Written by Chris Weber

The iconic alternative rock band called The Clash earned the nickname “The only band that matters” for creating classics such as “Should I Stay or Should I Go.” If the band penned a similar song for investing in real estate, the title of the song would read “Should I Sell or Should I Rent.”

As a way to establish a real estate investment, second time homebuyers are frequently curious if it’s possible and a smart idea to hold on to the home and convert it to rental property. Here are a series of questions to ask yourself before you make a financial decision that can produce financial ramifications for years to come.

Will You Make Money?

Yes, renting out your home generates passive monthly income. However, it is not all about the cash flowing into your bank account in the form of rental income. As the property management pros at Utopia Management in Stockton remind us, you have to consider the expenses of owning a rental property before you decide to become a landlord.

Here are some of the most common types of expenses associated with owning a rental property:

  • Mortgage
  • Insurance 
  • Taxes
  • Repairs 
  • Maintenance
  • Property management fees, if applicable
  • Marketing
  • HOA fees

Let’s not forget the expense called tenant vacancy. Every day your home goes unrented is a day that you lose money.

Can you Afford the Down Payment without Selling Your Home?

To qualify for the mortgage on your new home, you will need to have a substantial down payment, usually 20%, because it is a second property. This can be mitigated somewhat if you show a lease for the old property, but that is not exactly possible when you are still living in the home. Furthermore, some sellers will be counting on profit from their existing home to put down on the new home. It’s pretty easy to run the numbers with your mortgage lender to be certain this is a feasible option.

Do You Want to Be a Landlord?

Another way to ask this question is “Do you have what it takes to be a landlord.” Running a rental property can be incredibly stressful, even if the rental property is a home for just one tenant. Landlords deal with several issues that can disrupt their lives. From emergency phone calls deep into the night to delinquent rent payments, you have to possess almost extraordinary patience to be a landlord. You also need to be handy at fixing things because Murphy’s Law of “What can go wrong will go wrong” is a saying tailor-made for landlords.

You can still have your cake and eat it too. You hire a property management company to take care of all the responsibilities that you do not want on your plate.

What is the Outlook for the Real Estate Market

You might want to hold on to your home for sentimental reasons, but renting instead of selling when the housing market is on fire does not make financial sense. If you think the housing market is going to remain stagnant or is about to decline in value, then selling your home now is the way to go. Conversely, renting your home out during a housing market boom helps you receive a greater financial windfall down the road if you hold on to your home for a year or two.

What to Consider When Selling Your Home

Think about the relief you are going to feel on the day that you sell your home. Every burden associated with owning a home and renting it at the same time disappears like a genie inside a bottle. Although selling a house can be stressful, signing the sales contract is not.

Take Advantage of Tax Breaks

Federal tax breaks are not forever and if you are considering whether to sell your home instead of renting it, then the generous capital gains tax break is reason enough to sell your house. The tax break for capital gains is for the first $250,000 of the money that you made because of the increase in value of your home. Tax laws change, which means you might not have much time to take advantage of the generous tax break for the capital gains generated on the sale of your home.

No Tenants

No three in the morning emergency phone calls, no arguing over late rent payments, and no repair projects that cost you thousands of dollars. Not having to deal with a tenant is more than enough of a good reason to forgo becoming a landlord and instead, becoming a savvy real estate investor. That is, unless you know and trust the person or people that you want to rent your home. In fact, asking trusted friends and family members about their imminent housing plans can help you avoid the uncertainty involved with renting your home to a stranger.

There is a Compromise

Deciding whether to sell your home or rent it out is not a black and white decision. There is a middle ground, even if the middle ground is just a temporary solution to your real estate dilemma.

You can rent out your home, with a clause in the contract that gives the tenant the legal right to buy the home before a designated date.

This way, you keep your home until the economic conditions are right for a sale. You also do not have to be a landlord for the rest of your life. The tenant that you select will have more invested emotionally in your temporary rental property, which means you can expect a tenant that takes care of your property and is easy to get along with on all issues.

Post a Comment