Should You Sell Or Rent Your First Home If You Buy A Second?

January 9, 2024 - 9 min read

Most people who own a residence but yearn to move and purchase a new home opt to list and sell their existing one. After all, paying two mortgages can be cost-prohibitive, and you can only occupy one primary residence at a time. But selling House A isn’t your only option when you plan to occupy House B. Instead, you could rent out the former after you relocate.

It’s a good question: Should I sell or rent my current house? For answers, weigh the pros and cons of a rent vs sell home decision carefully, including the costs of either choice. Read on for further insights and advice from experts.

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Reasons to rent out your home

First, let’s explore reasons why you might want to lease out your vacated current home after moving into your next home.

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Demand for rentals is high in your area

One compelling rationale for playing landlord with house #1 after you move out is if there are plenty of prospective tenants in your neck of the woods.

“It’s a great idea to research the demand for rental housing in your neighborhood. Check major rental listing websites as well as online marketplaces to learn how many rentals are available, the average days on the market, and what the fair market rents are for properties similar to yours,” suggests Matthew Cave, a licensed real estate broker with Hudson Property Services LLC. “A good rule of thumb is if homes tend to rent in less than 21 days, you are likely in an area with strong rental property demand.”

But if rental property demand is less than desirable or later wanes, you could regret this decision. Your home may sit vacant for a long time; if you’re still paying a mortgage on that property, things could get expensive.

“Also, being a landlord almost always costs more than people realize. Things will break, and your tenants will ask you to fix them,” cautions Peter Kim, CEO of Odigo Real Estate Club.

Indeed, holding onto two properties means you’ll be on the hook for maintenance and repairs, which add up fast.

You have time and money to be a landlord

Let’s face it: Renting out house #1 is going to require some serious time and effort. That means listing/advertising the property for rent, screening and choosing tenants, collecting rent payments, and, as mentioned above, maintaining and fixing the home as needed. But if you have the bandwidth to take on these extra responsibilities – and want to avoid hiring an outside property manager – wearing a landlord hat could be a smart move.

“If you are doing it on your own, you’ll need to be accessible to deal with issues that come up and have the know-how and resources to solve these issues,” says Realtor Bill Golden. “It helps if you are handy or at least a committed DIYer. But if you’ll be moving away from the area, you’ll most likely need to pay a property manager, which will cut into your profit.”

You expect home values to go up in your area

Although there’s no guarantee, chances are your home will increase in value over time. Consider this: Per the Federal Reserve Bank of St. Louis data, the national median sales price of houses sold rose from approximately $171,100 in Q4 2011 to about $479,500 in Q4 2022. That price jump underscores how valuable owning and holding onto a home can be, assuming you enjoy healthy appreciation in your housing market.

“The challenge is that it’s nearly impossible to time the market. While the overall value of properties tends to trend upward over a long-time horizon, there are peaks and valleys,” says Cave.

If you choose to lease out your home but need to sell within a few years, you could lose money on the sale if home values drop between that time. If you plan to keep the rental home until you retire years down the road, it’s impossible to predict if and to what extent your home will appreciate over that time.

You've locked in a great mortgage rate

If you got your current mortgage loan at a low rate—like in the 3% range we saw a few years back—you’ll experience serious sticker shock if you need to finance your second home, as current average fixed rates on 30-year home loans are around 7% right now. If your first home’s rate is a lot lower than that, it can make sense to lease out your residence—assuming you can beat that rate with your rental revenues.

“Homeowners who purchased before the spike in interest rates occurred may be at an advantage here. Their lower payments may translate to the ability to rent at a profit,” says Marisa Simonetti, owner of Simonetti Real Estate Team.

But while having a low rate on house #1 helps with cash flow, don’t bank your entire rental decision on this factor alone, Golden advises.

“Also, if you have children or family members who may need a home in the future, holding onto this home could be a great option for them. Some people find that, after renting their property for several years, that rental home is now a great fit for their now-adult children or other close relatives,” says Cave. “Often, you can rent your home to a family member at rates well below fair market rent and still be profitable if you have a low mortgage rate on that home.”

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Your move is temporary

Of course, if your move to house #2 is only temporary, such as due to a short-term job relocation or military reassignment, renting house #1 is even more advisable – especially if you expect to move back in later.

“My nephew is in the Air Force, and he and his family have moved many times,” says Golden. “A few years ago, they bought a house for the first time. This year, they got transferred again, but only for a two-year stint. Since they bought their home at the top of the market and are very happy with it, it made sense for them to rent it out so that they could move back in at the end of two years.”

Ponder that renting out your first home prevents it from being vacant and, therefore, attractive to thieves and vandals.

“But it’s important to become familiar with landlord/tenant laws in your area. Certain municipalities have rules that can limit or prohibit you from ending a tenancy, which may hinder your ability to move back into the home at the time you need it,” Cave adds.

The numbers make sense for you to profit

If your monthly rental income will exceed the monthly costs of retaining your home (including expenses like principal and interest mortgage payments, homeowners insurance premiums, property taxes, utility bills, and upkeep/repair costs), renting out that home can look mighty appealing.

“A good rule of thumb that some landlords set is at least $200 or more a month in cash flow profit, which can be difficult to achieve with today’s interest rates. If the property does not cash flow or barely scrapes by, it may be better to sell,” recommends Simonetti.

If you decide to keep the home and rent it out, “be sure to set aside a healthy budget for these carrying costs, and calculate this into your financial assessment,” continues Cave.

Reasons to sell your home

Not confident renting your residence will pay off? Here are several justifications for listing and selling your current home.

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You're in a seller's market and could make a big profit

Remember that earlier stat about home appreciation? You stand to pocket a nice return on your home sale if conditions remain similar to the seller’s market we’ve enjoyed the past few years.

“When there is low home inventory and high demand from buyers, that’s the right time to sell. You may not hit that peak, but you could still make a big profit,” says Kim.

Keep in mind that there’s no way of knowing if and when you’ve reached the peak of the market, and it’s impossible to predict what price you might fetch for your listing.

“You should also only sell if you have somewhere to put that money from the sale. If you are just selling for the sake of getting more cash, you may find yourself losing more money to taxes and inflation than you expect,” says Kim.

You couldn't charge enough rent in relation to your home's value

You may have a large home that, assuming the right market conditions, should garner a high rental rate. However, rental demand may be lower in your area than elsewhere, forcing you to collect less per month than your home’s carrying charges. If you’ve crunched the numbers carefully and determined that renting won’t pay out as you’d hoped, it’s probably best to sell the home.

“It’s extremely important to do thorough research to determine the fair market rent for your home. Consult with a property management expert to determine an accurate fair market rent before making your decision,” Cave says. “In some instances, it’s okay to rent out a home without making a profit every month. So long as you are breaking even or losing just a little bit each month, market rent should hopefully increase over time – allowing you to get ahead and close that monthly deficit.”

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You need the equity from your home to purchase the next one

One of the biggest reasons why homeowners choose to sell house A is so they can afford house B after paying off the former and pocketing the earned equity—which can be put toward the down payment and closing costs on house B.

“If capital and credit are tight and, for personal reasons, you need to move, then selling is necessary. Yes, it’s a shame to lose your low interest rate on your first home, but it’s better than being one domino away from falling apart financially,” Kim says.

But one way around this problem is to keep house A, tap into its equity via a home equity loan, home equity line of credit (HELOC), or cash-out refinance, and use those funds to purchase house B—without parting with the former.

You're not ready to commit to becoming a landlord

Again, if you lack the time, skills, and will to manage a rental home, ask yourself if you can afford to pay a property management company to handle tasks associated with renters and any maintenance costs. If not, especially if you are relocating far away from house #1, don’t sweat it: Sell the home instead.

“Everyone has their own level of tolerance for dealing with stress. Being a landlord can be stressful, and if it is not something you want to deal with, move on,” advises Kim.

You are eligible for the capital gains tax exemption

Note that, if you sell your home, you may have to pay capital gains taxes on that sale. But you’ll be exempt from long term gains in 2024 if you earn less than $89,250 and are married filing jointly or earn less than $47,025 as a single filer. That’s a nice incentive to proceed with a home sale.

Rent vs sell a home: Costs to consider

Now, let’s examine the expenses involved with renting out that home instead of selling it. Here, you can expect to pay:

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  • Mortgage principal and interest costs, if you are still financing your property
  • Property taxes, often paid annually or twice a year
  • Homeowners insurance premiums
  • Mortgage insurance if you put down less than 20% on your home when you bought it
  • Maintenance expenses, such as costs to have your furnace and AC system checked and serviced, lawn mowed, house cleaned, and more
  • Repair costs if and when a major system or appliance breaks down, a storm causes damage, or other reasons
  • Property management fees if you need to hire an outside property manager
  • Homeowners association (HOA) fees if your property is within an HOA
  • Costs to list/advertise your property for rent and find a tenant

The question is whether your total expenditures above as a homeowner landlord would exceed your expected rental income.

Next, take a closer look at the costs involved with selling a home. These include:

  • Making necessary or recommended home improvements to raise the value of your property and attract more buyer candidates
  • Expenses involved with staging your home (optional)
  • Paying real estate commissions, which can add up to 5% to 6% of the home’s sale price
  • Closing costs are separate from the real estate commission

The bottom line: Which option is right for you?

Still weighing out the pros and cons of a rent vs sell home decision? If you don’t need the proceeds from your sale to help afford our next home, can either afford to pay a property manager or have what it takes to be a landlord, and can reasonably expect to make more in rental income than what you’ll pay in carrying costs, renting your home is definitely worth considering.

“It’s an excellent option for generating cash flow and building equity in the home while maintaining a backup plan should your housing needs change in the future,” Cave points out.

Just be prepared for a lot of uncertainties, and be willing to take risks—such as the risk that rental demand will remain strong in your market and that your home will continue to appreciate in value.

“I recommend finding an unbiased, trusted real estate agent or professional who can help you determine what’s best for you and your situation,” says Kim.

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Erik J. Martin
Authored By: Erik J. Martin
The Mortgage Reports contributor
Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, and The Chicago Tribune.
Aleksandra Kadzielawski
Reviewed By: Aleksandra Kadzielawski
The Mortgage Reports Editor
Aleksandra is the Senior Editor at The Mortgage Reports, where she brings 10 years of experience in mortgage and real estate to help consumers discover the right path to homeownership. Aleksandra received a bachelor’s degree in finance from DePaul University. She is also a licensed real estate agent in Arizona and a member of the National Association of Realtors (NAR).