If you’re a homeowner, then you’ve probably asked yourself, “should I rent or sell my house,” once or twice before. We don’t blame you. The idea of being a landlord in this economy is an enticing one. You can earn passive income with little effort and you don’t have to worry about rushing to move into a new home — you’ll simply move out and find a new tenant on your schedule.
However, it may not be that simple of a decision. Buying a home is expensive and many families rely on the money that comes from their previous home to make the purchase more affordable.
Should I Rent or Sell My House?
We’re going to break the answer down into a few sections: equity, cash flow, and the state of the economy.
What Will Your Cash Flow Be In Both Situations?
This one is easy. If you sell, you’ll get a lump sum immediately. If you rent, you’ll get smaller installments of passive income every month. What that sum is, depends on your home, the location, the state of the economy, and how much you can charge for rent.
When it comes to selling your home, the market value will determine a fair price. That is relatively easy to find by comparing your home to comparable properties in the neighborhood, as well as talking to a real estate agent.
Renting is a little more complicated, though. You can pick how much you’ll charge your tenant each month until their lease agreement is up.
How to Set Your Rent
You will need to conduct an extensive market analysis to compare your home to comparable rental properties in the area. You can check prices using websites like Zillow and Trulia to help you find the average monthly cost for a home like yours.
You can also charge more if you have extra amenities such as a pool, hot tub, two-car garage, fenced-in yard, and a den. Keep in mind that rent prices are expected to be competitive and reasonable. While you can charge $5K a month for your home, no renter will apply for it if homes in your area go for $2K a month.
Doing this analysis will also help you determine if it makes sense for you to rent at all. If homes in your area are renting for $800 a month, but you owe $1K for your mortgage, then renting your home out doesn’t make sense financially. Sure, you would be saving money on that mortgage, but you’d still be spending $200/month on a home you don’t live in.
Don’t Forget About Added Expenses
Both selling your home and renting it comes with additional expenses. Selling is usually a one-off thing, while renting has monthly fees that you will have to pay.
If you do decide to rent, figure out how much you are willing to pay for all of the following:
Property management fees (if you hire a company to help out)
Your time and money (if you are going to self-manage)
Turnover and cleaning
Marketing to tenants
If all of those fees and the estimated rent are still over your monthly expenses, then renting could be a solid option for you!
The State of the Economy
The economy can play a critical role on whether or not you sell or rent out your home. A seller’s market means your home will sell quickly and for (potentially) a lot more, while a buyer’s market usually means your home sale will be slow and for less than what you’re asking.
If you want to wait for the market to turn, then renting your home until the market bounces back could be a great option for you.
Don’t forget about the third state of the economy too: a renter’s market. Some cities are better to rent in, while others are less desirable due to how affordable it is and how many rentals are on the market. For example, Phoenix is great for renters due to its proximity to universities and rising property values. On the other hand, in cities like Cleveland, Ohio, it is more affordable to buy than rent.
You have to consider all of this if you want to make the best decision for yourself, your family, and your wallet.
How Much Equity Do You Have in the Home?
Equity is the difference between what you owe on your mortgage and what your home is currently worth. To break it down, say your home is worth $200K and you owe $150K on your mortgage loan. The equity is the difference between those two values, therefore you have $50K of equity in the home.
On the flip side of that, if you own your home, then your equity in it is equal to how much the home is worth.
Why is this important? Well, it determines how much money you could make if you decide to rent. If you have a lot of equity in the home, that means you will have a greater return on your investment than if you don’t. Let’s put it this way: if you only have 3 years left before you pay off your mortgage on the rental property, then you only have 3 years before every cent you make from rent can go into your pocket. However, if you have 10 years, then you’ll be making less in passive income than you could be.
Additionally, if you have more equity in your home than what your home is currently worth (say you own the home and put $500K toward it, but the market value for the home is $450K), then you may want to rent it before you sell it. This will give the market time to rise to match the value of your home. The opposite is also true — if you don’t have much equity in the home, it may make more sense to sell it instead of keep it.
Ultimately, though, you’ll still be making money, it just depends on how long you can wait before that money begins to go into your pocket instead of into your home equity.
Final Thoughts: Which is Easier?
Selling and renting your home are both frustrating in their own rights. Selling is usually a short-term headache, while becoming a landlord can be long-term. However, when you learn the ropes and hire a property manager to help, it does become a lot easier. It all depends on what is right for you.
The most important thing is that you need to do what you can afford. If you can afford to generate passive income slowly over the next few years, then consider renting. However, if you need the money quickly or are relying on your home’s sale to pay for your next mortgage, then selling is the right way to go. It all depends on your unique situation. No matter which you choose, The BC Team can help. We can help you manage your rental home, and we can help you sell and buy your next home. Visit us online to learn more.