Should I Sell or Rent My House?

October 16, 2020 | Lindsay Frankel Lindsay Frankel

If you’re choosing between whether to sell or rent your house, there are several factors to weigh before making a decision.

Renting out a property is a common way to recoup mortgage payments and even turn a profit for a home you’re not using. Perhaps you’re moving out of a prime location and hoping to earn rental income while your home appreciates further. Maybe you inherited a home and aren’t sure if you want to sell it yet. Or, perhaps you don’t use your second home enough and want to earn some money off the property. 

Many homeowners in these situations choose to rent out their homes. The Department of Housing and Urban Development estimates that between 10 and 11 million landlords are individual investors who manage an average of 2 units each. Many of these landlords manage one unit. But while it’s a popular option, it won’t be the right choice for everyone. 

While the earning potential is appealing, managing a property is a huge time commitment. Even before marketing your home for rent, you’ll need to make necessary repairs and possibly even cosmetic updates. You’ll also face higher insurance costs and may need to pay higher taxes when you sell your home later on. And there’s always a chance you could end up with a terrible tenant who damages your property or fails to pay rent. 

If you’re debating whether to rent or sell your house, here are some factors to consider. 

Time and energy

Consider the burden on your time and energy it will take to get your home in rentable condition, market your home to potential tenants, maintain your home, and mitigate any potential issues. 

Getting your home ready to rent can require almost as much effort as preparing it for sale. You’ll need to clean, declutter, make necessary repairs, and possibly make updates like new carpeting, a fresh coat of paint, or new appliances. And while being a landlord may not be a full-time job, you’ll need to be flexible with showings and respond to ongoing maintenance issues. 

If you get stuck with a tenant who doesn’t pay rent or causes health and safety violations, you may have to deal with eviction. That will involve filing a notice with your local court and scheduling a hearing. You’ll also be responsible for clearing out the property and preparing it for rent again.  

You could choose to hire a professional management company to handle the marketing, manage maintenance and repairs, and deal with other tenant issues. Some property management companies will even guarantee your rental income in the event of a vacancy. But you’ll typically pay a hefty fee for these services, so you’ll need to ensure that your rental income exceeds your costs. 

Total profits

Renting can be lucrative; the average Airbnb host earns $924/month, and long-term rentals can bring in plenty of cash as well. But there’s no point in renting out your home if it won’t produce a profit for you. That’s why you should first consider whether your rental income will surpass your operating costs. Look at other rental properties in your neighborhood to get an idea of what you can charge. Then, add up your mortgage payment, property taxes, insurance, HOA fees, management fees, and any utilities you’ll be paying. 

You’ll also need to estimate your maintenance costs. While these costs can vary, experts generally recommend planning for 1% of the property’s value annually. That means for a $200,000 home, you should plan to spend $2,000 per year on maintenance. 

Next, compare your rental profits to the potential proceeds from the sale of your home, minus real estate commission fees and closing costs. If you stand to gain $200,000 from selling your home but can only earn $4,000 per year in rental profit, you’d likely be better off freeing up that cash to invest in something else. Goldman Sachs analysts predict that the S&P 500 will provide a 6% annualized return on average over the next 10 years, which means you’d earn more in this scenario if you sold your house and invested the profits in the stock market than if you rented your home. 

However, you should also consider your home’s potential for appreciation when making this comparison. If you live in a hot area where prices are expected to climb, it might be worth holding onto your home longer. 

Tax implications

Usually, if you profit off the sale of a property, you need to pay capital gains taxes of up to 20%, depending on your tax bracket. However, if you owned your home for at least two years and lived in it for at least two of the previous five years, the IRS allows you to exclude from your income up to $250,000 in profits ($500,000 for married couples filing jointly). 

Let’s say you stand to earn $200,000 from the sale of your home. If you sold today, you wouldn’t pay a cent in taxes on that income. But if you rent for five years and then sell your house, you’d be subject to up to $40,000 in taxes. To make sure you benefit from renting your home, determine whether your rental profit plus any additional appreciation are likely to exceed those tax savings. While nothing is certain in the world of real estate, you should do your best to estimate how much you’d earn in each scenario. 

Related: What Expenses Can You Deduct When Selling a Home?

When should I sell instead of rent?

You’ll need to weigh all factors carefully when making your decision about whether to sell or rent your home. However, there are a few scenarios that might preclude you from renting. 

  • Your house is distressed and you don’t have the funds to repair it. If you can’t afford to get your home in rentable condition, consider getting multiple cash offers from trusted property investors through the Sundae marketplace. Properties on our platforms receive an average of 10 offers. The average difference between the minimum and the maximum bid on our platform is $71k. Let the investors compete to get you the best price.
  • You need money right away. If you’re strapped for cash, you may not be able to wait to market and rent your home. If you choose to sell your home with Sundae, we’ll give you a $10,000 cash advance after your inspection. 
  • You don’t have the time or energy to deal with tenants. If hiring a professional management company is too costly and dealing with tenants yourself seems like a nightmare, you’ll avoid a ton of stress by selling your house as-is.  

 

Read More: How to Decide if Sundae Is Right for You

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