As an experienced real estate agent in San Diego, California, I have had quite a few clients ponder this question. The question and decision can be triggered by a job relocation, a move to be closer to (or further from) family, or simply the purchase of a second home. Although some people seek out a sell vs rent calculator, the decision should really take into account many factors that don’t fit neatly into a real estate calculator. You might assume any real estate agent would immediately answer with “SELL!”, I try focus entirely on what might be best for each client. The advice that follows is in that same spirit and includes a comprehensive list of factors to consider when you’re making the decision to sell or rent out your home.
Before we dive into this further, it’s important I point out I am not a tax advisor, accountant, attorney or financial advisor. The decision to sell or rent out a house can have substantial tax, legal and financial implications. The selling vs renting evaluation should involve one or more of those professionals, and not just the opinions of a random real estate agent online. With that disclaimer out of the way, let’s dive into the factors that I think are important to consider as you contemplate selling vs renting a home.
Sell It or Rent It – How Do Each Pencil Out?
The most fundamental questions about whether to sell or rent out your home usually involve short and long-term financial considerations.
If you sell, how much will your proceeds net you, and what will you do with those proceeds? If selling now might mean taking a loss, or even breaking even on your purchase, that alone might encourage you to rent your home out. That’s especially true if renting is likely to be cash flow positive (meaning, after you pay your mortgage, taxes, insurance, maintenance, and other expenses, you are still taking in more revenue). However, if selling means your proceeds will be tens or even hundreds of thousands of dollars, the equation changes.
That equation should also factor in what you plan to do with those proceeds. If you plan to invest proceeds in another property, or in the stock market, each has the potential to grow those funds further. If you plan to blow the proceeds in Vegas, on a boat, or a buying a fancy watch, then maybe you should keep the property as a rental.
There can be both tax benefits to renting your home out and tax liabilities for selling it. These are best discussed with your tax advisor. However, from a general perspective, if tax considerations play a major role for you, those might steer you more towards renting the home out. If the home is an investment property and you’re considering replacing it with another investment property, then a 1031 tax deferred exchange might also be an important part of analyzing any tax implications.
Another key element of how real estate ownership pencils out relates to appreciation. If you decide to rent out your home and are just breaking even on rental income vs your costs, but the home is appreciating $50,000/year, keeping your home as a rental might still be appealing. Unfortunately, appreciation is a relatively unknown quantity and is subject to a lot of volatility in the short term.
If you happen to be weighing selling your house versus renting it out right at the start of home values declining in your area, appreciation (or depreciation in this case) could encourage you to make a quick sale or potentially hang on to the property to rent while riding out a downturn. Estimating potential appreciation is easier to do if you have a long time horizon, where historic data is more stable. Markets can rise and fall more readily in the shorter term.
As you can see, there are numerous financial factors at play as you contemplate, “Should I sell my house or rent it out?” Not all considerations are directly financial though. Some important factors relate more to lifestyle and the practical considerations related to selling vs renting. Those factors (and their interplay with some of the financial criteria above) are covered next.
Should I Sell or Rent Out My House? Want to be a Landlord?
Not everyone is suited to being a landlord. If you ask 20 people who have been landlords, some will likely say it’s pretty easy and others might say it’s a nightmare responsibility to be avoided by all but the most foolhardy. Their answers will be informed in part by their circumstances when they were a landlord and in part by how well-suited they were to the job.
A landlord has quite a few responsibilities you should be prepared for if you decide to rent out your house. Some of those include:
- Tenant Screening: This critical initial task can make or break your experience as a landlord. If you screen carefully and get a great tenant you might have years of smooth rent collections and no vacancy. If you screen poorly and find yourself with a problem tenant, you could be faced with substantial repairs, legal costs, and extended periods with no rent payments. Conducting thorough background checks, including credit, criminal, and rental history, is vital for selecting reliable and responsible tenants.
- Lease Agreement Preparation: Draft a comprehensive lease agreement that outlines the terms and conditions of the rental, including rent amount, due dates, security deposit, maintenance responsibilities, and rules for the property. Like tenant screening, this is an important step that can either reduce liability or increase it, depending on how the agreement is drafted.
- Property Maintenance and Repairs: Before renting out your home, you will want to ensure it is in good condition. More importantly, you will be expected to handle any necessary repairs promptly during the tenancy. This can be one of the more taxing aspects of renting out your home. Repairs can come up unexpectedly, which can cost you time and money.
- Rent Collection: You will want to establish a system for timely rent collection and to address any late payments or non-payment issues in accordance with the lease agreement. If you have a reliable tenant this can be very easy. If you have a late or non-paying tenant, this task can turn into a stressful nightmare.
- Legal Compliance: The responsibility of being a landlord also comes with liability, including a myriad of laws often geared toward protecting tenants. You will want to stay informed about and comply with local, state, and federal laws and regulations regarding rental properties, including fair housing laws, safety codes, and tenant rights.
- Property Inspections: Out of sight, out of mind is not a great policy for anyone renting out their home. Conducting periodic inspections (compliant with your lease agreement and local laws) can help you ensure the property is well-maintained and address any potential issues before they become major problems. Tenants rarely look out for a home with the same vigilance as homeowners do.
- Handling Tenant Concerns and Complaints: Responding promptly and effectively to tenant concerns and complaints to maintain a positive landlord-tenant relationship is vital. It can also be a very taxing aspect of being a landlord. Getting calls, emails, texts etc. at all hours can lead to a feeling of being on-call for your property.
- Security Deposit Management: You’ll want to properly handle and account for security deposits, including collecting, storing, and returning them in compliance with local laws and the terms of the lease agreement.
- Property Marketing: Advertise and market the rental property to attract potential tenants, utilizing online listings, social media, and other marketing channels.
- Eviction Process Management: Lastly, you’ll need to be ready to understand and follow the legal eviction process if it becomes necessary to remove a tenant due to lease violations or non-payment, ensuring compliance with all legal requirements. Evictions can frequently take months of effort. Of all the challenges of being a landlord, dealing with evictions is typically the most stressful, time-consuming and costly.
If you’re seriously questioning any inclination to rent your home out after reading that list, you’ll be happy to know there are some alternatives to managing the rental entirely on your own.
Property Management
If the idea of screening tenants, writing up lease agreements and dealing with calls from tenants day and night terrify you, hiring a reputable property management company might be a solution. Not only can a good property manager help you avoid pitfalls of renting through thorough screening, well-drafted leases, and timely repairs, but they can take a lot of the drudgery out of the task. Finding a reputable property manager is key though, as the last thing you want is to have to manage your property manager.
While the idea of property management may sound great, it does come at a cost. Property management companies typically charge 5%-15% of the monthly rental income. Although the monthly fee is what most people think of when it comes to property management costs, management companies also charge additional fees. Those can include a startup fee, tenant placement fee, markup on repairs, and eviction fees, just to name a few. If your rental is highly cash flow positive, hiring a property management company can make a lot of sense. If you’re just barely turning a profit with your rental, sometimes property management can be cost-prohibitive.
Some people view property management as the cure for all the downsides of being a landlord. In reality, you are mostly paying for someone to handle the more basic administrative aspects of renting. If you have any significant problems with a renter or property repair issues, ultimately the responsibility for dealing with them (or more specifically, paying for them) will rest with you. However, a property management company can minimize some of the challenges of being a landlord, and they generally make it a more positive experience.
Local or Remote?
Deciding between selling vs renting can sometimes boil down to logistics. That is especially true if you plan to manage the property and any repairs yourself, in-person. For all the challenges of being a landlord, being far away generally makes them more complicated.
A quick in-person visit might resolve a minor repair concern, but if you are located in another state, chances are you’re paying someone to handle your problem. Even if you have a property manager, being in a remote location from your rental can be more challenging. If you plan to rent out your home and will live a long distance away, hiring a property manager or simply selling your home might be more prudent.
Property Considerations
Not all real estate is created equally. There are some properties that lend themselves to renting more readily than others. A brand-new condo or townhome with on-site management is likely to encounter fewer property-related issues than a 150-year-old home with dated appliances and infrastructure.
If you are constantly engaged in the maintenance and repair of your home, that may skew things toward selling in the sell vs rent decision. On the other hand, a turn-key, newer condo might lead to a relatively low-hassle rental experience.
Might You Need the Home in the Future?
Another important factor in the selling vs renting decision is your time horizon, and whether you might want or need the home in the future. Deciding to sell your home is a pretty irreversible process. It’s rare for someone to sell their home and then buy it back later.
If the motivation for your move is temporary and you may want to move back, renting might be the more prudent choice. You can always decide to sell later, although that can be logistically more challenging if you move out of town and then decide to sell.
Similarly, if the home might be wanted as a future vacation home or is a property you plan to pass on to your kids, keeping it as a rental preserves those options. Renting can feel safer, especially if it delays your actual decision to rent or sell. It’s vital to take an unvarnished look at the various pros and cons for each so you’re not simply deferring your decision to a time that might be less convenient or advantageous to sell.
Rent vs Sell Market Conditions
Last but not least, the conditions for renting out your home vs selling your home can vary significantly. Some regions might have particularly strong rental markets, and might have relatively high ratios of home value to rental rates. Areas like this often skew the financial calculus at the start of this article in favor of renting. Other markets might have very costly real estate, but relatively low rental rates. These types of markets skew the decision in favor of selling your home instead of renting it out.
Similarly, if there is very little rental demand in your area, renting will be much more challenging. If rentals are snatched up immediately, that makes renting more practical.
The overall real estate market is also a vital factor. If home sales are weak, and it could take many months or more to sell, getting a renter in there might make more sense. If it’s a seller’s market and your home will command a strong sales price and will sell briskly, that can increase the appeal of selling your home.
I hope this article has helped bring you closer to answering the question: Should I sell or rent out my house? Like many decisions in real estate, this one involves risk tolerance, lifestyle factors, and significant financial implications. The rent vs. sell decision shouldn’t be taken lightly and is worth careful thought and consultation with relevant tax and financial professionals.
What to Do if You Decide to Sell Your Home
If you ultimately decide to sell your home and you happen to be in the San Diego, California area, please contact me for a no-obligation consultation and market analysis. Whether you decide to work with me or not, this article on how to find a great real estate agent can help. You might also find this article on preparing your home for sale invaluable.
Selling or Buying a Home Outside of San Diego?
Even if you are not in San Diego, I regularly refer people to outstanding Sotheby’s International Realty agents as a free courtesy, regardless of whether you are an existing client of mine. Our network encompasses 25,000+ sales associates in 1,000 offices throughout 70+ countries. Please let me know if I might be able to assist you with a real estate agent referral.
