Owning a home is a common way to build wealth and your net worth. In today’s market, homeowners thinking about whether they should sell now may consider renting out their house instead. Renting your house can be a great source of cash flow, but it comes with a price.
“I would love it if everybody could build wealth and hold on to their properties,” says Warren Bunker, an Acceleration Team Manager at Orchard with almost ten years of experience as a licensed real estate agent. “But the reality is, it's just not for everybody. Some people think of renting as ‘passive income,’ but there's a lot of work that goes into it.” Before you decide whether to rent or sell, weigh the pros and cons for your specific situation to decide what’s best for you.
Most homes can be rentals, but not all are financially worthwhile to rent out. When deciding whether to rent out your house or sell it, consider the following:
If you’re upsizing, downsizing, or even relocating, you may consider renting out your current home instead of selling it. But turning your current home into a rental may not be worth it if you can’t afford to purchase your next one without the proceeds from selling it.
Home equity is a boon for homeowners who are ready to buy a new house. It can help them put down a larger down payment, qualify for better financing, or even become a cash buyer. Selling a property turns equity into cash, while renting out the property can complicate accessing this capital.
You can still access home equity if you decide to hold onto your property through a Home Equity Line of Credit (HELOC) or a home equity loan. However, these options turn assets into debt, and can come with the risk of losing both properties if things don’t go as planned and you start missing payments.
Instead of asking yourself, “Should I rent or sell my house?” try answering, “Will selling or renting my house make a worthwhile profit?”
To see how much you'd make selling your home, use our Home Sale Proceeds Calculator.
Renting out your home can generate positive cash flow or drain your finances without careful planning. To get a sense of what the financials might look like for you, add up all the expenses of renting the home then subtract them from the profit and tax breaks you’ll get from being a landlord.
You can estimate a monthly rate based on comparable properties in the area. That monthly rate should cover your mortgage, taxes, insurance, and general maintenance. These are the most common expenses you’ll be responsible for as the homeowner when renting out your home:
This list is a good reference of what to keep in mind, but you can calculate more specific numbers with a rental income calculator.
Rental properties must adhere to strict code requirements that vary by state. To get your property up to code, it may require some additional, upfront investment.
To ensure your home is up to snuff, work with a real estate attorney. They can also assist you in drawing up a lease and other documents to protect you and your property. And remember that you can be held liable for tenant or visitor injuries, so get landlord liability insurance and landlord property insurance.
If you’re earning positive cash flow from your rental property, that’s great. But don’t forget, like any income-producing asset, that rental income is taxable.
On the positive side, you can write off all the costs associated with renting your home. For example, if your gross rental income for the year is $50,000 but you incurred $40,000 in expenses, you’re only assessed tax on $10,000.
In addition to deducting rental expenses, you can also claim a deduction for depreciation on the property should the market take a turn or the property suffers damage. Furthermore, if you lose money on a rental, you may be able to use the loss to offset your taxable income if your adjusted gross income is less than a certain amount $100,000. Always speak with a tax professional before claiming any losses or depreciation to understand your specific situation.
Life plans play an important role in deciding whether to rent or sell. If you’re relocating, renting provides the security that you can always return to a home you love. If you know this next move is permanent and you could use the liquidity to buy a forever home, you may want to sell.
This may be the most important factor to consider. Being a landlord requires a lot of work, risk, and responsibility. This is something that Bunker knows from personal experience as a rental owner:
“You have to be really honest with yourself because if anything goes wrong, your tenants are not going to take care of it themselves. They're going to want you, the landlord, to get up and come take care of it as you should.”
Plus, your tenants might not respect you or the home the way you want them to. Bunker recommends calling references and paying for state and federal background checks for assurance.
No matter how wonderful your tenants are, expect there to be some damage. When they move out, plan on scheduling a deep cleaning and probably some painting and carpet replacement too.
You understand the trade-offs between renting and selling. Now you just need to know if now is the right time to rent instead of sell your house. Here are some factors to consider:
Rental demand varies from time to time due to a number of factors. You can’t plan for a boom or bust, but you can predict spikes in rental demand in communities with job growth or new developments. For example, after Amazon set up headquarters in Seattle in 2010, the median rental rate shot up 41.7% over the next seven years, compared to 17.6% in other cities during the same time frame.
Apartment List publishes market-specific reports for dozens of U.S. cities that can help you determine and predict rental demand. When demand is high, you can agree with your tenants on a more valuable lease.
Amenities and proximity to things like shopping, dining, parks, schools, hospitals, and public transportation give a rental property a big boost. Even if you don’t take full advantage of these conveniences, they will be appealing to renters. Likewise, cool property perks like a finished basement or a private backyard will entice renters to pay a little more each month for things they might only otherwise get if they purchased a home.
Other amenities that renters want:
These amenities may increase your home’s sale value, too, so you’ll have to weigh if the rent income each month is worth more than a one-time sale price. If your home checks a lot of these amenity boxes, you may be able to earn more over the long run by renting.
Maybe you’re relocating due to a job transfer, family demands, or other unforeseen circumstances. If you really love your home, why remove it from your life? Forming a personal attachment to a house is natural and if you’re not ready to let it go, then don’t.
Being a landlord is a lot of work and can be a real headache. But a great property manager will alleviate a lot of stress. If you’re forced to relocate but you know someone personally who can take care of your home (or, better yet, live in it and pay you rent) and tenants, it’s a weight off your shoulders.
Hiring a property manager may cost 8% to 12% of the monthly rental but it’s well worth the investment if you have someone great lined up.
If you sell your house too soon, you may not break even from the profits unless property values have skyrocketed in the last six to 12 months. You’ll also incur capital gains taxes if you sell your home within two years of buying it.
Renting might make you a small profit each month for a long time to come, but in some situations, it might make more financial and practical sense to sell a home — especially in times of uncertainty. If you’re in imminent need of cash, selling property frees up a lot of liquidity fast. There are a number of other reasons why you might prefer to sell, too.
The proceeds from a home sale can make or break your next home purchase if you need that cash for a downpayment or to qualify for favorable financing terms. This can help you decide if you should sell instead of rent your home.
Buying and selling at the same time can be stressful, but Orchard can help — in fact, it’s our specialty. Learn more about how we can help youline-up closing and move into your new home before selling your old one.
Sometimes, you’re just ready to move onto the next stage in your life. Whether you want to be closer to family, you’ve taken a new job, or you’ve just lived in one place long enough, there are myriad personal reasons to sell your home and be done with it.
Selling is stressful and requires work but, unlike renting, it’s stress and work that ends as soon as you sell.
Related: Find out how much your home is worth
If you bought your home more than a decade ago, there’s a good chance it has appreciated in value. Markets, however, are fickle and some experts speculate we may be in a housing correction. If you’re concerned that the equity you’ve gained in your home and its appreciated value will drop in coming years, selling now could ensure you turn a profit.
As mentioned before, the Home Sale Tax Exclusion can help you avoid capital gains taxes on up to $250,000 for individuals or $500,000 for married couples. There are limitations depending on your tax bracket, but most homeowners can avoid a huge tax by selling now. The law isn’t in imminent danger, but tax codes change all the time, so why not take advantage?
If you’ve lived in your home for at least two of the last five years, you’re eligible for the exclusion. If you’ve gained enough equity and home values have increased in your area, selling is a smart option.
Every home requires maintenance, especially older ones. When you’re a landlord, you’re responsible for that maintenance. If you’ve lived in your home long enough to know that there is always something that needs fixing, renting may not be worth the constant maintenance expenses.
In older homes, some of the original components, like the HVAC system, roof, and appliances may not have ever been replaced. There’s an increased likelihood that those become major expenses in the future that prevent you from charging rent while you fix up the house. You might be better off just selling.
A landlord has an obligation to keep a “warranty of habitability.” That means providing a property that is safe, clean, and habitable. At a minimum, habitability entails offering:
Yes, those are all basic, but failure to maintain the warranty of habitability can result in legal consequences. Between expenses, legal risk, and the burden of communication with tenants, being a landlord isn’t for everybody.
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Use our home sale calculator to estimate your net proceeds.
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