So, you’ve found a new home and you’re not sure what to do with your old property. You could sell it to get a large cash sum or you could rent it out and have an extra income every month.
There are benefits to either option but finding the right choice for your situation can be difficult. To help make this decision a lot easier for you, we’re going to give you the information you need to make an informed decision so you can stop ruminating and asking yourself, “Should I sell or rent my house?”
As of April of 2019, there were about 673,000 houses sold in the U.S. That’s about 12% more than 2018. Demand is strong, inventory is low, so, selling your home is still a viable option and you’ll get top dollar for it.
But, it’s not the only option. To help you decide, we’re going to give you a few things to think about before you jump into either choice. Here are a few questions to ask yourself.
- Will You Make a Profit When You Sell or Rent?
- What’s the Value of Your House?
- What is the Real Estate Forecast for Your Area?
- Are You Ready to Be a Landlord?
- Is Your Move Permanent or Temporary?
- Have You Thought About Renting Property Before?
- Final Thoughts
Will You Make a Profit When You Sell or Rent?
Your first assumption might be that renting your house will generate the most profit. After all, you’re receiving cash every month for as long as you want to rent it, right? But if you sell your house, you’re only going to receive a one-time lump sum of cash.
But, this isn’t always the case. When you rent out your home, you have to spend money.
As a landlord, you have to keep in mind:
- Your monthly mortgage payment (if you’re still paying on it)
- Your monthly mortgage insurance payment (if you’re required to buy it)
- The cost of your yearly landlord insurance (which is at least 10% more than homeowner’s insurance)
- The cost of your property taxes
- Any fees you pay the Home Owners Association (if you have one)
- Commission to the real estate agent you hire
- The cost of an accountant because taxes are a bit different when you’re renting
- Any repairs when it’s occupied by a tenant
- Repairs or maintenance after tenants leave
- Capital improvements over time
Compare Income to Expenses
Compare these numbers to the amount of rent that’s appropriate to charge. This is determined by the quality of the property and the area where the house is located.
If you’re not sure where to begin, we put together this guide on analyzing your potential returns on rental properties.
As with any of your income, there are taxes on what you make. You can write off certain expenses that come along with renting out a house, including repairs.
This doesn’t mean you won’t make a profit off of renting. It depends on the money you have to spend and the location of the house.
If you sell the house, you have to consider the commission fee for a real estate agent, closing fees, and the price of real estate in your area.
There is a sales tax when you sell your home. It varies from state to state but it usually ranges from 6% to 10% of your sale.
Overall, you have to determine whether renting or selling will bring you a profit and not a loss in money.
What’s the Value of Your House?
This ties into whether you’ll make a profit or a loss. You need to know the true value of the house before you make a decision.
We discussed a few fees that you will have to pay when you sell a house but this doesn’t determine the actual property value.
There are a few ways you can determine your house’s value:
Get a CMA before decided to sell or rent
If you’ve hired a real estate agent, they should have a Comparative Market Analysis (CMA) for you to review. This analysis has information about how much similar houses sell for on the market and even how long they take to sell.
Compare your home with those that have a similar size and around the same number of bedrooms and bathrooms. They should also have the same or similar structure and design and be located in the same area.
It takes quite a bit of work for your real estate agent to create a CMA. They have to gather all the important information about your home and figure out tax rates that differ from property to property. They also have to find out what you paid for the house in the first place.
All this data is compared to houses that sold on the market that are similar and even similar property that was listed but never sold.
They gain this information from your local Multiple Listing Service (MLS). It has all property in your area that’s for sale and in the middle of being sold.
2. You can choose to hire an appraiser.
Don’t want to settle for a paper appraisal. You want a physical person in your home to determine the appraisal price. Their job is to decide what your house’s fair market value is, whether they’re appraising for you or a bank.
Like a real estate agent, an appraiser is going to find information on the local MLS for similar houses. They have to compare this data. then, they head out to your property for an on-site evaluation.
Appraisers take notes on the outside of the house, from the structure to the foundation. They pay attention to your area and neighborhood. They also take photos of the outside of your house.
They photograph the inside of your home and check and take notes on all the important factors, from the layout to the electric wiring.
Within a few days, the appraiser sends you an appraisal report. This tells you the fair market value of your house as well as how they came to that conclusion.
Before you hire an appraiser, check their credentials. Appraising can cost anywhere from $200 to $500. It varies depending on location and the size of the house.
3. There are several online estimation tools that you can access.
They help figure the approximate value of the house. But, you can’t factor in the things that may make your house different than similar houses. These tools only offer estimations so you won’t receive anything like a definite number.
What is the Real Estate Forecast for Your Area?
Keep in mind what the real estate forecast is for your community. Whether it’s dropping or rising says a lot about the decision you should make.
Watch the patterns in what property is selling. If a surplus of people is moving to your city, it’s safe to say that it’s rising. People shutting down businesses and moving away usually means it’s dropping.
Is the market dropping in your area? You might want to sell your house right away before you end up with a loss of money. If the market is rising, rent out the house for a while. Let the property value continue to rise and, when you decide to sell it, you’ll make a profit.
Are You Ready to Be a Landlord?
The job of being a landlord is stressful. It takes up your time, you have to live in the same vicinity for emergencies, and it’s can be extremely stressful.
There are two types of tenants. There are perfect tenants that pay on time every month, take care of the property, and only contact you for serious repairs. Then there are horrendous tenants who are always late on rent, cause damages from carelessness, or they’re ringing your phone all the time over trivial things.
Ask yourself: Can I deal with the worst tenants appropriately? Or will I get too stressed out?
Let’s not forget the possibility that you’ll have to evict somebody at some point. You need to have a hard heart. It’s not an easy situation to be in or a task to undertake.
Remember the repairs. If the oven stops working, that’s your problem. If you have can do the repairs yourself, that’s great, but you have to have the time to do them.
If you don’t have the skills or the time
You need to be able to afford to hire a repairman every time work needs to be done in the house.
If you can afford it, you can invest in a property managee to do all the dirty work for you, including evictions and repairs. Plus, you can move out of town because you don’t have to worry about the responsibilities at the rental property. You only have to work about house taxes, paying the manager, and other financial aspects.
There are companies you can hire a property manager from or you can find someone you trust to handle everything. Property managers charge around 10% of your rental income.
Is Your Move Permanent or Temporary?
Have you found a new permanent home or is your move a temporary work assignment?
If you’re going to be gone on a temporary basis, your best bet is to rent out the house. You need a stable piece of property to come back home to. Otherwise, you have to buy another home or even start renting yourself. You’ve already bought one home, ask yourself if you want to go back to renting.
Keep in mind, you can rent your house for up to three years without gaining capital gains tax when you go to sell it. But you have to have lived in the house for at least two out of five years.
Have You Thought About Renting Property Before?
Real estate is a profitable industry that’s never going away. People need shelter over their heads, whether it’s a house, apartment, condo, or duplex. It’s a necessity no matter who you are.
So. it’s no surprise if you’ve considered getting involved in real estate, including renting. It’s a somewhat stable source of income, depending on your tenants, of course.
If you aren’t at risk of major loss and can afford it, take a chance on renting out your house. Be aware that when you get a loan for a house as an investor or someone wanting to rent out the property, your interest rates are higher. You have to put more money down before a lender will consider giving you any money.
Loaning money to an investor is a higher risk for the bank. Since the property isn’t the roof over your head, you can walk away from it without a second thought and default on the loan. Plus, they don’t know who you’re going to rent to.
If you already own the house, you don’t need to pay extra interest or have a 20% down payment. This is your chance to try renting a property out.
If it’s not for you, you can change your mind and sell it instead. This could be a good first step to find out if renting out property is for you and your avenue to purchasing more pieces of property to rent out in the future.
Are you asking yourself, “Should I sell or rent my house?” You have a lot of work to do to figure out what is the best decision for you. It’s not a simple question, so there’s no simple answer.
Use this list of questions to consider your options before making such a big decision. Remember, the best choice is what’s best for you.
Eric Bowlin has 15 years of experience in the real estate industry and is a real estate investor, author, speaker, real estate agent, and coach. He focuses on multifamily, house flipping. and wholesaling and has owned over 470 units of multifamily.
Eric spends his time with his family, growing his businesses, diversifying his income, and teaching others how to achieve financial independence through real estate.
You may have seen Eric on Forbes, Bigger Pockets, Trulia, WiseBread, TheStreet, Inc, The Texan, Dallas Morning News, dozens of podcasts, and many others.