Buying a home to live in involves different priorities from investing in real estate or converting a primary residence into a rental property. When you are moving out of your current home, you need to think about both financial and personal needs to decide if it is better to sell your house or lease it out.
Sales Market Conditions
Look at what homes are selling for in your neighborhood and how long they are listed before they sell. Compare the expected sales price to what you owe on the home and determine what your profit or loss will be if you sell now. For a long-term view, consider market projections for the past few years as well as future expectations.
Rental Market Conditions
How does the average rent in the neighborhood compare to the costs of homeownership? In addition to the mortgage payment, you must pay taxes, insurance, repairs, upgrades and possibly property management fees.
Renting may have tax benefits, since some expenses are deductible against the rental income. Depreciation can also reduce your taxes. A tax advisor will help you determine any tax benefits.
If you decide to lease your house, it’s possible you might not have renters right away. Could you continue to pay your current mortgage payment if the rental property sits empty for a few months? If your expected rent minus expenses won’t bring in cash, selling might be the better choice.
Why Are You Moving?
Some owners move within their current city while others relocate farther away. Being a landlord in the same city is easier than being a long-distance landlord. This factor may impact your decision to do it yourself or hire a management company. If your move is temporary, leasing out your home, and then moving back, may be a better solution than selling and rebuying in a few years.
Another consideration is coming up with a down payment for a new home, if your money is tied up in your current home. The loan approval process may be a challenge with two mortgages.
Do You Want to Be a Landlord?
The job of a landlord goes beyond collecting rent. You must also find reliable tenants, make home repairs and deal with a wide range of issues, which could include chasing renters for late payments and initiating evictions. Hiring a property manager will minimize these potential hassles. If your home becomes an investment property, you’ll need to budget for repair costs, non-rental periods and upgrades between renters.
Real estate investing is different from home ownership. It is more about cash flow and home appreciation and less about the emotional side of loving a home. If you sell your home, what will you use the money for? What return will you get on your new investment? What is the return if the property is rented? You may have light cash flow at the beginning, but once you’ve paid off the mortgage, a rental home can provide ongoing income for retirement.
Real estate provides owners with a comfortable place to live and enjoy your family and neighborhood. Converting a home into a leased investment property is not a decision to be made lightly; it involves ongoing maintenance and expense. When the home is sold, you can move on.
When Not to Lease Your Home
In any of these cases, it may not make financial sense to lease your home:
- You needs funds to purchase another home
- The rental market would not produce a positive cash flow
- You don’t have the means to carry two mortgage payments when the rental sits empty
However, if the home sales market is slow and your home is difficult to sell, you may need to rent out the property while waiting for the market to improve.
Real estate can provide income each month, but it can also be a burden. Treating the decision as an investment may be the best way to decide which option is best for you.