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There are many reasons why a homeowner might want to move. But whatever your reason, one question remains: 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 “Should I sell or rent my house?” debate, let’s take a look at what factors to consider, including the costs.
Should I sell or rent my house?
The decision shouldn’t be taken lightly, and there are pros and cons to both scenarios. For example, selling may get you cash now, but renting will allow you to build equity as home values go up and earn income through your tenants. Take a look at the following scenarios to determine which path is best for you.
When to sell your home
If you need the cash to pay for your next house
If your ability to buy a new home relies on accessing the equity tied up in your current home, then selling it is the best way of doing so. That way, you can take the proceeds from the home sale and put it toward your new down payment.
If you have no interest in being a landlord
Managing a rental property can be time-consuming and 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 are eligible for capital gains tax exemptions
If you 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) 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 to rent your home
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 rent out your home. Knowing there’s a place for you to live when you return can provide some security and peace of mind — and it may 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 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 appreciation.
Renting vs. selling: 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 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, potentially hiring a property management company. From there, you can gauge whether you’ll be able to recoup your expenses and then some.
Costs of renting out a home
Even though you’ll be earning rental income, you’re still responsible for paying the mortgage, which may not be entirely covered by the rent you receive.
Home 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.
Property tax rates vary widely depending on location, but you can expect the rate to increase as your home’s assessed value rises.
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.
Property management fees
If you need to hire a property manager, that will cost you, as well. These companies tend to charge a percentage of the rent price, typically 10 percent.
Tax filing and accounting fees
Even if you do your own bookkeeping for expenses pertaining to the rental, you’ll likely incur costs for filing taxes using tax preparation software or if hiring an accountant.
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.
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.
Costs of selling a home
To get your home in shape to sell, you’ll likely have a few services to pay for. These might include enhancing the property’s curb appeal 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 commission
At up to 6 percent of your home’s sale price, the commission you pay to your agent could be your biggest expense when selling your home.
While not a requirement, staging your home can increase your home’s desirability to potential buyers and 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.
You’ll still be responsible for paying your home’s utility bills until the closing date.
Home loan payoff
Once you’ve sold the home, the proceeds will need to go towards the remainder of your mortgage.
In some cases, you may be required to take on some of the closing costs, such as attorney fees.
Deciding whether you should rent or sell your home depends on both monetary and lifestyle factors. To help guide your decision, consider what your financial situation is like, whether you’ll return to your current location anytime soon or if you’re interested in being a landlord.