When you’re ready to move, figuring out what to do with your house is a big decision. And today, more homeowners are considering renting their home instead of selling it.
Recent data from Zillow shows about two-thirds (66%) of sellers thought about renting their home before listing, with nearly a third (28%) taking that possibility seriously. Compared to 2021, when fewer than half (47%) of homeowners considered renting before selling, it’s clear this trend is on the rise.
So, should you sell your house and use the money toward your next home or keep it as a rental to build long-term wealth? Let’s walk through some important questions to help you determine the right path for your financial and lifestyle goals.
Is Your House a Good Fit for Renting?
Before you decide what to do, it’s important to think about if it would make a good rental in the first place. For instance, if you’re moving far away, managing ongoing maintenance could become a major hassle. Other factors to consider are if your neighborhood is ideal for rentals and if your house needs significant repairs before it’s ready for tenants.
If any of these situations sound familiar, selling might be a more practical choice.
Are You Ready for the Realities of Being a Landlord?
Managing a rental property involves more than collecting monthly rent. It’s a commitment that can be time-consuming and challenging.
For example, you may get maintenance calls at all hours of the day or discover damage that needs to be repaired before a new tenant moves in. There’s also the risk of tenants missing payments or breaking their lease, which can add unexpected stress and financial strain. As Redfin notes:
“Landlords have to fix things like broken pipes, defunct HVAC systems, and structural damage, among other essential repairs. If you don’t have a few thousand dollars on hand to take care of these repairs, you could end up in a bind.”
Do You Understand the Costs?
If you’re considering renting primarily for passive income, remember, there are additional costs you should anticipate. As an article from Bankrate explains:
Mortgage and Property Taxes: You still need to pay these expenses, even if the rent doesn’t cover all of it.
Insurance: Landlord insurance typically costs about 25% more than regular home insurance, and it’s necessary to cover damages and injuries.
Maintenance and Repairs: Plan to spend at least 1% of the home’s value annually, more if the house is older.
Finding a Tenant: This involves advertising costs and potentially paying for background checks.
Vacancies: If the property sits empty between tenants, you’ll lose rental income and have to cover the cost of the mortgage until you find a new tenant.
Management and HOA Fees: A property manager can ease the burden, but typically charges about 10% of the rent. HOA fees are an additional cost too, if applicable.
What are some benefits and drawbacks of rental property?
There are long-term considerations to owning rental property. Some considerations are terrific benefits, other considerations have expensive tax ramifications. Advance thought about exit strategies is very important. Some rental benefits could include:
- Monthly cash flow
- Ability to expense supplies, repairs and improvements for tax purposes
- Ability to take depreciation expense on the cost basis of the property over 27½ years
Some drawbacks could include:
- Need to sell quickly due to life changes
- Potentially expensive tax consequences
- There is a 15%-20% capital gains tax on the gain on sale of the home
- Upon sale, there is a 25% depreciation recapture tax on the total depreciation taken during the rental periods
- Future political changes in tax law, rent control and landlord rights
Bottom Line
To sum it all up, selling or renting out your home is a personal decision. We have personal experience with renting out a home you have lived in so let’s connect. Not only will you have a pro on your side to help you feel supported and informed as you make your decision but we can also share both the personal benefits and downsides of renting out your family home.
Real Estate | Your@HomeTeam 