Should I Rent Out My House or Sell It?

Deciding whether to sell or rent a home is a financial and personal choice. This decision often arises from changing life circumstances, such as job relocation or family expansion. Making an informed choice requires understanding the financial and non-monetary factors of each path. This article guides you through the decision of selling a home versus retaining it as a rental property.

Financial Aspects of Selling a Home

Selling a home involves financial considerations, starting with assessing its current market value. A professional appraisal, typically costing $300 to $600, provides an independent opinion of value based on the property’s condition and comparable sales. This market value helps estimate potential sale proceeds.

Selling costs can significantly reduce net proceeds. Real estate agent commissions are often the largest expense, averaging around 5.44% of the sale price in the U.S. This percentage is usually split between the listing and buyer’s agents. For instance, on a $369,100 home, realtor fees could exceed $20,100.

Beyond commissions, sellers incur other closing costs. These costs average around 1.81% of the sale price without commissions. Expenses include title insurance, escrow and settlement fees, and transfer taxes, which depend on location. Prorated property taxes and homeowners association (HOA) fees are also adjusted at closing.

Pre-sale expenses also impact net proceeds. Home staging, which helps showcase a home, costs an average of $1,843. Minor repairs, such as painting or yard work, might cost $1,000 to $5,000. Sellers often spend around $5,400 on average to prepare their homes for sale, covering items like landscaping and painting.

Existing mortgages are typically paid off from sale proceeds. Net proceeds are calculated by subtracting the mortgage payoff, all selling costs, and pre-sale expenses from the final sale price.

Any capital gains from the sale of a primary residence may be subject to tax, but Internal Revenue Code Section 121 allows for an exclusion. Single taxpayers can exclude up to $250,000 of gain, while married couples filing jointly can exclude up to $500,000. To qualify, the homeowner must have owned and used the home as their primary residence for at least two of the five years preceding the sale. This exclusion can be used once every two years.

Financial Aspects of Renting Out a Home

Renting out a home involves different financial considerations, starting with determining potential rental income. Researching comparable rental properties helps establish a realistic monthly rental rate. Factors like location, property size, amenities, and condition influence this assessment.

Ongoing expenses are a consistent financial outflow for landlords. These include the monthly mortgage payment, property taxes, and homeowner’s insurance. Landlord insurance, distinct from standard homeowner’s insurance, typically costs about 25% more, averaging around $1,300 to $1,516 per year. This higher cost reflects increased risks associated with rental properties, such as tenant damage or liability claims.

Maintenance and repair costs are also significant. Landlords should budget for routine upkeep, such as HVAC servicing, appliance repairs, and general property maintenance. A common guideline is to set aside 1% of the property’s value annually for maintenance. Vacancy costs, representing periods when the property is unoccupied, should also be factored into financial projections.

Property management fees are an additional expense if a professional company handles rental operations. These fees typically range from 8% to 12% of the monthly rent collected. Some companies may also charge a leasing fee for finding a new tenant and a one-time setup fee, which averages around $300 to $500.

Calculating cash flow involves subtracting all ongoing expenses, including mortgage payments, property taxes, insurance, maintenance, and management fees, from the projected rental income. Positive cash flow indicates the property generates more income than it costs to operate. This analysis helps determine the immediate financial viability of renting.

Rental income is subject to income tax, but landlords can deduct various “ordinary and necessary” expenses. These deductions include mortgage interest, property taxes, insurance premiums, repairs, and professional fees. A tax benefit for rental property owners is depreciation, which allows a deduction for the wear and tear of the building over time. Residential rental properties are depreciated over 27.5 years using the straight-line method, meaning a portion of the building’s value (excluding land) can be deducted annually. For example, a building valued at $225,000 could yield an annual depreciation deduction of $8,181. This deduction reduces taxable rental income, potentially lowering tax liability. However, when the property is sold, any claimed depreciation is “recaptured” and taxed.

Retaining the property as a rental can also contribute to long-term equity growth. As the mortgage principal is paid down, the owner’s equity increases. Property values may also appreciate, leading to a higher asset value over the long term. This combination of principal reduction and potential appreciation can build wealth.

Non-Financial Factors to Consider

Beyond financial calculations, non-monetary factors influence the decision to sell or rent a home. The time commitment for landlord duties is a consideration. Managing a rental property involves screening tenants, preparing lease agreements, handling maintenance requests, and addressing emergencies. This can be a demanding role, requiring responsiveness and problem-solving skills.

Emotional attachment to the home also plays a role. A cherished home holds memories, and selling it might evoke strong feelings. Retaining it as an investment property allows for continued ownership, though the relationship with the property changes from a personal residence to a business asset.

Future plans and flexibility are important to assess. Homeowners should consider how long they anticipate being away from the property and whether there’s a possibility of returning. Being a landlord entails a long-term commitment, potentially limiting flexibility for spontaneous moves. Selling provides immediate freedom from property responsibilities.

The homeowner’s outlook on the future real estate market is another factor. While specific predictions are uncertain, a belief in continued property value appreciation might favor renting to capitalize on long-term growth. Conversely, concerns about a market downturn might make selling more appealing to lock in current value.

Landlord responsibilities extend beyond day-to-day management and include legal obligations. Landlords must adhere to fair housing laws, maintain the property in a safe and habitable condition, and follow proper procedures for tenant screening, lease enforcement, and, if necessary, eviction. Understanding these legal duties is essential to avoid potential disputes and liabilities.

Synthesizing Your Decision

Making an informed decision about selling or renting a home requires reviewing all gathered information. Begin by comparing the estimated financial outcomes from both paths. This includes analyzing net proceeds from a hypothetical sale against potential long-term cash flow and equity growth from renting. Consider the initial costs and ongoing expenses for each option to understand the immediate and sustained financial impact.

Integrate the non-financial factors into your assessment. Weigh the time commitment of being a landlord against your personal availability and willingness to manage property responsibilities. Reflect on any emotional ties to the home and how selling or renting aligns with your comfort level. Think about your future plans, including potential returns to the area or desires for greater flexibility, and how each option supports those aspirations.

Aligning your choice with your personal goals is important. If your primary objective is to maximize immediate cash, selling might be more suitable. If building long-term wealth through real estate investment is a priority, renting could be the preferred strategy. Consider your risk tolerance, as being a landlord involves risks such as vacancies or unexpected repairs.

Creating a personal pros and cons list or a decision matrix can help organize your thoughts. Assigning a weighted value to each financial and non-financial factor, based on your individual priorities, can provide a clearer picture of which option aligns best. Finally, seek guidance from professionals, such as real estate agents for market insights, financial advisors for investment planning, and tax professionals for specific tax implications.