Should I Sell My House or Rent It Out?

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When it’s time to move, you have two options: sell the property and use the profits to buy your new home or rent out the property as a source of rental income. Selling is always the faster and easier option, especially in a seller’s market, but listing your property could have some financial drawbacks. On the other hand, renting your house takes more work and involvement, but it could be a good investment with the right planning. 

How do you decide which option is best? Managing the property, market uncertainties, and financial commitments often cloud decision-making. Don’t worry, we’re here to help. 

Here’s what you need to know if you are trying to decide whether you should rent or sell a house. With a clear eye on your finances, you can make the best decision for your particular situation.

Identify Potential Profits from the Current Home Sale 

When choosing between selling vs. renting your home, the first thing to consider is how much you stand to make from the home sale. This will depend on your initial down payment, your home’s value fluctuations, interest rate at the time of purchase, mortage payment history, and the duration you have lived there.

Evaluate Your Home’s Value

There are multiple ways to get an idea of your home’s property value before you list it on the market. You need an accurate idea of what you could sell your home for if you listed it today, especially considering any home improvements that could affect the value. A few options include:

• Conduct a market analysis yourself. Review nearby properties and see what houses are selling for. Look for listings that match your square footage, amenities, upkeep levels, and check the rental market for similar properties. 
• Meet with a real estate agent. Realtors are experts on the current market and can also provide insights into the impact of interest rates and cash flow trends. They can estimate what your home would sell for if you listed it today. 
• Schedule a home appraisal. A home appraiser is an objective party that will look at your house, and neighborhood, and considers maintenance costs to provide a value estimate on the property.

The sales price is the base number you will look at when starting your profit calculations. You can also consider the merits of selling a house as-is versus the potential profits of making home improvements before listing the property.  

Subtract Your Mortage, Commission Fees, and Closing Costs

The next step is to consider all of the debt and fees you will need to pay off once you sell your house. Every home sale comes with closing costs, which include title transfer fees, taxes, Realtor commissions, and other miscellaneous expenses. Take your estimated home sale price and subtract the following debts:

• Mortgage: review what you owe to your lender if you are currently paying a home loan. Consider the remaining mortgage payments and interest rate.
• Real estate commissions: the average home seller pays a commission rate of six percent of the home’s value. 
• Transfer taxes: many states levy a tax on homeowners when they sell their homes. 
• Miscellaneous closing costs: add another one percent of the home’s value to cover minor expenses related to the home sale. 

These calculations will give you a clear idea of how much money you will take home from the sale. For example, if your house sells for $500,000 and you owe $200,000 to your mortgage lender, your profits are $300,000. You can then subtract $30,000 in Realtor fees and $5,000 for miscellaneous closing costs for a total profit of $270,000. 

Learn Whether You Need to Pay Capital Gains Taxes

Even after the closing appointment, you may be on the hook for additional fees related to your home sale. Capital gains taxes are levied on people who sell their assets. For example, if you bought a motorcycle, fixed it up, and resold it, you would pay a tax on your profits. 

Fortunately, there are capital gains tax exemptions for homeowners. If you have lived in the house as a primary residence for more than two years, you can file an expectation for the first $250,000 in profits (or $500,000 for couples filing jointly). 

Know that moving out of the house and renting it will disqualify you from the primary residence exemption when you sell in the future. (However, you might qualify for a 1031 Exchange when the time comes.)  

Signs You Should Rent Your House

When contemplating whether to rent or sell your home, it’s essential to evaluate the local rental market and the condition of your home.

Here are five signs that might suggest renting your home is a savvy decision:

1. Rising Rental Demand in Your Area

One of the primary indicators that renting out your home could be a lucrative move is an increasing demand for rental properties in your locale. This demand can often be linked to factors such as a thriving job market, new local developments, or a growing population. 

Specifically, areas near educational institutions, emerging neighborhoods, and places with a booming job market tend to have a higher demand for rentals.

2. Aspiration to Dive into Real Estate Investment

If you’ve had a longstanding interest in venturing into real estate investment, turning your home into a rental property can be a stepping stone. 

Being a landlord is not only a source of additional income but can also serve as a learning experience in property management and real estate investment, which could be rewarding both financially and personally.

3. Emotional Connection to Your Home

If you have a sentimental attachment to your home and foresee the possibility of moving back, renting it out can be a wise choice. 

By renting, you maintain ownership while generating income, and keep the option open to return to the property later.

4. Your Home Boasts Attractive Features

Evaluate if your property has specific features or amenities likely to be highly sought after by renters. These might include a favorable location, parking availability, outdoor spaces, a good number of bedrooms, or proximity to schools and workplaces. 

Such attributes can make your property stand out in the rental market, possibly ensuring a steady stream of interested tenants and a stable rental income.

5. Financial Analysis Indicates Potential Profits

It’s a common misconception that a rental property is a source of passive income. You will accrue both time and monetary costs in this process. 

Your bills don’t stop because you no longer live in the house. Add up your monthly home expenses, which include:

• Your mortgage
• Property taxes
• Home Insurance
• Utilities (electricity, internet, water) 
• HOA fees (if applicable)
• Miscellaneous costs (pool cleaning, landscaping, etc.)

If the rental income comfortably exceeds the expenses, and there’s room for positive cash flow, renting can be a financially sensible decision.

Also, decide whether you will include the cost of utilities in your rental agreement or expect the tenants to cover these costs on their own. This will affect your profits and also the affordability of the property for renters. 

These basic calculations are the most basic way to determine whether renting your house will be profitable. If the most you can reasonably charge to rent your house is $1,500 per month and you have $1,250 in expenses, the profits might not be worth it. 

A real estate agent can also help you set a reasonable rental price.

By considering the local rental market trends, your interests and attachments, and the features of your home, and conducting a thorough financial analysis, you can make an informed decision on whether renting is the right path for you.

Signs You Should Sell Your Home

Selling your home can often be a better option than renting it out. Below are some indications that it might be wise to consider selling:

1. Prevailing Seller’s Market Conditions

When there is a high demand for homes and a low inventory available, you are in a seller’s market. This can be an opportune time to sell your home as you will likely get a better price and faster sale. 

Keep an eye on the local real estate trends, including the year-over-year changes in housing inventory and price growth, to determine if it’s an advantageous time to sell.

2. Inadequate Rental Returns Compared to Home’s Value

If the rent you can charge is not proportional to the value of your home, it might make more sense to sell. As property values increase, the return on rent often doesn’t keep pace, making the property less desirable. 

Analyzing the Gross Rent Multiplier (GRM), which is the ratio of the property’s price to its rental income, can help in evaluating this aspect.

3. Lack of Sufficient Liquid Assets

Owning a rental property requires having liquid assets to cover maintenance, property taxes, and mortgage payments, especially during vacancies.

If your financial cushion is not strong enough to sustain these expenses, selling your home might be a more secure option.

4. Other Financial Objectives

If you have significant equity in your home and other financial goals that require capital, such as buying another property or investing in a business, selling your home can free up the necessary funds. 

Evaluate the equity gains and the potential profits through selling, keeping in mind the expenses such as repairs, commissions, and closing costs.

5. Increasing Maintenance Costs Due to Age of Property

Older homes generally have higher maintenance costs. If your property is aging and the maintenance expenses are piling up, selling it might be a wise decision. 

This is especially true if the property still has original components, such as the HVAC system, roof, and appliances that might need replacement soon.

6. Reluctance to Take on the Landlord Role

Being a landlord entails responsibilities such as maintenance, finding tenants, complying with regulations, and managing the property. 

If you are not inclined to take on these responsibilities or hire a property management company, which comes at an additional cost, selling could be the preferable route.

7. Property Not Well-Suited for Rental

Not all properties make for good rentals. If your property has been plagued with issues such as frequent vandalism, problematic tenants, high operating costs, or excessive community regulations, it might be more sensible to sell the property. 

Assess the long-term viability and potential returns of the property as a rental before making a decision.

While renting can provide a steady income, there are situations where selling is the more prudent option. 

Consider market conditions, financial readiness, property characteristics, and your personal willingness to take on the responsibilities of a landlord when deciding to sell your home.

Other Considerations

It’s imperative to recognize that selling or renting out your family home is a significant decision that should take into account various factors, including your personal financial condition, current interest rates, and the housing market. 

Moreover, your home’s curb appeal, any upgrades or improvements you have made, and the services of a brokerage can also influence your decision. 

Here are some additional considerations to make:

1. Decide What You Will Do With the Home Sale Profits

It may be better to sell vs. rent a house if you have a plan for your home sale income, especially considering your personal finance goals.

You can use this money to buy your next house or pay down existing debt.

Selling your family home could be an ideal option if you are better off with cash instead of keeping your wealth in property assets. 

2. Extra Costs Can Eat Into Your Rental Profits

Even if you think it would be more profitable to rent out your house, there are additional costs that could eat into your revenue. A few examples include the following:

• Unplanned maintenance: you will have to pay to replace broken appliances, make home repairs, and fix any damages caused by tenants. Budget 1-3% of your home’s purchase price annually for home maintenance.
• Lost months: there may be periods between tenants when you aren’t collecting income. However, your expenses will remain the same. Every month without a tenant costs you money.  
• Management fees: you can pay a management firm to look after your property, market the house to tenants, and communicate with renters. However, these firms usually charge a flat monthly fee. 

Additionally, you may need to take out extra insurance on the property if you are renting it – even if you expect your renters to also carry insurance on the space.

3. Renting a House Takes Work 

Renting out your family home takes effort. Everyone hopes for dream tenants that pay their rent on time, never cause damage, and never need anything done to the house.

However, there is no guarantee that the people you rent your house to will treat it with respect. Upgrades and home improvements might be necessary to keep the property in good shape.

When deciding whether to rent or sell a house, consider how much time you are willing to spend managing the property. Do you have time to interview tenants and run background checks on them? Will you be able to visit the house frequently to make repairs? Can you handle bad tenants that stop paying rent, break appliances, and cause disruptions to the neighborhood? 

Yes, you can hire a property management company, but you will still be responsible for upkeep and repairs to the home.

4. Renting Allows You to Grow Your Home’s Value 

Before you give up on renting your house, there are some benefits to holding on to the property. It’s okay if you only break even while renting out the space as long as you have a long-term financial plan. 

Your house will grow in value over time. If you hold on to the property for a decade (or longer), you could reap higher profits on the sale when it’s time to let it go. Some people rent out their properties for years and don’t expect to turn a profit. Their main goal is to wait for the house to appreciate before listing it. 

Additionally, you potentially lower your monthly expenses the longer you own your home. You can work to pay off the mortgage faster to eliminate this cost. You might even be able to refinance to pay a lower monthly rate. These steps could make renting more lucrative. 

The decision to rent or sell your house depends on your current finances, long-term housing plan, and the risks you are willing to take. 

5. Your Decision Might Change Based on the Housing Market

The choice to rent or sell your house might change within a few years. Your personal circumstances might change and you might want to sell your rental property. Additionally, the housing market could affect your potential profit margin. 

Look at the cities where home prices are rising the most. Home prices in Fayetteville, Arkansas, increased by almost 32% year-over-year. Several Florida cities, including Sarasota, Tampa, Naples, and Ocala, experienced home price increases greater than 25% in 2023. If you live in an incredibly hot market, your home’s current value might tempt you to sell. 

However, if the market is cooling in your area, you may want to wait. It could be better for you to rent out the property for a few years until you think you can get a better price. You don’t have to rent your house forever – only until you can make a near profit on the sale. 

6. Talk to a Realtor Whether You Plan to Rent or Sell a House

It’s okay if you are on the fence about whether it’s better to rent or sell a house. Both options come with their own benefits and drawbacks. One resource to help you decide is your local Realtor. A real estate professional can help you understand what your home is worth – both as a rental property and a home for sale. They can also help you answer questions about the current market. 

To find a qualified agent, turn to FastExpert. This is the #1 trusted platform to search, compare, and hire the best real estate agent. FastExpert is free for sellers and helps people find the best Realtors in their area. We cut through the clutter to recommend the best people to work with. Try out FastExpert today and see how we can help you.