Should I rent or sell my house?

Homeowners move to another property for various reasons. They may be first-time owners who need more space for their growing family. Urban professionals might move to quieter neighbourhoods now that working from home is an option. Older couples might want to downsize and move to a smaller home now that their children are out of the house.

Whatever the reason, one question that comes up time and again is whether they should rent or sell their current home.

There is no right or wrong answer to this question. Essentially, it all comes down to personal financial circumstances, your unique long-term goals, your investment appetite, and your willingness to manage tenants.

Let’s unpack these factors and see if you should sell your house or rent it out.

Affordability and cashflow

The first and probably most crucial factor in deciding if you should sell your house or convert to a rental property is affordability. Even though you will be receiving rental income for your home, there are other financial elements as well as the rental market as a whole to consider.

1) Do you need to sell your house to purchase your next one?

Often, homeowners need to sell their current home to obtain the deposit they need for their new mortgage. If you can finance your new home without selling your current house, then treating the property as a property investment and renting it out may be an option.

2) Do you qualify for a second mortgage?

Purchasing a new home will most likely require you to obtain a mortgage from a financial institution. If your debt-to-income ratio qualifies you for a second mortgage, then renting instead of selling your current home is a financially viable alternative. This can be determined by your current credit score and whether it meets the minimum requirements for a second mortgage. You may also be able to improve your credit score in the long term by paying off at least some of your debts.

However, investment property mortgages offer various options that significantly impact what you pay, your taxation gearing, and other related financial factors. If you qualify for a second mortgage, you need to consider these various impacts.

3) Will the potential rental income cover the property’s expenses?

If you rent out your property, there are property-related expenses that you need to pay. These include the mortgage, any rates and taxes, ongoing repairs, and general maintenance.

In some instances, market conditions may force you to agree to a rental that may not cover the property’s expenses. If you cannot afford to absorb these additional costs into your monthly budget, then selling your home may be your only option.

4) Is it the wrong time to sell your home?

For many people, their home is also their largest financial asset. If the property market has significantly depreciated since you purchased your house, selling it may result in a net asset loss. In this scenario, renting may be a better alternative.

5) Will I get a decent return on investment?

In some circumstances, selling your home may offer an insufficient return on investment. This scenario is particularly relevant if you have spent time, effort, and financial resources renovating your property. If your home’s potential selling price does not meet your return on investment expectations, then renting may be a better financial option for you.

The tricky part here is that selling your home may not always result in a positive return on investment. For example, if you’ve bought the property for X amount of money, and then you find out that the best selling price you could get was still X-Y, this will result in a net loss. But of course, it might be your only option if you need the money to buy the new property and you don’t qualify for a second mortgage.

Therefore, consider whether earning a rental income will benefit or contribute to your long-term personal and financial lifestyle goals.

6) Can you afford to rent out the property?

For many property owners, renting their properties out isn‘t an ideal option simply because they don’t have enough liquid cash to make it work out.

As a landlord, you need to have enough cash to prepare your investment property for tenancy, like maintenance and repairs. Of course, you also need to account for taxes and mortgage payments. Many landlords also hire a property manager to run their rental business for them.

And while renting your property will generate cash flow, it may not always be consistent, especially if the rental market in your area isn’t booming. A vacancy means that you will lose your rental income while also having to pay for the property’s overheads.

In many situations, preparing your property for rental after a tenant moves out will require a lot of money. As a general rule of thumb, make sure that you have at least $10,000 of cash in hand before deciding to rent your property. This will help you cover maintenance, insurance, and other property expenses.

Managing a rental property requires regular maintenance, such as fixing leaky faucets, dealing with temperamental water heaters, or battling ant infestations.

Newer or well-maintained properties are typically easier to manage than older ones. With older rental properties, the costs of maintenance and renovations can be hefty, making the option to rent the property less appealing for you.

As a result, you might consider selling your older property as-is in a hot market to avoid future overhead costs.

7) Is there promising capital growth potential for your property?

In certain cases, selling your property right away may not be the most optimal thing to do, especially if the properties in your area are expected to appreciate in value over the upcoming period.

Here, you need to conduct market research and take a look at the historical property values in your area. This should help you forecast whether there’s potential capital growth for your property. In that case, you may decide to either wait for a few months or even years before selling your property, or rent it until it reaches the expected value.

Just keep in mind that, in the property market, there are absolutely no guarantees that a property will appreciate or depreciate in value at any given time.

Taxation

Another factor that can influence your decision to sell your house or rent it out is tax. As you will be receiving an additional taxable income, your tax liability will increase. That means you will be paying more tax each year. Again, this element raises the question of affordability. If you have the budget to pay this additional expense, then renting is an option.

However, the opposite is also a factor that requires careful consideration. If you make a net loss on your rental property, your taxable income decreases, resulting in you paying less tax. Depending on your circumstances, paying less tax and holding onto your property may be the best option for you.

Property market trends

Your home’s location can also play a part in determining if you should sell or rent it out. Certain areas are better for renting than others. You also need to consider the state of your home. Can you rent it from day one, or do you need to attend to some repairs or renovations first? If you need to renovate, how much will it cost, and can you afford it?

Urban and luxury areas tend to have a strong rental demand. This can also be said for new or improving neighbourhoods and areas surrounding colleges and office complexes.

Moreover, rental demand can also be strong in areas with increasing job opportunities and development projects.

If the property investment market is experiencing a low vacancy rate, renting your home will be much easier. However, if there is a significant amount of rental stock available, you will need help marketing your property effectively.

The other factor to consider is what you will do if your rental property stands empty for a few months? Owning an investment property requires you to keep an eye on market trends. As with any investment, it comes with a certain level of risk. It would be best if you considered all these factors before deciding to sell or rent.

Sentimentality

Any financial decision needs you to think with your head and not your heart. However, one cannot deny that a person’s home will always have some form of sentimental value. We make memories where we live, and some of us form an emotional attachment. If you have also spent a great deal of time renovating and fixing your home, the emotional attachment could be even stronger. If you would find it difficult seeing another family live in your home while you rent it, then selling it and letting go may be a better option for you.

Amenities

Does your property offer attractive amenities that can attract potential tenants?

For you, these amenities may not be that relevant. However, for tenants, amenities like convenient parking and outdoor spaces are everything they need in a property, especially if they’re long-term tenants. Other relevant factors include well-maintained appliances, flooring, and whether the place is close to their work.

Property management time and effort

Renting your property will take some of your time and effort. Dealing with tenants is not for everyone, especially when there are challenges.

Being a landlord simply isn’t for everyone. If you already run a business or have a demanding full-time job, you need to be on top of things like taxes, maintenance, and collecting rent.

Nevertheless, you can still rent your property and maintain a positive cash flow without the footprint by hiring a property manager. A property management company can deal with tenants on your behalf. In that way, you get the benefits of being a property owner with much less time and effort needed on your part.

An experienced property manager will handle everything related to renting your property for you, including helping you to determine how much rent to charge, finding and screening tenants, maintaining the property, collecting a rental bond and rent, paying insurance premiums, performing regular rental appraisals and creating a residential tenancy agreement template.

Of course, this comes at an additional cost, but it will save you the hassle of managing your property yourself.

Also, keep in mind that, if you decide to manage the property on your own, you could potentially have to deal with operational and legal risks related to safety and water quality, among other things.

So, is it better to rent or sell a house?

When you need to decide if it is better to sell your house or rent it out, there are several factors to consider. You need to do your own research and look at your financial situation, understand the current market, and, if possible, leave emotion out of the decision.

Everyone has unique circumstances and different aspirations. Before you make any decisions, talk to an expert and explore all your options. If you want to speak with someone who can help decide what the next steps should be, we’re HERE to help.