When it comes to moving and deciding what to do with your current home, one question that often arises is: “Should I rent out my primary residence, or should I sell it?” This dilemma is something I hear frequently from clients who are thinking about relocating, especially if they’ve owned their home for a while and have benefited from a low interest rate. If their property has appreciated significantly over the years, renting it out could provide a steady income. But is that the right move?
Unfortunately, the answer isn’t as straightforward as a simple “yes” or “no.” There are several factors you need to consider before making this decision.
Key Considerations:
- Do You Own Other Rentals or Plan to Add More? Many people assume they want to be landlords, but the reality is that renting out property isn’t for everyone. I don’t know many individuals who own just one rental property and are completely satisfied with it. Owning rentals requires a significant amount of time and effort, almost like taking on another job. As a landlord, you’ll be responsible for:
- Finding tenants
- Conducting background checks
- Handling rent collection
- Managing maintenance requests
- Addressing tenant concerns
- What’s the Going Rent for Your Property? You’ll need to analyze the numbers to determine if renting out your home is a financially viable decision. It’s not enough to simply compare your mortgage payment with the potential rental income. You also need to consider:
- Vacancies (typically 1 month out of every 20 months)
- Cleaning between tenants
- Property management fees (if you hire a property manager)
- Maintenance costs
- Property taxes
- How Much Equity Do You Have in the Home? One of the most important factors often overlooked in this decision is the amount of equity you have in the home. If you sell your primary residence, you may be eligible for a capital gains exclusion—up to $250,000 if you’re single or $500,000 if you’re married—provided you’ve lived in the home for at least two of the last five years. For example, let’s say you bought your home for $1,000,000 and now it’s worth $1,500,000. If you sell the house, you’d have a $500,000 capital gain. If you’ve lived in the home long enough to qualify for the exclusion, you could avoid paying taxes on that gain. But if you decide to rent the property instead of selling, you won’t benefit from this exclusion. Plus, you would need to recoup the tax savings you lost, which could take years of rental income and property appreciation to make up for. In general, rental properties are most beneficial when you have little equity because they offer better returns through leverage. If your home has substantial equity, you might be better off selling and using that equity to purchase multiple properties with less equity—offering you more potential for growth.
- What’s Your Plan for the Next House? If you’re planning to purchase another home, you also need to consider how you’ll afford the down payment. Many people use the equity from the sale of their current home to fund the down payment on their new property. If you choose not to sell, you’ll need to save up for a 20% down payment to qualify for a jumbo mortgage, which can be a significant financial burden. Make sure you plan accordingly for the financial implications of either renting out or selling your current home.
Conclusion
Deciding whether to rent or sell your home is a major decision and requires careful consideration of several factors. By evaluating your current rental situation, the financials of renting out your home, your home’s equity, and your plans for the future, you can make the most informed choice. Whether you choose to sell or rent, ensure that you’re making the best decision for your personal and financial goals.
