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How To Rent Out A House You Own

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 11 minute read

As soon as I signed the papers for my first home and moved in, I swore I would never buy another. I planned to remain there indefinitely.

Obviously, I talked too soon, and then real life got in the way. After only a few years here, I no longer find it desirable to spend the rest of my life here. As I consider my options for the future, I must decide whether to sell my first home or to rent it out.

Does any of it ring a bell? The market, your personality, and your goals for the money will all play a role in determining which option is best for you. Though only you can make the final call on whether to sell or rent out your home, being aware of the factors to consider will help.

Is it better to rent out or sell my home?

Any potential outcome carries both advantages and disadvantages. Even though selling your home will free you from all the responsibilities that come with ownership, it will also prevent you from profiting from the property and may cause you to experience feelings of regret. 

If you rent it out, you’ll have a regular source of money, but you’ll also have to deal with the headaches of managing a rental property. Weigh the benefits of buying versus those of renting to determine your best course of action.

Why You Should Sell Your House

Selling your home can be a good option if you’re ready to make a big life change and take the next step up the career ladder. 

It can provide you with the funds necessary to purchase a new primary residence, save you the trouble of dealing with renters, and shield you from the effects of a downturn in the housing market. 

Selling instead of renting could be the best option in many cases:

1. This market favors sellers.

There are more people looking to buy a property than there are current listings. You have the one thing that most people strive for in life a place to call home. Some purchasers are prepared to go to extremes to acquire it. 

Price increases are usual in a seller’s market. It’s also usual for buyers to sign the dotted line before the home has even been inspected.

In a seller’s market, it’s usual for buyers to engage in heated bidding wars, which can have positive and negative effects on the seller. The sale of your house may get complex if the buyer needs a mortgage and the buyer’s pressure causes the price to rise above the appraised worth. 

When a buyer loses their home’s mortgage, the deal falls through even if everything else is perfect. With a strong housing market and a desire to move on, selling your property could be the best option.

2. You Need Money Right Away

While it’s great to be able to develop equity through home ownership, that equity won’t serve you well if you keep it all tucked up in your mortgage. You’ll need a substantial down payment if you want to purchase a new house.

Your next real estate purchase need not be funded by the profits from the sale of your current house. If you come into some extra cash, you can put it toward a variety of goals, including sending your kid to college, paying off a sizable medical expense, or even moving abroad.

Your home’s equity can be quickly turned into cash through a sale, easing the burden of your next step.

3. You Want to Avoid the Troubles Associated with Owning Rental Property

Property management isn’t a good fit for everyone. Despite the popular misconception that rental revenue is passive, it actually requires active management on your part. Find and vet potential renters, collect rent on a regular basis, and keep up with maintenance and repairs.

Marketing your rental property and dealing with tenants can be a real hassle if you’re not a people person.

In addition, a common problem for property owners, especially new ones, is a lack of cash flow. Even though the house didn’t have any issues while you were living there, it may now require extensive maintenance in order to be rented out.

A property management firm can be hired, but it will cost money to have the organization handle the management duties. Sell your house if you want to avoid all the hassle.

4. Lots of Work Is Needed on the Property

Maintaining a home in livable condition requires regular attention and care. For an older house, the cost of making the necessary repairs could far surpass the potential rent increase.

In a similar vein, you could decide that fixing up your old house or making major renovations is too much of a headache and want to look for a new place to live instead. 

The home might be listed for sale with a credit given to the buyer to use toward the cost of fixing any issues they may find. It’s also possible to sell the home as is to a buyer looking to save money on a renovation project.

5. You Can’t Afford the Upkeep Costs or Property Taxes

Repairs and upkeep are costly endeavors. You might easily see your revenues dwindle when you have to pay for routine maintenance like annual HVAC inspections or the services of a landscaper.

The problem of property taxes must also be considered. Property taxes can be a considerable financial burden depending on where you live, and rising property prices simply add insult to injury. 

Your best option may be to sell if the rent you could get each month doesn’t cover the cost of your mortgage, taxes, and repairs.

6. You’re Experiencing a Significant Life Change

Adapting to new circumstances is inevitable. However, substantial life upheavals may leave you with little time or energy to cope with tenant screening, repairs, and paperwork. It’s possible you won’t be ready for the challenge of change, even if it’s a positive one like the arrival of a new child. 

When you have a new baby or child, the last thing you want to do is deal with the requirements of tenants. When a change is bad, it always gets worse.

For instance, following a divorce, it is usually more convenient to sell joint property than to try to rent it out. And that’s especially true if you and your ex-spouse had trouble agreeing on even the smallest of matters. You’ll be able to part ways amicably after the house sells and divide the money accordingly.

Therefore, it is generally preferable to sell the house if any major life event could cause you to neglect your responsibilities as a property owner.

7. You Don’t Enjoy Owning a Home

There’s a lot of pressure to fulfill the American Dream by buying a home, but many individuals are disappointed once they do take the plunge.

As a homeowner, you’ll encounter a wide variety of shocks, some pleasant and others terrifying, such as a broken heating system on the coldest day of the year or a burst pipe.

Having tenants move in will only add to the headaches of house ownership if you decide to convert your primary abode into an investment property.

If you don’t like being a landlord, that’s fine. In that scenario, it is time to get in touch with a real estate agent and have them put your home on the market.

Why You Should Rent Your House

You need to relocate, but right now is not the right time to sell your current house. Earning cash from rent while also benefiting from rising property values is a win-win situation. 

You can optimize your earnings from a rental property if rental rates are increasing. Under the correct conditions, renting out your home is the optimal course of action.

1. A weak housing market

The antithesis of a seller’s market is one where buyers have more leverage. If there are more houses on the market than there are people looking to buy them, it is considered a buyer’s market. 

When homes sit on the market for an extended period of time without being sold, prices drop. The seller must often go to extreme measures to attract bidders and achieve a fair price for the property.

The current market strength is also affected by mortgage interest rates. If interest rates are high, fewer people will want to take out loans. Having fewer potential purchasers in the market might have a negative impact on the housing market when lenders become more selective in their approval processes.

When this occurs, many people opt to forego homeownership in favor of renting, increasing the demand for available apartments. If that’s the case, you could be better off renting out your home until the market shifts to favor sellers.

2. Your area has a high rental demand

There is a persistent demand for rental homes in areas where the number of tenants outnumbers the number of homeowners. If your house is located near a college or university, for instance, you will likely find renters among the students or visiting faculty.

Comparing the monthly rent to the median home price in your area is another good indicator of the local housing market’s desire for rentals. More people can afford to rent than buy when the median home price is 15 times the typical monthly rent. 

However, if the asking price is lower than 15 times the monthly rent, more people will be interested in purchasing the property. Consider buying a rental property if you’ve come to the conclusion that there are more people in your neighborhood who rent than buy.

3. You Need Rental Revenue

Assuming you can find a good tenant, renting out your property can provide you with a dependable stream of money.

The money can be used to settle your mortgage and maintain up with annual tax payments. Rental income might be saved for future use or applied to other expenses if the mortgage has already been paid off.

4. Ready to Own a Rental Property?

Getting paid rent every month is only part of being a landlord. Rental housing is an excellent option if you’re comfortable with the responsibility and don’t feel overwhelmed by the complexities involved.

Being a landlord can be enticing if you’re the type of person who can keep a smile on your face no matter how bothersome your tenants are, or who thrives on the challenge of figuring out complex issues.

Distancing yourself emotionally from your home is a good indicator that you’re ready to rent it out. That’s especially challenging when it’s your first house, which you’ve probably worked hard to personalize.

If you can separate your property from your personal life and treat it like a house instead of a home, renting it out to others will be less of an emotional strain.

5. You’d Like to Own Investment Real Estate

Having investment property in your portfolio is one approach to diversifying your holdings and aiding in wealth creation through the acquisition of many assets. The increased worth of your home might be used to your advantage if you decide to keep it and rent it out.

6. You Possess More Than It Would Sell For.

When selling a home with a mortgage, the proceeds are applied to the balance of the loan. However, if you are underwater on your mortgage, which means that you owe more on the home than it is worth, the proceeds from the sale of the home will not be enough to pay down the remaining balance of the loan.

Fortunately, you can choose from a few different responses. Your savings, if you have any, can be used to cover the difference.

You might also try to negotiate a short sale, in which case the bank would agree to accept a price that would leave you with a net amount owed to them. In some cases, they may even waive the outstanding debt.

Unfortunately, if the lender agrees to a short sale, it might negatively affect your credit and result in a significant tax liability. If you owe more on your mortgage than your property is worth, renting may be your best alternative. 

Mortgage payments can be made in part through rental income, buying you time. In an ideal world, you’d be able to sell your property within a year, once its value has improved and your mortgage balance has decreased.

7. You Have a Future Return Date for the House

Though life has the potential to take you in many different directions, you will inevitably circle back to where you began. For that reason, it’s important to have somewhere to return to after your travels are done.

If you are planning to move overseas or have a temporary job assignment out of town, renting your home is a good option.

However, if your absence won’t be lengthy, Airbnb could be a great option for a short-term rental. You can relax knowing that you won’t have to time your move back to the conclusion of a tenant’s lease.

8. You Want to Keep Accumulating Equity

There is such a thing as seller’s remorse, and it’s typically generated by selling an object before it reaches its maximum potential value. There is a possibility that the value of your home has increased since you purchased it, and there is also a potential that it will continue to increase while you continue to own it.

By renting out the property, you can earn passive income and increase the value of your investment through the accumulation of equity.

9. You Haven’t been a Resident of the House very Long.

The tax burden that results from selling your property too soon after purchasing it can be quite large, especially if you make a profit. The rate of short-term capital gains tax is the same as the rate of personal income tax, so both will apply if you sell your house in less than a year.

If you hold on to your house for more than a year, you can benefit from long-term capital gains tax rates of around 15%. But there’s a caveat for people who’ve owned their homes for at least two of the last five years: they don’t have to pay the tax. 

If this describes you, you can avoid paying tax on up to $250,000 of profits if filing as an individual, or up to $500,000 if filing as a married couple. To reduce your tax liability, consider renting out your home if you’ve only had it for a short period of time and are unable to stay in it yourself.

How to Choose Between Rent and Sell

Math is the deciding factor in whether you should sell or rent out your home. If you have a large mortgage balance and the monthly rent you’re asking for won’t cover your loan payment, you’re better off selling the property. This is also the case if the rental rates are too low to pay the costs of upkeep, taxation, and management.

Renting out a home might be a smart financial move if the market rents in your area are much more than your mortgage payment and you expect home prices in your area to rise. Evaluate the numbers and evaluate which course of action results in a net gain in the long run.

Take into account your particular preferences and long-term plans as you weigh the pros and cons of buying versus renting. If you’re the kind of person who would rather not deal with anyone at all and would rather avoid any potential for contention, then being a landlord is probably not for you unless you can afford to hire a management company. 

Renting out your property can be rewarding and profitable if you’re conflict-averse, have no problem with initiating eviction proceedings, and don’t mind cleaning up after others’ messes.

Bottom Line

There are dangers involved in both selling and renting. A bad tenant can ruin your house and make it difficult to pay your mortgage. The loss of equity due to selling too soon is a common mistake among homeowners.

If you decide to rent, it is in your best interest to work with a leasing agent and a property management firm. If you’re thinking about selling your property, it’s a good idea to consult with a real estate agent first so you can learn more about the current market conditions, determine an appropriate selling price, and plan for a successful closing.

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