When moving out of a primary residence, most homeowners make the obvious decision to sell their current property. But is that really the best choice for you? The answer, of course, depends on many factors — your current financial and housing situation, the real estate and rental market where you live, and several others that can add up to help you make a decision about what to do.
Will you make a profit if you rent?
If you’re still paying a mortgage on your primary residence (and you probably are), then you’ll need to make sure you can cover your mortgage with the rent price you’d like to charge. You’ll also have to pay for insurance on the home — and this is likely going to be more expensive if you rent it out than straight homeowners’ insurance would be, so price insurance costs for a rental with your insurance agent. Property taxes and HOA fees will still need to be paid, too, so include those in the monthly expenses.
And then there are a number of other costs involved with renting a house that you’ll want to add to your balance sheet before you can know for sure whether this will be a profitable step to take or whether you’d be losing money every month. There will likely be repairs you have to make here and there to the property — that’s only to be expected. If you don’t want to deal with the ins and outs of being a landlord yourself (screening tenants, scheduling repairs, and so on), then you’ll want to hire a property manager, and that can cost up to 10% of the monthly rental income. It’s unlikely that your home will be occupied constantly, so consider the cost of vacancies, and you’ll also need to pay to market the house when it is vacant so you can attract new tenants. Finally, if you want to do any rental reference checks or credit checks on tenants, you’ll need to accommodate those costs into your calculations, too.
Once you’ve added up all the expenses and done some research on fair-market rental prices for your area, you can determine whether or not you’d be making a profit every month or year, or whether renting would cost you more money than it would make you.
Do you need the money from a sale sooner rather than later?
If you’re really not sure whether it would be more financially viable to rent or sell your house, talk to a financial advisor about it. Maybe you can set up a payment plan for some of those debts and use the rental profit to pay them off over time, or maybe you could use the cash from a sale to make some smart investments and retire sooner. Nobody knows your financial situation as you do, so do some assessing of where you are and where you want to be, and then figure out whether renting or selling would get you closer to that goal.
Will you want to move back in eventually?
Maybe you’re not sure if you want to move back or not — that’s fine! If it’s even a remote possibility, though, sometimes it’s nice to have a backup plan for housing, especially if you’re heading off to a new adventure and you aren’t sure how things are going to go. Obviously, you don’t want to plan to fail, but knowing that you have a safety net if you need one and can get back into your old digs without buying them back might be worth quite a bit when push comes to shove.
And if you’re upgrading or downsizing, then this lens looks slightly different. Maybe you’re not sure you’ll enjoy moving into a condo or a smaller home and there’s a strong possibility you might want your old space back. Or maybe you’re not certain that the upkeep and cleaning that a larger space requires is going to work out well for you. It’s even possible that you’re not certain your current household configuration is going to last all that long — if you have kids who are about to fly the nest in a few years, or (hopefully not!) you’re unclear that your relationship is going to go the distance, then keeping your home and renting it out might be a good decision long-term.
Can you improve or update the house right now?
Tenants are typically a lot less selective than buyers when it comes to the brand of appliance used in the kitchen, the wear and tear on the carpeting in the bedroom, or the landscaping in the front or back yards. So if you know your house isn’t exactly the definition of move-in-ready — especially compared to other homes on the market in your area — consider renting it for the time being and wait until you can make those upgrades before you sell it.
Do you want to live a landlord life?
After thinking about it, if you decide you really don’t want to live a landlord life, then you’ll know that you either should sell your house or hire a property manager to handle it.
What’s the real estate market doing?
Talk to a real estate agent about where they see the market going, and if you can, try to make sure you’re getting opinions from someone who’s worked in real estate through several market cycles. Nobody can predict the future, but an experienced agent knows the warning signs of a seller’s market or a buyer’s market, and they can give you an educated opinion about what to expect for at least the next year, if not further.
How about the rental market?
This is another area where an experienced real estate agent or a property manager can give you some insight into how you should approach your decision. Get some estimates on rent for your house and ask their opinions about whether it would be more likely to increase or decrease in the future so that you can weigh that along with other factors as you figure out what to do.
Can you afford capital gains tax if you sell later?
Are you going to buy or rent another house to live in?
Can you healthily absorb a financial hit or two?