When you have to relocate or choose to buy another primary residence for a life change, you’ll face a big decision: should you rent or sell your home? This isn’t an easily answered question because there are so many considerations to take into account. It’s not just about your wants and needs, it’s really about mathematics and leaving emotion out of the equation. Of course, that mindset is simple to understand but very difficult to put into practice.
One way to get into that particular frame of mind is to look at your old house for what it truly is — an investment. It’s no longer your home, it’s a property asset and requires you to think long and hard about which option to choose.
Should I Rent or Sell My Home?
Because so few can afford to pay two mortgages, there’s often a knee-jerk reaction to this kind of situation. Some will almost immediately jump into renting their properties, but, the majority will sell. The reason for this is obvious — selling amortizes the existing mortgage and can bring more money to the closing table. That’s certainly a powerful and persuasive reason to sell, but still, others will see renting as the better long-term decision.
“Before you decide which way to go, consider the current situation in the area where your property is located. Determine the demand for rental properties like yours is in the neighborhood. Through a comparative market analysis, which real estate professionals use, determine the value of existing properties in the neighborhood and the price similar properties rented for within the last six months.” —U.S. News and World Report
Renting a property is usually thought of as a way to gain “passive income.” The truth though, is much different than the concept. You’ve likely heard the phrase, “It takes money to make money,” and, this is not an exception to that undeniable rule. Before you decide to cleanup your old property and advertise it for rent, answer the following questions:
- Are you prepared to be a landlord? Being a landlord is a huge responsibility because it entails so much. There’s not only the time and effort to find and vet a tenant, there’s also the emotional toll it takes. Ask yourself if you have the means and fortitude to go through three to six month periods of vacancy. In addition, ask yourself if you’re ready to handle the inevitable emergencies, such as replacing the HVAC system.
- What’s the true cost of renting out your property? One huge mistake new landlords make is to believe that their rent will cover their mortgage, taxes, and insurance. Don’t forget, though, there’s also maintenance, repairs, and more expenses. For instance, you’ll lose your homestead exemption, which will greatly increase your costs.
- Is the rent going to actually bring a return on investment? Right in-line with the question above is knowing if the rent you charge will actually turn a profit. Breaking-even isn’t necessarily bad, but it will not last because of the rate of inflation. Even though you are amortizing your mortgage, costs and inflation will eat away at any returns.
- Is the neighborhood plateauing or growing? If there’s one time-tested truth about real estate, it’s location matters — a lot. When you purchase a home, you’re not only buying a residence, but into the neighborhood, as well. If it’s getting past it’s prime, you’re better off to sell than because the equity equation won’t work in your favor.
- Is there a better place to invest? This question is very important because when you own real property, it is an asset, but, can’t be easily liquidated. Though real estate does have a long track record as a growing investment, the rate is notably slow compared to mutual funds.
If you have a property that you’re considering selling, get a professional opinion about it’s market value to make an informed decision.