider the area the home is in – where is the local market going? Is it appreciating or depreciating?

If the market isn’t hot, how long can you afford to keep it listed without selling?

And finally, do you need to buy another home? And will owning your home hamper your purchasing power? For example, if you have a VA Loan with no money down, you might need to come up with a sizeable down payment if you want to use it to purchase another home.

If all the math works out on paper, and you have a solid plan for any funds you gain for the sale, maybe now is the time to jump ship.

4. Can you afford to make it a rental?

If you’re converting your home to a rental, check your math and ensure you realistically cover your mortgage, taxes, insurance (which is generally more expensive than homeowners insurance) and upkeep. Many people are surprised to see they’ll still have to cover a difference every month. Also consider what kind of fixes need to be done to both prepare it for sale now, or long-term to keep it maintained and appealing as a rental.

If you’re not making a little bit of money on your rental every month, saving for those sorts of issues need to come from somewhere else. However, if you do have a positive cash flow and plan for profit goes back into the property for repairs, maintenance, emergency funds and to paying down the mortgage, then becoming a landlord will look more appealing.

Another financial question that many people overlook are the inevitable costs of tenant turnover and repairs. If you’re not local and cannot fix issues yourself, you’ll need to have a handyman on call. You’ll also need to fill your vacancy, potentially going a month or two without rent, repaint, clean carpets, repair or replace flooring, and treat wear and tear.  You’ll also need to be prepared for legal counsel to prepare leases and, potentially, deal with tenant eviction and damages. 

These costs add up quickly – especially if your tenants do not stay long-term. If your tenants do stay long-term, you still need to plan for large, long-term repairs like HVAC, roofing, siding, landscaping projects and more.

Then there are tax implications to consider. Although owning a rental can entitle you to some tax deductions, any income you make will also be taxable. Additionally, when you convert a home from a personal property to an investment, you could face potential future capital gains taxes if the house’s value increases before you sell.  If you’re not already, you may need to seek counsel with someone who can prepare your taxes professionally, to be sure you’re making the most of potential deductions. 

Deciding between selling and renting a property is a complicated decision that involves risk assessment, math, emotions and more. Before you make your final decision, it’s best to talk to a real estate agent who can advise you, and guide you, and keep your emotions in check as you assess your options.

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