Should I Sell or Rent My Home?
Whether the change is exciting or sad, dealing with it can be difficult for us all. It's especially difficult when you have to decide what to do with major assets like a home. Often a big question when moving is, "What do we with our current property?" Usually, two options are hanging in the balance: Rent it or Sell it.
Many like the idea of renting an existing house to bring in extra money every month. There are plenty of situations where this makes sense, but there are many things to consider before you can start counting that money. Others enjoy the simplicity and closure that comes with selling. They often appreciate the flexibility and freedom that comes from having their equity available to them immediately.
No matter how you are leaning, this blog will be discussing how to assess your options and what to look out for when considering selling vs. renting your house.
Evaluate Your Financial Situation
There are several details to consider while evaluating whether to sell or rent your existing home. Your financial position should be at the top of this list.
Owning a home can be very expensive. Naturally, owning two of them is more so! But what you don't want is for your current home to keep you from being able to get approved for your next home.
If you will need a mortgage to purchase a second property you should determine if your debt-to-income (DTI) ratio with both mortgages will be low enough for banks to approve you for the second mortgage. While the amount required varies, most banks will want less than 50% DTI. So if your car payments, student debt, credit card, and current mortgage put you close to that threshold currently, you may not be able to get approved for the second mortgage. In this situation, it may make sense to sell your house instead of renting it out. Eventually, you would be able to include the rent you are paid as income, but most banks won't count this as income initially.
The next thing to consider is if you can handle the carrying costs and upkeep of the rental. There are a lot of hidden costs to owning a rental. Let's discuss those more.
Consider the Costs of Owning a Rental
When it comes to owning a rental, there are a lot of costs to consider: maintenance, taxes, insurance, vacancy, potential utilities, yard care, snow removal, background and credit checks for tenants, and more!
These can all take a big bite out of what you perceived to be a great profit. Believe it or not, many real estate investors estimate that nearly 50% of their rents are going to be lost to operating costs.
One area you shouldn't underestimate is vacancy and turnover costs. If you estimate that you can rent your house for $1000 a month, what happens if it takes a month to fill the place? Not only did you not have income for that month, but you still had all the operating costs associated with the property, including utilities. Instead of making $1000 to cover those costs, you paid $650 plus your mortgage payment out of your pocket. You will need to make sure that you the reserves or the cash flow to be able to handle this.
Another point to consider as you evaluate the costs associated with a rental is the property tax. When you leave your current residence, you will lose your Homestead Exemption, which helps dramatically reduce your property tax. This means you cannot simply use your current annual tax statement when calculating this cost. In Fort Wayne, Indiana, you will have a 2% property tax cap. You can use this cap to find the maximum tax you will owe by going to Allen County's Tax Info page, finding your property, and multiplying the assessed value by 2%. If you forget to do this, you may find yourself facing some serious tax delinquencies.
Do You Have the Time?
Let's say you have evaluated your financial situation and found three things:
You have a low enough DTI to carry two mortgages
You have reserves to cover vacancy and any maintenance issue
You visited Rentometer and determined that your home will rent for enough to cover the ongoing costs and make you some extra money. Nice!
Now comes the question about lifestyle. While many horror stories about owning rentals are overblown, you will occasionally get the midnight call from a tenant. You will also need to handle little maintenance items that may come up from time to time. Beyond this, you will need to invest time in developing a lease, marketing the property, evaluating applicants, and finally, placing qualified tenants.
If you aren't in a position to take calls from tenants/applicants during the day and you aren't able to maintain the property due to skills or free time, you can always choose to use a property manager, but most will charge close to 12% of your monthly rent. This will affect how much cash flow the property provides, so you should consider it now if you think you may go this route.
Another Option to Consider
While many people only consider renting vs. selling there are many other options homeowners can sort through when deciding what to do with an existing home. If your main goal is to generate profit from the equity in your home you could consider some form of seller financing.
Seller financing can come in many forms: holding a note, land contract, lease options, carry-back financing, and more! But no matter the route you take, this is a way for you to transfer ownership and responsibility for the property while receiving monthly payments for your property. An arrangement like this may allow you to make more money off your property then if you just sold it, but doesn't come with the hassle of managing a rental monthly.
What's Right For You?
Ultimately, your financial goals, tolerance for risk, and free time will determine which option is best for you. As always, it's best to consult with your tax and legal consultants before entering into legal contracts with buyers or renters.
If you are still deciding what option is best for you, or you want to learn more about any of the options discussed here, the team at Olive Tree Properties would love to help you assess your options. You can contact us by phone, email, or schedule a call here.