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Many real estate investors venture into property ownership to turn it into a rental property, so if you already have your own real estate, why not turn it into a rental as well? The answer is: It takes a lot of financial planning and effort to make it work.
When it comes to renting versus selling, the unique personal circumstances of an owner should be taken into account. So, what do you need to consider first to make an informed decision?
1. Financial Situation
If you need a lump sum right away, then selling would be your best option. Selling costs in California are high, especially if you do so during spring or early summer. You can consult a real estate agent to find the best deals for you.
With renting, you can get a steady monthly cash flow that can help you with mortgage payments as well. This option is preferable if you want a long-term source of rental income. This also applies to rent-to-own options if you want a steady stream of income but want to sell the home as well.
2. Current Market Conditions
Before deciding to sell or rent, one deciding factor you should look into first is the rental demand in your local housing market. Rental properties are lucrative, but only if there are actual tenants to rent to. High vacancy rates can lead to significant losses, resulting in negative cash flow.
Look into housing prices to determine whether it's a seller's market. Check the current interest rates and calculate whether the buyers can afford the selling price. According to the National Association of Realtors, most young buyers depend on their own savings for a down payment, so checking the current economic conditions is crucial.
3. Property Condition
Selling your home or turning it into a rental both depend heavily on the property's condition. Buyers are looking for their dream home, so they would not choose a house that has been worn down or shows damage.
The same goes for potential renters. They will prefer similar properties in the rental market if they are in better condition. Whether you're selling or renting, be prepared for major repairs or renovations to make it more appealing to buyers or renters.
4. Ongoing Expenses
Both renting and selling will have ongoing costs that you need to anticipate. Selling your home means you might have to pay closing costs, such as appraisal fees, title searches, taxes, recording fees, and other added expenses.
While renting out your property means a steady income, you will also have to account for property taxes, maintenance costs, property management fees, minor repairs, renovations, and other ways you can make the rental habitable and appealing to tenants.
5. Tax Implications
Selling your property can trigger capital gains taxes. You may be eligible for primary residence exclusion if you owned and lived in the home for at least two years in the last five years before selling it.
With rentals, your rental income will be taxed as well, but you can take advantage of the tax benefits with the business. Deductible expenses include repairs, maintenance, insurance premiums, utilities, HOA fees, and advertising costs.
6. House Equity Wealth
How much of the home's value do you already own outright? The outstanding mortgage and liens should be one of the several factors you have to consider. You will have to deduct these from your sales proceeds, and huge outstanding loans can leave you with nothing. Try to use a rent vs sell calculator for more accurate results.
It would make sense for you to rent your property instead, provided that the calculated potential rental income would be able to cover your due payments. If the investment property is in a good location with high demand for rentals, the potential profit could cover your remaining balance in a few years.
7. Management Plan
Selling a home is significantly easier than turning it into a rental property. You will have to market your listing, conduct background and credit checks, make necessary repairs when requested, conduct maintenance, collect rent, and perform many other time-consuming responsibilities that come with being a landlord.
This is an important factor in the rent vs sell debate, given that negligent property management can lead to negative cash flow. Of course, you can always hire a residential property manager and earn passive income. Having a professional by your side will contribute to your chances of succeeding.
8. Appreciation Potential
The potential value of your property can grow over time, and it might make more sense to keep it as your primary residence for now or turn it into a rental property. You can factor in things like the home's location, the local housing market, economic conditions, and more.
When it comes to renting or selling, deciding by looking farther ahead can benefit you greatly. Having tenants who consistently pay rent or waiting for the house to increase in value are both good options to consider.
Rent vs Sell FAQs
Which is more profitable: renting or selling?
- It depends on market conditions, your financial goals, and how long you plan to hold the property. Renting provides ongoing income, while selling gives a lump-sum return.
How do I know if it’s a good time to sell?
- If home prices are high, inventory is low, and buyer demand is strong, it may be a good time to sell.
What are the tax implications of selling vs renting?
- Selling may result in capital gains tax unless exemptions apply. Renting allows you to deduct expenses like mortgage interest, repairs, depreciation, and property management fees.
Can I sell a property I’ve been renting out?
- Yes, you can sell a rental property, but the tax treatment may differ depending on how long it’s been used as a rental and your overall profit. Think about the repair or renovation costs, as well as other expenses you might need to sell the house.
How do I determine the rental value of my home?
- Compare similar local rental listings, evaluate your property’s condition, and consider amenities, location, and current rental demand. When unsure, consult a real estate agent or property management company.
With the Assistance of Real Estate Professionals
Experts like Blue Line Property Management can help you assess whether selling your home or renting it out is the best choice. You can even use our Rent vs Sell Calculator to help you make data-driven decisions.
We have qualified listing agents to help you get the best price for your property, as well as property management services to maximize the potential of your rental.
Whatever you decide, we can help you with either option. Just give us a call, and we will help you to the best of our ability!
