When your current home no longer suits you, selling it is a popular option, but in some cases, turning it into a rental home makes more sense.
There are lots of factors to consider when making the “sell vs. rent my home” decision, including:
- Your financial situation.
- Local market conditions for rental homes.
- Your future housing plans.
- Your tolerance for being a landlord.
- State and federal income taxes.
- Current and future home prices.
If you want to make your decision based solely on finances, use an online calculator to compare the return on investment for renting or selling your house to a hypothetical 5.7% Treasury bond yield. The calculator has got some flaws — it doesn’t consider what you’ve already invested in your home — but it’s a quick overview that can help nudge your decision one way or the other.
Other factors to consider include:
Is your move permanent?
Going away for a few years and planning to come back to the area? It may be cheaper to rent your house and move back in when you return, rather than paying sales commissions to sell your current home and purchase of another one when you get back.
You’re going to eventually sell your home, but not in the next two years.
To avoid capital gains taxes, you generally have to live in your house in three of the past five years. You can rent your house for two years and as long as you sell before year three, you typically won’t owe capital gains.
Rent it for three years and unless you move back in, you won’t qualify for the capital gains exclusion, so you’ll pay capital gains taxes on any increase in your home’s value since you bought it.
Can you rent your home for enough money to cover the mortgage payment and expenses?
If you can, keeping your house can be a smart way to fund your retirement. Each month your tenants pay rent. You likely won’t pay tax on that income if you have enough expenses to offset it (like mortgage interest and repair costs).
When you finish paying off your mortgage, you can sell the house if you need a lump sum, or continue renting it and collecting income during your retirement.
Do you need more tax deductions?
When you rent your home instead of selling, you get to depreciate it for tax purposes. You divide the current fair market value of your home by 27.5 (that’s how many years the IRS says a house will last) to arrive at your annual depreciation.
For example, if your house is worth $100,000, you get to deduct $3,636 in depreciation annually, along with deducting other expenses, such as property taxes, repairs, and community association fees.
You think home prices are going to rise over the next five years.
Even if your rental income doesn’t cover all your expenses (mortgage, property taxes, repairs, etc.), you might make up that loss if your home’s value rises before you sell it.
Say your home is worth $100,000 today and your expenses are $1,000 a year more than the rent you can collect. Over 10 years, you’ll lose $10,000 ($1,000 x 10 years), but if your home sale nets you more than $110,000, you’ll make money despite those annual losses. Your annual loss might also be a tax deduction for you, saving you money on your tax bill.
What’s your home’s condition?
Renters, more so than buyers, can be willing to overlook outdated home fixtures because renters know they’re just passing through your home, not owning it.
If you don’t have the money to invest in improvements and your home’s fixtures scream 1970s (and not in a good, retro chic way), renting may be the better choice.
You need the profit from selling your home to fund your move-up home.
If you need a different home and must sell your current home so you can use the profit as a downpayment on your next home, opt to sell your home vs. renting it.
If you don’t need all the equity in your home for your downpayment, you can take out a home equity loan or refinance into an investor loan, use the loan proceeds as your downpayment, and still make your home a rental.
You freak out about condition and panic over repairs.
When someone lives in your home, they can scuff the walls, burn the countertops, and forget to water your prized shrubberies. If you can’t live with that wear and tear, sell rather than rent your home.
Becoming a landlord often means you still have to maintain your house. You’ll get the bills when the plumbing springs a leak or the refrigerator dies. If making DIY repairs is beyond you and paying for upkeep is going to cause you to panic, opt to sell your house vs. renting it to save your sanity.
Can you evict a tenant who fails to pay?
If you wouldn’t have the heart to force out a renter who didn’t pay, you should not become a landlord — or if you do become a landlord, plan to have a professional manage your property.