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Should you sell your house or rent it out?

Peter Warden
The Mortgage Reports contributor

In this article:

If your professional, educational or personal life changes, your address may as well. If you own your residence, should you sell your house or rent it out?

  1. Will your house provide income or cost you money as a rental?
  2. What are the tax consequences of selling?
  3. How are property values trending in your neighborhood?

Most of the reasons for selling or keeping revolve around finances. So run the numbers if you’re comfortable with the math, or turn the decision over to a neutral accounting or financial pro.

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Sell your house or rent it out? It’s just math

You’re moving. But what should you do with your existing home?

Most people would sell it. However, you’re wondering whether you might be better off renting it out.

It’s about the money

This “sell your house or rent it out” dilemma rarely comes with a long list of pros in one column and a similar number of cons in the other. Of course, there will be secondary factors to take into account. But, bottom line, your focus will be on … well, the bottom line.

If you have a horror of math, don’t panic. We’re not talking advanced calculus or algebra here. Providing you (or your calculator or spreadsheet application) can add up, subtract, multiply and divide simple sums, you’ll likely be fine.

Related: Tips for landlords: how to set your rent

Be like a zombie — pick brains

You’ll have to make realistic assumptions about trends in the property market in your area. If it’s hot, you stand to get a good rent and have short periods when the home’s empty. And you might expect to watch the property appreciate in value quickly. If it’s cool or cooling, you may have the opposite experiences.

You’ll also need to know about the tax implications of renting out. You may be able to find what you need on the IRS website and online real estate sources. But you might feel more confident if you consult a tax professional and chat with a knowledgeable, local real estate agent and some landlords who already own rental property nearby.

Those simple sums

What you can’t do is deduct your mortgage payments from your rental income and think you’ve identified your profit. The following is a long (but not necessarily comprehensive) list of other expenses you may or may not have to deduct:

  • Mortgage payments
  • Vacancy rate — tenants come and go and periods when the property is empty (and generating zero income) are close to inevitable. At a minimum, expect a 5 percent vacancy rate. But mortgage lenders hit you with a 25 percent vacancy factor when determining potential property income
  • Property taxes
  • Home insurance — rates for rental properties are usually higher (often 15-to-20 percent higher) than those for owner-occupied homes. So get a quote
  • Utilities

Related: Guide to becoming a landlord in 2018

  • Sewer
  • Garbage collection
  • Homeowners’ association fees — where payable
  • Preventative maintenance — clearing the gutters, getting the HVAC and furnace serviced, periodic painting … Occasionally, you may be faced with a big bill for a whole new roof, replacement windows or something similarly expensive
  • Repairs — When a pipe bursts, the hot water fails or the roof springs a leak. Some of those may involve emergency call-out fees
  • Yard work and lawn care
  • Snow removal

Depending on your lease, you may be able to make your tenant responsible for some of those. However, expect that to be reflected in the rent you can charge.

ROI is king

If you’ve owned your home a long time, selling it could release a big chunk of money. Ask yourself if you could earn more investing it elsewhere (maybe in the stock market or a business) than you could renting out your home and let its value increase.

In other words, you should calculate the different return on investment (ROI) each opportunity potentially provides.

Related: First-time landlord surprise!

Of course, there are risks whatever you do. You could pick the wrong stocks, the whole market could collapse or your business plan flawed. And property prices and rents can go down as well as up.

Risk and reward are closely associated in all investments. All you can do is think through your choices and make the best judgment call you can at the time.

The secondary issues

So far, your decision to sell your house or rent it out has depended solely on dollars and cents. And that’s how it should be.

However, there are other factors to take into consideration before you go ahead and press the button.

Related: Tips for landlords (beware of tenants who are identity thieves)

Distance

How far from your rental home you’ll be living can have a big effect on the viability of being a landlord. It’s one thing if you’re still within a reasonable drive of the property. You can pop back periodically to:

  • Keep an eye on the place and make sure it’s being treated well
  • Ensure your tenant isn’t causing a nuisance or even dealing drugs out of the property
  • Find and screen a new tenant when an existing one gives notice
  • Manage the paperwork and processes associated with your lease/rental agreement — including, perhaps, evictions
  • Chase late rental payments
  • Keep down costs by doing yard work and routine maintenance yourself
  • Be the single point of contact for tenants — And call in plumbers, electricians and contractors, when required

If you’re living hundreds or thousands of miles from the property, you’ll have to get other people to fulfill all those roles. Typically, that’s a property manager. And those can be expensive.

Your personality type

Not everyone can delegate such responsibilities well. You can end up feeling very helpless when you’re far from a property you own and are entirely in other people’s hands. If you’re going to lose sleep worrying about what’s happening to your old home, you might prefer to offload responsibility now by selling it.

Related: 1 more reason to buy rental property (tax breaks for landlords)

Having the right personality traits to be a landlord is even more important if you live nearby and want to be a hands-on owner. Ask yourself whether you will:

  • Stand up to troublesome and perhaps intimidating tenants who are regularly late with the rent or are damaging the home or are attracting nuisance complaints from neighbors
  • Be too empathetic to rid yourself of tenants (perhaps with young children or sick and elderly parents) with spiraling financial problems
  • Tire of maintaining two homes and yards: your new one and the rental property
  • Remain happy to take calls at 2:00 a.m., complaining about a burst pipe or blown fuse/trip switch
  • Be ready to devote the time and energy necessary to find new tenants and screen them effectively
  • Enjoy managing the legal and financial paperwork associated with being a landlord

There were 43 million rental units in the U.S. during 2017. So a lot of people are very happy being landlords.

You just need to be sure you’ll be one of them. So should you sell your house or rent it out?