Should I Sell My Home or Rent it Out?

May 8, 2019
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Inevitably, there comes a time when we decide to sell our house and move to a new one. There may be many reasons for moving. You might be moving for work or heading to a new town for your family. You might be selling your starter home/condo in order to move up into a family home. You might be an empty-nester looking to move down into a smaller home for your retirement years.

Why you are moving may play some part in what you decide to do with your current home. Most people just sell it because that’s what they’re expected to do. However, many others decide to keep it as a real estate investment. They choose to rent out their old property rather than selling.

I should clarify that we’re not talking about a real estate investor that owns a ton of rental properties or flips houses for a profit. That’s a little different topic. In this article, we want to talk about the pros and cons of renting vs. selling a home that was once your primary residence.

Rent vs. Equity

The first thing to consider is purely financial. Do you need the equity from your old home to put as a down payment or toward repairs for your new home? If the answer is yes, then selling is probably your preferred option. You can consider a larger mortgage loan or a home equity line of credit (HELOC) to finance things. However, that may just put you deeper in debt. In most cases, if you need the cash and have it in the form of equity, use it.

Cost of Ownership

If considering renting out the home, you will really want to crunch the numbers on the rent you can expect to receive. Ideally, you will need to be making a profit from the rental income after the ownership and expenses below are covered:

  • Mortgage Payment (assuming you don’t own the old home outright)
  • Property Taxes
  • Landlord Insurance
  • Homeowner’s Insurance
  • Natural Hazard Insurance
  • HOA Fees
  • Repairs & Upgrades
  • Bookkeeping & Accounting Costs
  • Leasing Costs
  • LLC Costs
  • Property Management Fees (if hiring someone else to handle landlord duties)

Note that the property will likely still continue to increase in value, thus earning you more equity over time—on top of what you’ve already earned and haven’t cashed out because you didn’t sell the home. Projecting the equity growth isn’t as easy to predict with cyclical real estate markets, but it is another long-term profitability factor to consider in addition to the rent payments you receive.

Capital Gains and Income Taxes

The income you generate from your rental property (after expenses) is considered taxable income, so that is something else to keep in mind. Also, once you rent out the property for more than three years, it is no longer considered a primary residence. Your primary residence has a $500,000 capital gains exclusion for a married couple. So by converting it to a rental, you could forgo $150,000 in tax benefits because the rental home is subject to capital gains and  depreciation recapture taxes if and when you ever do sell the property. On the other hand, you can also choose to move back into the property and make it a primary residence again, which comes with many great tax benefits if done right.

Other Considerations

There are various other financial and emotional factors to take into consideration when deciding whether to rent or sell a home. This will include:

  • Headaches of becoming a landlord (weighed against economic gains)
  • Location of the rental property compared to your new home
  • Tax implications of leaving the property to your heir(s)
  • The interest rate differential between your old and new mortgages

Ultimately, renting vs. selling is a major decision that comes down to both your finances and the lifestyle you want. If you have the means and live in an area where rental prices are high (like here in San Diego, for instance), then there may be an argument to hold onto the property and rent it out. If you need the equity from your old home or don’t want to deal with the complications and expenses of owning multiple properties, then selling might make more sense.

Either way, it’s a financial life planning issue worth giving serious thought before you pull the trigger on selling or renting. Talk with your financial advisor and look at the numbers to make the right decision for your financial future.

Illumination Wealth is here to help you with all your personal and business financial planning needs, including wealth management, tax planning, real estate investment and retirement savings. Contact us today to schedule a no-obligation financial consultation.