by Elizabeth Colegrove
I get the question a lot: I am thinking of moving or upgrading… do I rent or sell my home?
That question is really loaded. A simple yes or no answer doesn’t really do the question justice. Honestly, anything shorter than an article really can’t answer the question and does you the questioner a disservice.
Therefore, this article is for all of you who have thought, asked, or wondered about this conundrum.
Before We Get Started
Let me preface this whole discussion by saying: It really depends on YOU! No matter what is said in this article — or any other forum, newspaper article, etc. — at the end of the day, it is what YOU are comfortable with and willing to do. Think of it like stocks: while you can make a killing in the penny stocks, you have to be comfortable with your financial decisions — because at the same time, you can lose your shirt!
Any investment that entails the use of a “vehicle” to obtain your dreams is going to have its up and its down days. If you don’t fully believe and aren’t invested in it to succeed, you will be not be a successful landlord. Going into this half-hearted means you won’t be willing to go the extra mile to stay out of landlord trouble, deal with tenant stress or any of the other wonderful “consequences” that come with being a landlord. On the other hand, if you choose not to go in this direction, you won’t be able reap the amazing rewards that come with being a successful landlord.
Lets Get Started: Do I Rent Out or Sell My House?
Here are some questions you need to ask yourself:
Are you willing to be a landlord?
Landlording isn’t fun, and it definitely has its moments. For us, they have only been in the form of emotional, not financial, stress. That is draining and never seems to be at a good time. We have had tenants break lease during a move, right after my husband deployed, and we’ve had a house leak during our vacation — to name just a few of the “fun” situations of landlording. While the rewards have been amazing, they are slowly realized, so patience is a must.
Are you going to make a profit or bring money to the table?
If you bring a profit to the table, make sure you have assessed the true profit after real estate agent fees and capital gains. If you are bringing money to the table, make sure it is an amount that is worth it to you!
What is the TRUE cost of bring money to the table?
Frequently, I see BiggerPockets members calculate the costs of having a home based on vacancy, management, and maintenance costs. If the only reason you are selling is for monitory purposes, make sure you are looking at the costs. While long term you might have vacancy and management costs, I have been able to eliminate these costs. My houses’ margins are $120-$450 a month, and I have NEVER had to raid my pocket to pay for anything. So before you shell out $40,000, figure out how long it will take you to break even! It might not be as bleak as you think. Remember, if you can afford it, there is nothing wrong with trying the rental thing and then selling it if it doesn’t work out.
For example, if you are losing $100/month, that’s $1200/year. If it costs you $40,000 to get rid of it, it would take 33 years to break even. That’s a lot of “extra” cost that would have to appear to make it worth the $40k! Plus don’t forget about deprecation and other tax “credits.” Just food for thought!
Are you looking for cash flow or payout?
Life requires flexibility; business success requires a plan. Create a plan that reaches your long term goal. Our long term goal is early retirement for 15 years. While our plan when we started 3 years ago looks NOTHING like what we are doing today, we still are on path for our goal!
Do you have a better place to invest the proceeds?
Congratulations, you can make $20,000 if you sell the house! Now for the hard question: what are you going to do with it? I could sell all of my houses for a profit, but I couldn’t reinvest them into other assets that give me the same return long term. My goal is long term cash flow for early retirement. So before you sell, make sure you have an reinvestment plan that maintains your LONG TERM goals.
Is the area depreciating or appreciating?
I recently sold a house for family and 1031-ed it into 3 houses in California. The area was depreciating. The house was older and had an oversupply of brand new condos for rent. While the sales market was still in a good place, it wasn’t going to be there forever. So this was the perfect time to jump ship.
Look at your market. Where do you see it going? If you see the writing on the wall, this is the time to leave.
I am buy and hold landlord who has turned personal properties that are highly leveraged with low margins into great rentals. So of course I am biased when I advise someone to keep their house as a rental.
Just remember that once you have a mortgage, it’s yours; there is no re-qualifying later. If you sell now, you have to re-qualify for the new house. While you might qualify for a new house, you might not qualify for 2 new houses. Rates are not at the lowest they have been in history, so if you have some of those amazing 3.125% rates, you might not want to sell. Just remember: look at EVERYTHING before you decide to sell!
Weigh in: What questions would you add to my list? What do you consider when trying to decide whether to sell or rent?
Leave me a comment below!
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