I often get asked whether a family is better off selling their house or renting it out instead. Our answer to the “should I sell or rent my house” question will depend upon what your current situation is. There are times when renting out your house will make sense, just as there are times when selling your property would be prudent. Let’s dive in further to see what’s your ideal sell or rent strategy given a few different contexts.
Is your move away only going to be temporary?
Some people might be moving out of town for a job transfer with the option of coming back. You might not want to deal with the house when you’re out of town, but you want to hold onto it because you might be coming back later. If you bought the house at or near the peak of the market, the trouble with selling it is that you’ll likely be in the negative after closing. My personal opinion is that you should hold on to the house and rent it out.
Renting out your house will give some time for the housing market to rebound. Another consideration is that the rental market is very good right now. The housing landscape is filled with people that have gone through short sales and foreclosures. These people need good rental properties to rent. They have decent incomes, but they may have just bought at the peak of the housing market and lost their house.
Renting and building equity go hand in hand.
Real estate can be an awesome investment. But keep in mind that you will have carrying costs of retaining your property. These include a mortgage, your property taxes and housing insurance. You also have to consider whether it’s feasible to be a landlord for a property you own. If you live in a different city than your rental unit, then you’re going to have to hire a property manager. This will be another cost that you’ll have to add to your expenses.
Equity is not created through the cash you’re getting from the renters. It’s actually the growth of what the house is worth. The equity goes up as my property goes up in value and the remaining balance of my mortgage goes down. The ideal scenario is that you keep paying off your mortgage and your property value increases. This is the scenario that every real estate investor wants as it means they’ll be selling their house for a profit sometime in the future.
When you rent out your property, you now have two sources of income:
• You have a revenue stream of rental income.
• You have the appreciation on equity as you pay down your mortgage and/or your house goes up in value.
Many homeowners use the rental income stream to pay down their mortgage. Using their homes for rent income is therefore indirectly helping the homeowners increase the equity in their homes. You can get an estimate of your rental income by researching comparable rental properties like yours in your neighborhood.
Are you ready to be a landlord?
A question you should ask yourself is how comfortable are you being a landlord? Keep in mind that being a landlord is a job. The rental income that I earn is not free money if I’m the one who is managing the property. Being a landlord is going to take some work if you don’t want to hire a property management company. It will likely take time away from other stuff that you want to do. You also need to be realistic about your cash flow projections. Real estate can also go down in value if you don’t choose your neighborhoods wisely. A negative cash flow from property that sits vacant will ultimately end up coming out of your checking account.
Do you have a team in place to back you up as a landlord? Do you have a realtor, a contractor, an electrician and a plumber in your network to deal with issues as they come up? Experience has also taught me that landlords will need an on-call handyman for small issues as well as a lawyer for big issues that come up. You have to have people you trust working for you. If not, then you’re going to be calling and comparing rates instead of strategically deploying these professionals to work on your behalf.
You can also hire a management company to handle the day to day business of managing the property. These responsibilities include:
• Screening the tenants / performing credit checks and reference.
• Performing the role of the property manager.
• Taking phone calls when there’s a problem with the house (washer quits working, or the plumbing gets clogged).
• Dealing with structural problems with the house that needs to be fixed.
In my experience of being a landlord, these issues that come up never happen on your schedule. There are all sorts of things you have to be willing to deal with unless you hire a great property management team. Tenant issues will happen when you are busy and when you already have too much on your plate. And you can’t simply put these issues on the back burner. You will need to handle them in a timely manner or risk being labeled a negligent landlord. I already have a good property management company in Scottsdale, but you’ll need to find a good team in your location.
Only you can answer whether you should sell or rent your house.
The answer to the question “should I sell or rent my house” really depends on what you want to do with your house. There are a lot of people right now that are successfully putting up their homes for rent, while other people simply want to cash out and move on.
An important question you have to ask is whether you think you will enjoy being a landlord. Many things have to be dealt with once you start renting out your house. These range from minor things that need to be fixed to stuff like rent checks getting lost in the mail. When you become a landlord, you end up dealing with someone else’s household. If you’re not up for the hassle, then hiring a property management firm will help you keep both your rent checks and your sanity.