Should I sell my house or rent it out?

There are many reasons why a homeowner might want to move. But whatever your reason, one question still applies: What should you do with your current home? Depending on your financial situation and your local housing market, you may be better off renting it out than selling it, or vice versa. If you’re caught in the selling vs. renting home debate, let’s take a look at what factors to consider, including the costs.

Should I sell or rent my house?

A home is the biggest financial asset most people own, and deciding what to do with it shouldn’t be taken lightly. There are pros and cons to both options: For example, selling gets you a large windfall of cash all at once, while renting earns you smaller increments of steady monthly income from your tenants. If you have somewhere else to live and can afford to hang on to the house, renting it will also allow you to continue building equity as home values go up. Take a look at the following scenarios to determine which path is best for you.

When selling your home is a good choice

If you need the cash to pay for your next house

If your ability to buy a new home relies on accessing the cash tied up in your current home, then selling it is the best option. That way, you can take all your proceeds from the home sale and put it toward your new down payment. Buying a new home while selling your current one can be a tricky balancing act, so be sure to work with an experienced real estate agent who can guide you through the process.

If you have no interest in being a landlord

Managing a rental property is time-consuming and often challenging. Are you handy and able to make some repairs yourself? If not, do you have a network of affordable contractors you can reach out to in a pinch? Consider whether you want to take on the added responsibility of being a landlord, which means screening tenants and fielding issues, among other responsibilities, or paying for a third party to take care of things instead.

If you stand to make a significant profit

Property values have risen all over the country over the past few years, and home prices remain high. Depending on how long you’ve owned your home, how much you paid for it and how hot your local market is, selling could net you a significant windfall. Take a look at nearby real estate comps to see how much homes similar to yours have been selling for.

If you are eligible for capital gains tax exemptions

If you do sell your home for a profit, you may be able to exclude up to $250,000 of capital gains from the sale (or up to $500,000 for married couples filing jointly) from your taxes. For this to apply, the home must have been your primary residence for at least two out of the last five years.

When renting your home is a good choice

If your move is temporary

If your move is short-term and you plan on returning to your current city in the future, you may want to keep your home and rent it out in the meantime. Knowing there will be a place for you to live when you return can provide security and peace of mind — and when you factor in closing costs, it may even cost less than selling and purchasing another home at a later date.

If you want the rental income

Extra income can be hard to turn down! But if you decide to rent your current home and want to buy another one with a mortgage, keep in mind that lenders will consider rental income when determining your financing. In some cases, a lender will only allow a portion of your rental income, typically up to 75 percent, to be counted as an income source. In addition, you will be carrying two mortgages at once, so make sure this is something you are financially able to take on.

If rental demand in your area is high

Is your home in a hot neighborhood with lots of buzz? Is it in an extremely desirable school district, near a vacation destination like a beach, or close to the best amenities in town? Evaluate the rental demand in your area — renting your home makes much more sense, and becomes much less stressful, when finding a tenant is fast and easy. Research the local housing market to determine what other similar properties are charging in rent. You can also speak to a local agent or property management company to learn more about the rental demand in your neighborhood.

If you expect home values will go up in your area

It’s impossible to foresee with 100 percent accuracy where the housing market is headed. That being said, you may be able make an informed prediction. If you expect that your current home’s value will increase within a few years or less, you might want to consider renting it out now and selling later, to take advantage of the price appreciation.

Selling vs. renting your home: Costs to consider

Both renting and selling a home will incur costs. One of the most important things to think about is whether the rental income you’d receive will be enough to cover the property’s mortgage and upkeep.

To determine how much rental income you can reasonably expect to earn, take a look at what other similar properties are charging and weigh that against the costs of owning and maintaining the property — mortgage payments, maintenance, repairs, taxes, insurance premiums, potentially hiring a property management company. From there, you can gauge whether you’ll be able to recoup your expenses, and maybe even turn a profit.

Costs of renting out a home

• Mortgage: Even though you’ll be earning rental income, you’re still responsible for paying the mortgage, which may or may not be fully covered by the rent you bring in. You’ll also still be responsible for paying property taxes.
• Maintenance and repairs: You’ll need to keep up with routine maintenance to ensure the home is fit for tenants. As a rule of thumb, budget at least 1 percent of the home’s value every year (more if it’s an older property) to pay for maintenance.
• Finding a tenant: To find a tenant, you’ll have to get the word out. Consider any marketing costs you may incur, such as taking out an advertisement. You may also need to pay for background and credit checks of potential renters — though you might be able to pass this expense onto the tenant. The cost generally ranges from $15 to $40.
• Vacancies: Consider, too, the cost of vacancies between tenants. If a tenant moves out and you don’t have a replacement, that’s income you’re losing out on.
• Property management fees: Hiring a property manager makes being a landlord less onerous, but it will eat into your profits as well. These companies tend to charge a percentage of the rent price, typically 10 percent.
• HOA fees: If your home belongs to a homeowners association, you’ll also be responsible for HOA fees, which vary considerably depending on what type of amenities are offered.
• Insurance: Landlord insurance can cover certain costs, such as damage to the home or someone getting injured on the property. You can expect this to cost roughly 25 percent more than the typical homeowners insurance policy — which you’ll also still have to pay for.

Costs of selling a home

• Home improvements: To get your home in shape to sell, you’ll likely have a few services to pay for. These might include sprucing up the landscaping, a thorough deep cleaning and making any necessary repairs. You may also consider a pre-listing inspection to find out what needs fixing, which will add to your costs.
• Real estate commissions: Averaging between 5 and 6 percent of your home’s sale price, Realtor fees are likely to be your biggest expense when selling your home. For example, the median price of a home in the U.S. as of October 2023 was $391,800 — 5.5 percent of that comes to more than $21,000.
• Closing fees: Sellers typically incur some closing costs beyond Realtor commissions, too, such as attorney fees, transfer taxes and title insurance.
• Home staging: While not a requirement, staging your home can increase your home’s desirability to buyers and potentially net you more as a result. Depending on the size of your home and other factors, staging can cost up to $2,500 or more.
• Mortgage payoff: If you still have a mortgage on the home, once you’ve sold it, some the proceeds will go toward paying off the remainder of your loan.
  

What if there’s a recession?

Some economists still predict a recession in the country’s near future. According to Bankrate’s most recent Economic Indicator Poll, the odds of a recession by September of 2024 are 46 percent. Before you make a final decision on whether to sell your house or rent it out, ask yourself how a serious economic downturn might affect your finances. Is your job stable? Is your savings strong? Would you still be able to manage two mortgages during a recession, or the possibility of less rental income than expected? If the answer to any of these questions is no, selling may be the safer option.

Bottom line

Deciding whether you should rent or sell your home requires careful consideration of your financial situation, your lifestyle and the local housing market. To help guide your decision, consider the costs of both options, whether you’ll return to your current location anytime soon and if you’re interested in being a landlord.