So, you are about to move to a new house? Maybe you’ve just bought a larger and nicer (hopefully!!!) home across the street from your current home. Or maybe you are moving to a different city, state, or even country. Regardless of the reason for your move, you are asking yourself an important question: Should I sell or rent out my house? (that is, the old one) Answering this question is not straightforward (I mean, how many straightforward answers have you ever gotten in real estate investing???), but here we have gathered a list of the factors which you should consider when deciding “Should I sell or rent out my house?” depending on your personal situation and on your house conditions. We are certain that after reading this article, you will feel much more prepared to make this important decision.
1. Are you coming back and when?
The very first thing that you need to know in order to decide for yourself – should I sell or rent out my house – is whether you plan to come back to your current location and when that would happen. If you are going away for just a couple of years, it is probably a better idea to offer your home for renting rather than sell it now and then buy another property after you come back. This is likely to save you a lot of money from the commissions and other fees associated with selling and purchasing a home. However, if you don’t plan to be back (soon), that doesn’t mean that you should necessarily sell your home. Let’s look at the other factors which will let you decide – should I sell or rent out my house.
2. Do you qualify for capital gains tax exemption?
So, going back to the previous point, if you are expecting to be back within three years and you think conditions in your location are such that real property prices will go up, then you should wait with the sale. The IRS allows exemption from capital gains tax on the sale of your primary home (of up to $250,000, or $500,000 in case you are married and filing jointly with your spouse) as long as you’ve lived in your home for at least two of the past five years. This means that you don’t necessarily have to answer the question – Should I sell or rent out my house? – right now. You can wait a bit to see what happens to property prices in the area as long as you don’t go over three out of the last five years out of your home.
3. What about other tax deductions?
If despite the capital gains tax exemption, you decide to transform your home into a rental property rather than selling, you will get to depreciate it for tax purposes. For income properties, you divide the total cost of the property (the purchase price plus any major improvements) minus the land value over 27.5 years to calculate the annual depreciation for tax purposes. Let’s say you bought your house for $200,000 and paid another $20,000 for fixing; the land on which the house is built costs $30,000. You get to deduct in depreciation ($200,000 + $20,000 – $30,000)/27.5 = $6,909 annually. Not bad, right? Moreover, when you are thinking should I sell or rent out my house, you should consider other tax-deductable expenses such as property taxes and repairs.
4. Do you need the sale money for the new mortgage down payment?
If you are leaving your current home, you are probably about to buy another one, for which you will need a down payment in addition to monthly mortgage payments. In this case, you might think you have a ready answer to the question should I sell or rent out my house? But you might not actually be forced to sell your first home to finance the purchase of the new one. You should check out whether you can take a home equity loan (which allows homeowners to take a second mortgage against the equity of their first home) or even refinance your rental-property-to-be into an investor loan using the loan proceeds as a down payment for your second property.
5. Do you expect positive cash flow?
Whether you are considering turning your old home into an income property or purchasing a new rental property, you should always look for positive cash flow. It requires some math, but really basic one. All you need to do is subtract all monthly (or yearly) expenses from the expected monthly (or yearly) rental income (don’t forget the tax-deductable expenses!!!). There is your answer to the question should I sell or rent out my house. If you forecast positive cash flow, then it is better to keep your home as a rental property. A few years from now, you will be happy that you did that. Once your mortgage payments are over, your cash flow will increase significantly, allowing you an option of early retirement. If, on the other hand, you expect to be at a loss, just sell your house now.
6. What return on investment do you expect?
When deciding whether to sell or rent out my house, the expected profits from both options should be compared. If you both your home for $100,000 a few years ago, and it appreciated to $200,000 today, you could sell it for a large profit even after deducting the nearly 10% sale-associated expenses. To see if this is for sure the better of the two options, though, you also have to look at the expected return on investment (ROI) in case of renting out your house.
ROI = Annual Rental Income/Total Cash Investment
Let’s say we will need to fix up things around the house for $10,000 if we want to be able to rent it out, and we will receive $1,500 in monthly income, then:
ROI = 12 x $1,500/$100,000 + $10,000 = $18,000/$110,000 = 16.4%
Actually, that’s quite a good ROI, so you should definitely think about turning your home into an income property instead of hurrying up to sell it. If some developments are due in your area in the coming years, rent out your home now and maybe sell in a few years after its value has appreciated even more.
Related: How to Value an Investment Property
7. Is your real estate market appreciating?
Another very important factor to consider when answering the question “Should I sell or rent out my house?” is the outlook for the economy, the real estate market, and your location in specific. If things are looking good and your area is expecting developments, then it is better to hold on to your house and offer it as an investment property. Don’t sell it now if you have reasons to expect appreciation.
If your local real estate market is a seller’s market right now, you might consider selling your house as conditions are favorable for making good profit. Definitely, don’t sell in a buyer’s market if you have the option not to. But even if it is a seller’s market, think about renting your house for a few months or years as real estate property prices might rise even higher.
9. Can you be a landlord?
Last but not least, when thinking whether to sell or rent out my house, everyone should answer one critical question – can I and do I want to be a landlord? If you are just starting real estate investing, most probably you will need to function as a landlord (unless you want to pay extra fees for hiring a professional property manager). And being a landlord is not an easy job! You will have to look for tenants, deal with maintenance issues 24/7, insist that tenants pay the rent regularly, and possibly even deal with evictions. But you know, there are people for everything, so maybe you were born to be a landlord. In this case, make sure to check out Mashvisor for numerous tips of how to start real estate investing and for access to thousands of actual available properties around the US, with available analytics and comparisons.
Related: 8 Steps to Becoming a Landlord
Once you take into consideration all the above-listed factors, you should be able to answer the question “Should I sell or rent out my house?” in an educated rather than speculative manner.