The time has come to part with your beloved first home. Emotions are running high, and as you begin packing up those cardboard boxes, you start to wonder how you can part with this charming, little house. It’s then a new scenario pops into your head and you ask yourself – hmm, should I rent or sell this house?
There are certainly pros and cons with each scenario, so let’s walk through the decision making process together and see where we land.
Should Rent or Sell Your House?
Ultimately, you will have to make the decision that’s right for you, but hopefully these factors will make it a little easier to reach a conclusion.
Basic Financial Considerations When Deciding to Rent or Sell Your House
Whether you have already found your next property or are just starting the process, you may be struggling with what to do with your current residence. If you’ve already paid down a decent chunk of the mortgage, or own the property outright, it may actually make sense for you to hang onto it.
Here are the first questions you should be asking yourself when deciding to rent or sell your house.
- Will I have enough cash for closing costs and down-payment on the next house if I hold onto this one?
- Can I set the rental price high enough to put aside 25% for maintenance costs each month, and still profit?
- Do I have enough of an emergency fund to cover any issues with this home in addition to the one I plan to purchase?
These questions are truly deal breakers right out of the gate! However, if you find that you are able to take on the added financial burden, then it’s time to move to the next step.
So now that you know you can technically afford to keep both properties, it’s important to consider whether or not it’s worth it for you in the long run.
1) Does Your House Meet the 1% Rule?
The 1% rule basically states that you should “multiply the purchase price of the property plus any necessary repairs by 1% to determine a base level of monthly rent.”
ie. If you purchased your house for $200,000, you would ideally be able to get $2,000 a month in rent.
While this isn’t a hard and fast rule, it gives you a minimum baseline to run the numbers and see if holding onto the property is even worth your time.
2) Take a Solid Look at the Current Rental Market in Your Area
It’s advisable to talk to your real estate agent to get an honest assessment on the overall rental market before you decide if you should rent or sell your house.
If properties are being snatched up quickly and you aren’t seeing rentals sit too long, that may be pretty good sign that you won’t have trouble finding tenants.
Don’t forget to take into consideration the average advertised rent prices for properties similar to yours.
- While you may feel it’s worth a certain amount, at the end of the day, the market decides.
- You will also need to factor in the cost of potential vacancies, so don’t overlook that aspect in your excitement to get it rented out!
Read More: Making Money With Vacation House Rentals
If this is your first step into property management and land-lording, it’s a good idea to do your research on what’s involved. In fact, I highly recommend you join some Facebook groups created by and for landlords to get an inside look at the day-to-day nitty gritty.
Land-lording tasks include:
- Showing potential tenants the place, selling them on the features of the home (and potentially doing this EVERY YEAR)
- Forming applications, contracts, amendments, and initial walk-throughs for noting pre-existing damage to the property
- Cleaning the rental in-between tenants
- Handling the security deposits and rent payments – chasing tenants around and charging them late fees if they don’t pay on time
- Potentially kicking people out when they catch a bad break and can no longer pay you
- Responding to calls about broken toilets, leaky sinks, non-functioning furnaces… you’ve got to be Johnny-on-the-Spot.
- …among many other things
You can choose to have someone else do many of the above tasks – but nobody cares as much about your investment as you do (so you’ll likely do a much better job), and everyone else costs money….which is going to eat into your profits.
In terms of the lease – you’ll want to have a lawyer take a look at it (or put it together for you). As with anything, all is great until there’s a problem. Then you’re going to want to be sure you did everything right from the beginning.
Want some helpful resources? Bigger Pockets is always a great site to browse!
Benefits of Turning Your Place Into a Rental
If you decide to hold onto your property, it’s not ALL tough stuff. In fact, there are plenty of tax advantages if you decide to keep your house as a rental.
The best part of keeping your home as an investment property (beyond the additional income) is that you will get a tax write-off for most maintenance and improvement costs. Yes, you will need to consider that when you eventually go to sell it, capital gains tax will be levied against the profit. However, with all the tax advantages and rental income factored in, you should ideally come out ahead in the end!
Especially once the property is paid off and you can invest the rental income!
No Need For Pesky Investment Loans
Another advantage with keeping your property is that you’ll be turning it into an investment opportunity after you already own it. This means you can skip the typical investment loan process and forgo needing to come up with a 20% down-payment. You’ll likely still be eligible to pursue a conventional or FHA loan for your next home purchase as well.
Still Not Sure If You Should Rent or Sell Your House?
Let’s talk about the advantages of letting your house go.
If you are moving out of the area, it may not make a ton of sense to hold onto your property. Especially after you factor in any property management costs. The added cost and stress will likely take the joy out it.
Selling your house will also alleviate the potential stress of owning a rental. (Will there be a major repair? Will I have to deal with a vacancy? Etc.)
Assuming you don’t need the cash from the sale to purchase your next property, you could throw that chunk directly into investments. You will likely see a quicker return on this chunk of change in the stock market than you will from a single-family property rental. In either case, you are playing the long game, so it’s tough to say with certainty which will come out ahead sooner.
You could also just decide to make a larger than planned down-payment on your next home and ideally avoid having to pay PMI.
Rent or Sell Your House? Which Will You Decide?
Deciding whether to rent or sell your house is a huge decision. You will definitely need to do your homework and weigh all the pros and cons.
For some, the added stress and financial burden does not make it sound like an appealing option. However, if you ever wanted to try your hand at investment properties, this is a GREAT way to get started. Worst case scenario, you change your mind and sell the house after a year or two.
So what do you think? Have you personally gone this direction and made your primary residence a rental? Tell us about your experience!
AUTHOR Kerah Kemmerer
Hello! I'm Kerah. I'm a writer and personal finance enthusiast with a background in marketing. I'm also a wedding and portrait photographer, part-time RVer and a lover of simple and minimal living. Always up to some project or adventure over @krisandkerah on Instagram.