When you’re finally ready to move on from your current home and find something new, whether it’s because of a new job, a larger family, or just the need for a change of location and scenery, you’ll probably ask yourself this: should I sell my home, or rent it?
It’s extremely common for single-property owners to transition to investment-style ownership rather than sell their house outright. But being a landlord isn’t for everyone. While it’s always advisable to develop passive income streams, it may not always be advantageous to own a rental property. However, if the circumstances are in your favor, you could stand to gain much more from renting your old house than you would from selling it. Think about your expenses and your financial expectations to decide if renting will work for you.
Profitability & Expenses
First things first: will renting your house actually make you money? Since you most likely intend to purchase a new home to serve as your primary residence, you need to be certain your rental property is able to generate sufficient income to net you a profit and cover all expenses.
If you go into the landlord business without having done the math, you may very well end up hemorrhaging money in order to maintain a fruitless rental.
Take stock of your expenses, which will surely include some of the following:
Mortgage
Do you still owe on your old house, or is it fully paid off? Your mortgage, including interest, should serve as the primary basis for determining your rental fee. Not owing on a mortgage means you already have a leg up in the landlord game. You can look forward to relatively quick gains.
Taxes
Don’t make the mistake of forgetting about taxes. Yes, you still have to pay taxes on your old house, even if you don’t live there. Depending on where the property is located, your taxes may look different now that it’s no longer your primary residence.
Insurance
Just like your taxes, your homeowner’s insurance may change once your house is officially considered an investment property. And just like taxes, don’t expect the cost of insurance to ever go down.
Repairs
You should prepare for the possibility of shelling out money for repairs, especially if the house is showing its age. Water heaters, roofs, air conditioners, and plumbing are common points of maintenance. You’ll have to keep up if you expect to keep your property occupied and lucrative.
Management
If you’re not already a landlord by trade, don’t expect to become one overnight. You may need to enlist the help of a property manager.
Other Expenses
Advertising fees, real estate agent fees, and homeowner’s association fees may creep up on you.
Develop a working estimate of your monthly expenses, and do so conservatively. It’s better to be a realist and end up pleasantly surprised with your net profits than to be optimistic and find yourself disappointed or worse.
Management
If your new home is going to be in a different city or state than your old one, you will most certainly want to hire a property manager or management firm. “A novice landlord with only one property under their belt can usually handle its upkeep on their own if they have the right skills,” says Pete Evering of Utopia Management.
“But as soon as you move to a new city or state and are no longer able to access the property regularly, or in case of emergency, there’s really no option other than hiring a resourceful, thorough, efficient property manager.”
A good property manager will provide a variety of services to landlords, not just maintenance and repairs. The fee they take typically pays for itself in savings on repair costs, vacancy rates, and client retention.
Property managers can be the one-stop middleman for all elements of investment property ownership, including advertising vacant units, showings, applications, background checks, and payment processing.
Lesser Appreciated Benefits of Renting
Besides passive income from rental fees, there are other benefits to renting your old house rather than selling it.
Keeping your house means you’ll basically always have a backup housing plan, in case of unforeseen circumstances like a major economic downturn, the loss of your primary source of income, or a severe injury or illness that prevents you from working and forces you to reassess your living situation.
If you’re moving out because your family is growing, you may later find that you’d like to return to that smaller home once the kids are out of the house. And speaking of kids, an investment property is a fantastic asset to pass down to them; like you, they’ll have the option to either liquidate it, rent it, or live in it themselves.
You may also regret selling your house in a year or two, since real estate markets generally rise in value, with sometimes major spikes. Keeping your old house in the family may be a good idea for this reason, even if you don’t expect to turn a huge profit from renting.
While this shouldn’t serve as a goal, it could be said that just breaking even on a rental property can be justified by a large enough increase in the property’s valuation. In a hot market future, that lukewarm rental could reveal itself as a golden egg, and you’ll be happy you incubated it as long as you did.