If you are thinking about moving, you are probably wondering if you should rent your house or sell it. Here are the important renting vs selling pros and cons to consider to help you make the best decision.
12 Important Renting vs Selling Pros and Cons You Should Consider
Evaluating whether you should rent or sell your home is a big decision. You should evaluate all avenues towards an optimal outcome for you and your personal finances. I’m here to help.
These are plenty of pros and cons of renting vs selling that you need to know in order to make that optimal decision. Not just make the right decision, but feel comfortable doing it.
I recently made the decision the rent my home to AND purchase a new one to increase the convenience of my wife’s commute. I’ve always been a big fan of real estate from an investment asset class perspective.
I use real estate to earn passive income from a real estate crowdfunding perspective, but also look forward to building a portfolio of single-family property within my local market.
Read more about real estate crowdfunding.
I’ve been integrating my real estate assets into my Personal Capital portfolio, which is completely free to use. It helps me track my net worth and cash flow. For real estate investing, I only track my net worth building on my actual real estate assets.
I consider the income from these properties as business income. I simply don’t like my landlord bank accounts to my Personal Capital tracking.
I learned a lot along the way and I’d love to share my learnings as a case study for you.
In this breakdown, I will highlight the two perspectives to help you:
- A comprehensive pros and cons analysis of renting
- A comprehensive pros and cons analysis of selling
Let’s get started by evaluating the options for renting your home.
Pros & Cons Analysis of Renting
There are several advantages and disadvantages to renting your home rather than selling.
Pros of Renting Your Home
Here are some of the advantages of renting.
Cash Flow & Income
When renting your home, you should have conducted an analysis of how much you can realistically rent your home. You can do this by using a tool like Rentometer.com to evaluate the rental price for a particular address.
Everything is location dependent. I’d only consider renting my home if I could achieve a 7+% annual cash yield from the spread of rental income to the mortgage payment.
For example, you should consider investing in a property that provides annual distributable cash flow of $7,000 if your downpayment was $70,000. This equates to a 10% annual cash yield.
Real estate remains one of the better ways to make money.
Play on Equity Appreciation
If you really like the location of your home, why sell it? By renting your home, you could be just along for the ride. This can be a great way to play the dynamics of your local market without having too much at stake going forward.
Yes, you will have your capital tied up in the form of home equity. That’s okay. While you rent your home, you can focus on building up a new savings base.
See Related: Best Books on Flipping Houses
Use of Low-Cost Leverage
This is another one of my favorite components of renting my home rather than owning it. It’s basically the third prong to the overall economic story of becoming a landlord.
The first is income, the second is equity appreciation (inflation-adjusted) and the third is low-cost leverage.
Real estate is one of the few asset classes that have very easy access to debt financing. Mortgage rates have been historically low for years. By using a lower cost of capital financing, you enhance your equity returns.
By renting, you are simply having someone else pay that low-cost leverage for you while you can reap the benefits of principal amortization over time.
Easier to Rent a Home Than to Sell It
It’s much easier to find a person to rent your home than it is to find someone to buy it. It’s as simple as that. I rented my 2,400 square foot house after hosting a 1 DAY OPEN HOUSE.
Selling your home will generally be a very laborious process. Be prepared to clean nearly every day and leave for hours on end. Only a few lucky people are able to sell their home in less than a week. Always be realistic about what you want to rent your house for.
Use a tool like Rentometer to determine what you can rent your house for. All you need to do is input your address and bedrooms. You will get a range of rental rates in seconds.
Don’t get greedy and don’t be too conservative. If you find the balance, the market for lessees in your home will come.
In considering the pros and cons of renting vs selling, you should evaluate the qualitative considerations. The optionality of renting can work to your advantage.
What if you want to eventually return back to the home that you originally owned?
By renting it, you can term out your renters and then move back into your property.
See Related: Ways to Make Money Online
Cons of Renting Your Home
These are some of the major disadvantages of renting your home.
Might Preclude You From Buying Somewhere Else
Depending on your personal financial situation, renting your home to a tenant might limit your ability to find a mortgage elsewhere. If you are looking to buy elsewhere, your new mortgage provider will run a credit report and evaluate your income and asset flexibility for having two mortgages.
If you have enough in savings for 3-6 months of reserves for one home’s mortgage payments, you will likely be in good shape for approval on your second mortgage.
Tips for Reducing Risk in Having a Mortgage Provider Deny You
Here are some tips to ensure that by renting your home, you don’t limit yourself:
- Mention to your mortgage provider that your other home will be rented out
- Provide the lease showing that you are making a spread off the mortgage payment
- Consider letting your mortgage provider know why you are renting your home (relocation, job promotion, etc.), you should always position yourself in the most positive light
Becoming a Landlord is Time-Consuming
This is likely the biggest disadvantage to renting your home. No one really wants to become a landlord. You only become a landlord because you will likely be financially compensated for it.
Becoming a landlord means that you will likely need to answer phone calls at odd hours of the day, make trips to the house, learn how to become a handyman and so much more.
I rented the first single family home that I owned. I didn’t use a property manager and learned the ins and outs of being a landlord on the fly. It’s a great learning experience.
For anyone trying to become a large owner of real estate, I suggest that you learn the hard way. Being a landlord.
There are some ways to reduce the time needed in becoming a landlord, including:
- Hiring a handyman to be your personal fixer-upper
- Using a home warranty plan (there are mixed reviews on these)
- Find a property management company (this comes at a cost)
If you can make the numbers work with hiring a property manager, go for it! I’d always take peace of mind over additional income. There are some good and bad property managers that you will likely need to vet out.
I love tools like Landlord Studio that will help me manage my properties by providing accounting tools, rent collection and maintenance.
I’d recommend getting references for the property managers you are evaluating.
See Related: Pros and Cons of Real Estate Investing
Vacancies / Evictions / Repairs Can Destroy You
The single biggest disadvantage of renting your home is that vacancies can be absolutely bone-crushing to your personal finances. You should never rent a property where a single month of vacancy could wipe out the entire profit of your property.
You need to do your homework on if you have enough reserves in your account to cover vacancies, evictions and major maintenance.
If you don’t have economies of scale with becoming a landlord, you simply won’t achieve superior results.
View your rental property as a business. If you don’t have that mindset, you simply won’t win out in the long run.
You can use your free rental property Excel spreadsheet to ensure the economics make sense for you.
Ready to start investing smarter? Click the button below to download the investment property excel spreadsheet to evaluate your real estate property.
Pros & Cons Analysis of Selling Your Home
Selling your home is a tough decision. It’s a place you likely call home. You’ve created a lot of memories in your home. It’s hard to just give it away.
Pros of Selling Your Home
These are some of the major advantages of selling your home.
Frees Up Capital
You can free up significant capital by selling your home. You’ve likely recognized some gains in your home equity ownership both through repayment of your mortgage as well as price appreciation.
By selling your home, you inherently free up capital that can be invested elsewhere. You don’t necessarily need to say goodbye to real estate. You can use the freed-up capital to invest in real estate crowdfunding like Fundrise or RealtyMogul.
These are my two favorite platforms to invest in real estate passively. They can help you achieve your returns and earn some extra income. They are both completely free to sign up.
When you free up capital, you can invest in other asset classes that provide higher returns. This is another option for younger individuals looking to take some money off the table.
Here are some of the best real estate crowdfunding options for you to continually park your money in real estate.
Capital Gains Free
If you live in your house for 2 out of the last 5 years, the sale of your home is completely excluded from capital gains tax (up to $200,000 of gains). This is great for smaller homeowners that have capital gains.
Small hack: If you hit the 2-year threshold during your homeownership early on, why not rent it for the next 3 years? You can earn passive income from the rental income and then you won’t have to pay capital gains on the sale.
Obviously, not paying taxes on a sale event has massive benefits for your personal financial situation.
See Related: How Much Should a Real Estate Investor Make
Cons of Selling Your Home
These are some of the major disadvantages of selling your home.
Could Have a Failed Sale Process
So many people think that they will sell their home in a heartbeat. That rarely ever happens. The process could end up completely different than what you envision.
The most common problem with your sale process is the following:
- Unrealistic expectations for a sale price (don’t start high and move low, start low and get people to bid on it!)
- Not willing to update or improve the home for sale value
- An incompetent realtor
Vet your realtors in advance. Hire someone that has a proven track record of volume and success in selling homes. In addition, selling to a house investor might be a very different process than selling to a primary homeowner.
Selling Requires Updates to Your Home
If you are considering selling your home, you may think that it is completely turnkey. It’s not. Your home will require updates before you start the sales process.
Then, guess what? After the sale process and once you find a buyer, they will likely have some required updates or improvements. There’s no way around it.
Don’t want to do the updates? Expect a price concession of your sales price. Another reason why you should have realistic expectations with the proceeds.
See Related: 5 Considerations for Selling a Property at a Loss
You Could Take a Loss
One of the most hidden cons of selling your home as opposed to renting is that you might take a paper loss or minimally gain.
Renting can be a great alternative to helping you wait it out and crawl your way out of a horrible investment. There is a chance that you own a lemon and it simply will never recover in value.
That is the million-dollar question you should at least try to figure out. There is limited harm in playing the long game.
See Related: How to Retire on Rental Income
Conclusion on Renting vs Selling
Consider all factors of renting vs selling your home in your evaluation, including your age, your target date to retire and even your own personal financial goals. Not everyone is the same. For me, cash flow and equity capital appreciation are very important.
I know that if I can build a foundation of real assets that provide both, I can end up doing just fine with my personal finances. I’m not the most conservative investor out there.
I know that if I can invest in something that I understand, I will do okay.
An interesting perspective would be to do the following strategy to build wealth through real estate:
- Buy a home that has strong rental characteristics,
- Live in it with the goal to save for another property,
- Rent that property,
- Buy a new property with strong rental characteristics,
- Rinse and repeat.
What do you think are the biggest pros and cons of renting vs selling?
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Financial Wolves is a blog focused on helping you make money to achieve financial freedom.