Should You Sell Your House or Rent it Out?

So you’re moving out from your primary house to a new house. Our best wishes to you. But what do you plan to do with your current house? Would you sell it or rent it out?

The rent versus sell debate is often crucial. Some say rent out your house to get a second income source. At the same time, some may suggest investing the sales proceeds in another profit-making instrument, such as stocks, Real Estate Investment Trusts (REITs), etc.

Whether you choose to sell or rent, you must consider these five factors to reach a solid decision (you may add more to this list):

  • Costs of selling vs cost of renting
  • Consider property tax
  • Calculating profit
  • Days on the market
  • Looking for the right prospect

Home Selling vs Home Renting Decision: Things to Consider

Should You Sell Your House or Rent it Out

Costs of selling vs cost of renting

The cost of selling a house is very different from the cost of renting a house. Renting out a property doesn’t mean you’re free from making any repairs or renovations. In most cases, the landlord is entitled to pay for repairs and maintenance costs. However, the tenant pays for the damage if s/he is responsible for the damage.

The landlord is also entitled to keep the rental property in habitable condition, involving substantial amounts.

The cost of renting a house may include:

  • Mortgage Payment
  • Property Taxes
  • Mortgage Insurance Premiums
  • Landlord Insurance
  • HOA Fees
  • Repairs and Replacements
  • Maintenance
  • Advertising and Rental History Checks on Tenants
  • Accounting and Property Management Fees

On the other hand, you’ve no obligation to pay such costs once you have sold the house. You’re only obligated to these costs till you hold ownership of the property. However, there are some specific costs attached to selling a property. The costs of selling a house include:

  • Realtor’s Fee
  • Legal Fee
  • Mortgage Payoff

Consider property tax

Selling your house or renting it out both involve property tax (with some variations). When you rent out a property, you pay rental income tax (after deducting relevant costs), which may include:

  • Advertising
  • Insurance
  • Interest and bank charges
  • Professional fees (includes legal and accounting fees)
  • Management and administration fees
  • Repairs and maintenance
  • Travel
  • Utilities
  • Other rental expenses

On the other hand, you pay capital gain tax when selling a house (if sold at a profit).

Calculating profit

That’s the key to your decision – is it profitable to sell a house or rent it out. And it’s our primary objective here.
Generally speaking, both renting out a property and selling it generate profits. However, one could stay ahead of the other, and you have to find the best option.

While calculating possible returns on renting a house, subtract all costs (including taxation and mortgage) from monthly rentals. According to Investopedia, the average return (return on investment) on a rental property should be (at least) between 5-7% (after deducting monthly rental costs).

The same formula goes when you’re selling your property.

The question now arises, “how would you choose between the two options, when one option gives you profit now (that’s by selling) and the other would give you profit in the future (that’s by renting)?”

While calculating profits, you also need to consider these factors:

  • The time value for money: What you get today wouldn’t be as beneficial tomorrow. So, you do need to consider the time value for money.
  • Opportunity cost: When you rent out your property, you might miss an investment opportunity that could give you more returns over the period.
  • Economics (supply and demand): While we are familiar with the best time to sell a property (spring), some unforeseen events (like COVID-19) could change the course of time. You need to keep up with the housing market and sell or rent when it’s the best time to do so.

Days on the market

Recall the time when COVID-19 just started spreading across continents. There were very few transactions, although it was spring. Sellers held on to their homes, while renters tried to extend their contract period for the same rental amount.

Those were some unpredictable times. You need to consider those while making the big decision. The longer your property stays on the market, the higher your loss could be.

Looking for the right prospect

That’s again an unpredictable and uncontrollable factor. But you could do your homework before handing over your property to the new owner or renter.

It isn’t a big deal to know the new owner. But it’s when renting out the house. You don’t want to end up with a bad renter.

Conclusion: Should You Sell Your House or Rent it Out?

Once you have every answer to your decision, it would be easy to reach a regretless conclusion.

Here, you do need to consider one more thing – how would you finance your second home? If you don’t have savings for your down payment and other related costs, selling it would be the only choice.

Just make sure you make the right decision, as buying a home is not as simple as buying a pair of shoes.

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