Rent or Sell Your House?
When moving out of a home you purchased, it is often worth asking whether it would be beneficial to rent the house out rather than selling it. There are advantages and disadvantages to each option.
It takes some time and effort to be a landlord
The first question to ask yourself when considering whether to rent or sell, is whether you are willing to put forth the time and effort required to rent. Selling a home is usually complete within a few months, depending how well you price it, and then you can move on. If you rent a house out, it will require time to locate tenants, do repairs, collect rent, etc. While such issues will generally not take all your free time up, theyíll likely require a few hours every few months.
You can outsource most of the time required to be a landlord to a rental management company. They will typically find renters, collect rent, and will often take care of small repairs without needing to consult you. Rental management companies usually charge ~8% of rent plus fees for finding renters, renewing leases, and doing repairs. They can be a good option, particularly if your rental property is geographically distant from your residence. However, taking 8% of your rent can eat into your profits quite a bit.
Will your house make a good rental?
Itís important to consider whether your house will make a good rental when determining to rent or sell. If you have an immaculate house with nice carpet, then selling may be the better option -- buyers will be attracted by an immaculate house and it will fetch a good price. Also, an immaculate house may deteriorate quickly with a renter inside it who will likely not treat it as nicely as you. A house that is already a bit worn wonít show as much wear after having a tenant in it for a while. Another consideration is your yard maintenance -- while you may not mind cutting the grass, weeding your flower beds, and trimming the trees, your tenant might be unwilling to do yard work. This may result in more expenses for you in order to maintain the yard.
Risks of renting
The question of whether to rent or sell is also a question of risk and reward. Selling a house carries very little risk: you list it (priced correctly) and transfer ownership to someone else. The inspection and appraisal will mitigate the risk of the buyer and seller. A rental carries many forms of risk:
- The house may depreciate in value during the rental period (although this is not typical)
- The tenants may cause property damage or accrue HOA fees
- The tenants may stop paying rent and need to be evicted
- The house may remain vacant for a period of time
- If the house carries equity and you have any debt, then there is inherent risk in not using this equity (which is fairly illiquid) to pay down other debt
While these risks to renting can be substantial, and you can find horror stories scattered across the internet, it should be noted that there are many rentals in existence. In recent years investors have been buying up properties and renting them out. This indicates that renting is generally profitable, relatively low risk, and usually financially advantageous to selling.
Renting is more profitable than selling in most situations
In most situations, renting will be better than selling on a financial basis. Consider that when you rent out a house, you will probably be using leverage (a loan). If the house appreciates at a faster rate than your interest rate, or if you already have some equity, then you will be gaining equity just by holding the property. Besides that, youíll be using the rental income towards your mortgage payments which will help to pay down equity. If youíre selling a house, the best thing you can usually do with the money is to invest it in the stock market which will return something like 10% over the long run. While this isnít a bad option, itís hard to match the profitability from renting.
The Rent or Sell Calculator Excel spreadsheet linked below has inputs for most of the variables you need in your rent or sell consideration. Itís not perfect, but it should give you a good idea of the financial difference youíll see in renting or selling. Please use the Contact form if you see any big issues with it. Also, please consider donating to this site if you find it to be useful.
Link to the Rent or Sell Calculator Excel spreadsheet
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Financial considerations are only one part of the rent or sell equation. Be sure to consider time and risk when deciding to rent or sell. I recently faced this decision, and after thinking it through, I decided to sell my home so that I could avoid the hassle and put my equity towards reducing debt on a new home. This may cost me several thousand dollars in the long run, but it reduces risk and brings peace of mind in the near term, which is valuable to me and my family.
B. Taylor, 4 February 2015