You are a homeowner and for whatever reason, it’s time to move on. Maybe you’ve outgrown your house, perhaps there’s a new job waiting in another location or you’re just ready to move to a more appealing home in a different neighborhood. No matter what the reason, you are no doubt struggling with the question, should I rent or sell my house?
This decision often comes down to where you are in life and what your long term goals are. If you don’t have a lot of cash reserves or investments, you might need the proceeds from the sale of your existing home to go towards the down payment on a new home. If on the other hand, you’re looking for investments, owning and managing a rental property might be a great option for you.
There are a lot of different factors to consider before jumping into the world of residential rental property investing. Some of them are financial, while others have to do with the demands this type of investment can make upon your time and lifestyle.
Let’s take a look at the major considerations that will affect your decision of whether to rent or sell your home.
Cash flow should be the primary focus when considering the financial side of the rental business. Just like it sounds this term describes how cash flows in and out of your accounts.
Cash can flow positive or negative, but for most people, positive cash flow from your rental property would be the ultimate goal.
There are rare exceptions to this principle, these exceptions usually involve taking losses for tax purposes, certainly not something most people are looking for.
The other reason you might consider taking the negative cash flow would be if you were pretty far into a 15-year loan. You would do this in order to pay off the house and own it free and clear.
In order to establish cash flow, you’re going to have to do some estimating of both income and expenses. It’s important to be realistic about these numbers. When working with a new property owner in our property management company, we tend to lean towards the pessimistic side of these numbers.
If the property leases for more money and the expenses end up being less, our clients are pleasantly surprised. If there is some kind of negative trend in the market, having forecasted from the worst-case scenario means they’re less likely to get hurt. We suggest you do the same when making your estimations.
Rental property income can come from a number of different sources. Some landlords offer various services and options to tenants for a fee. Services like landscape maintenance, cleaning and various insurance policies for late rent and deposit protection. It’s a good idea for the new landlord to keep it simple, this means using only the rent payment when calculating income.
The first thing you need to establish is how much you can realistically lease your property for. You want to be realistic because you want the property to lease quickly, no matter what the condition of the rental market. Keeping it leased goes hand in hand with keeping the cash flow positive.
You have several options when it comes to pricing.
Getting the pricing right is a very critical factor. Real estate markets are seasonal, and the rental market is no different. Tenants tend to move in waves for things like job transfers, the school year, etc. and they usually start looking 30 to 60 days prior to when they want to occupy. Additionally, tenants probably need to give notice to their current landlord. If you take the first couple of weeks testing your price, you may miss a wave of renters and find your rental sitting vacant for a couple of months. This mistake will kill your cash flow.
It is important to be methodical about your pricing and it is a mistake to use the ”This is how much I need to get method”. This method consists of the homeowner looking at their payment and adding a little profit in order to determine the rental rate. This method doesn’t work because the market doesn’t care how much your payment is or how much profit you want.
Renters will be looking at everything available on the market. If your rental is overpriced they will more than likely politely pass leaving you clueless as to why they didn’t lease it. So, before you do anything else establish a fair market rental value for your property.
Once you establish the fair market rental value for your property you can start to apply debits to that number in order to see if the cash flow will be positive. Here is a list of expenses you’re going to want to use in order to figure out if this is going to work. This is probably the most accurate method to determine whether you should rent or sell your house.
Once you’ve tallied all of your expenses and compared against the potential income you’ll receive from the property, you’ll have a better sense of whether or not renting versus selling is a good idea.
In addition to the financial aspects, you should consider the effect managing rental properties will have on your personal life. These may seem like small items, but when they add up, they could definitely sway your decision on whether to sell or rent your house.
If you’re going to self-manage your rental property, you will need to handle the following:
Some homeowners have no problem with performing any of these items. But oftentimes, it is very time-consuming to find the right vendors and schedule all of the work to be completed in a timely and cost-effective manner. A property manager will handle all of this for the homeowner and this is one of the big benefits of using a property manager.
You might consider renting your property if you have a desire to return to the area. Here in Colorado Springs, we often see military families that plan on returning to the area at retirement or when they’re through with their military service. For this reason, they will decide to put their home into a property management program or in some cases, manage themselves from a distance. The upside is that when they return they know exactly where they’re going to live. Additionally, pricing fluctuations don’t affect them as they don’t have to buy back into the market at a higher rate.
Another good reason to rent your home is the possibility of catching a rising equity tide. During the latest recession, we used a term referring to some of our homeowners as “accidental landlords”. These were people that were unable to sell their homes without writing a check and were not willing to face foreclosure or go through the short sale process.
These people put their homes up for rent and decided to weather the storm. Fast forward to the latest real estate boom, and many of these people have sold their homes at a tidy profit.
Some people have a genuine desire to own property and be a landlord. Every now and again you meet someone who just loves owning a lot of property and getting to know the tenants. They really don’t mind the hassles involved and always seem to be on the run and energized by what they do. Yes, these people exist but are rare.
Selling your home and walking away with a profit is a great feeling, especially in a seller’s market. Doing so can give you the flexibility to take advantage of other opportunities.
This money can potentially be a substantial amount of money that you might use as a down payment on your next property. Many people love the prospect and the excitement of starting over in a new home.
Be aware that in an extremely hot seller’s market you will need to be able to find someplace to move to. Talk to anyone trying to buy in a hot market and you will soon learn about the stress and disappointment of navigating this type of market. This is a problem you don’t want to discover after your house is under contract.
If you’ve lived in your home for at least 2 out of the last 5 years prior to the sale, you may be eligible for an exclusion on any capital gains tax up to $250,000. If you are married and file jointly this amount doubles to $500,000 (2017). You’re not going to find a lot of other investments that give you this kind of break.
Handling a rental property as a homeowner takes a fair amount of time and effort. Re-read the section on time and effort and ask yourself if you are really ready to handle all of those responsibilities. Using a property management company alleviates most of these responsibilities, but selling your property alleviates all of the responsibilities once and for all.
If your home is a maintenance nightmare, or in need of repairs, renting it out is probably a bad idea. The tenant will certainly expect the condition to be up to a livable standard. Repair requests will create a constant hassle and eat into your bottom line.
With a home in need of numerous repairs or remodeling, selling is most likely the best option. This allows you to deal with any repairs and deferred maintenance in one fell swoop, after the inspection and prior to closing. Once you negotiate those items, the maintenance and repair headaches are over.
If your home has elaborate or even significant landscaping that requires regular maintenance, leasing might be a bad idea. While even the best tenants enter into a lease with every intention of taking care of the landscaping, in our experience it’s one of the first things to be neglected.
Landscaping will of course grow back in most cases, but the time and aggravation associated with the loss of a healthy lawn or garden can in many cases outweigh the benefits of leasing.
This list will certainly get you thinking about the core issues that surround the decision on whether to rent or sell your house. Timing, lifestyle, income, and a long list of other factors go into the decision to be a home seller or a landlord. This information should go a long way to get you pointed in the right direction.
As always, if you have any questions or help to get started selling or renting out your home, feel free to give us a call.