From time to time, you can only live in your property for a long time until something happens and you have to relocate. Maybe it’s a choice, or the work is forcing you to do so. Maybe you like the idea of earning some passive income. In any case, you finally have to face the question: should I sell my house or rent it?
It can be difficult, but owning two homes actually works and you can make a profit by renting the previous one. By maintaining a home, you can start building serious wealth through cash flow and fairness. It’s not the right move for everyone, so how do you know if it’s right for you?
Like most real estate questions, these are not universal “right or wrong” questions. However, once you understand the options, you can make the best choice for your situation. Not all homes have good rentals and not everyone has been cut out to become a landlord. Here are some reasons to rent your second home.
Rent: Positive cash flow
The first thing to look at when deciding whether to rent or sell your home is math. Mathematics was probably not my favorite subject at school, but fortunately, I don’t need to know much about math to understand real estate investment math.
If your property is rented and you deduct all related costs such as mortgages, taxes, insurance, utilities, administration, vacancies, repairs, HOA, etc., does the property generate a monthly profit or loss? If you are profitable, keep it. When you think of the money you will make from borrowing it, you will get more from your property in the long run.
Rent: Get a return on your investment
Next, consider how much profit you would get if you sold your property today, assuming you lose about 10% on agent fees, closure costs, and other selling expenses. If you do little or nothing, it may be advantageous to keep the property and wait for the market to improve over time. This is especially true if the property provides cash flow and appreciation, especially if you are renting in the meantime.
Rent: Wait for a bad market
Of course, there are no crystal balls, but it’s not impossible to measure where the market is heading. Look at the growth of your city — is it moving away from you or heading for you? Is your business moving to your area? Is the house being repaired or is it corrupt? We cannot be 100% sure, but by analyzing the current trends in the market, we can make more informed decisions about what to do in the future.
All this information will help you decide what the future holds and how the value of your neighborhood will increase or decrease. What’s more, it makes sense for buyers and borrowers to want to come to an area where new and exciting things are happening. If you are unsure or need a more experienced opinion, we recommend that you consult a real estate agent.
Rent: Option to return to property
Listen, no one will judge you to love your home. With such a huge investment, I hope you at least like it. So if you want to come back someday, renting may be the best of both worlds for you. That way, you can plan for the future with it while you still own the house and rent it for passive income in the meantime.
Rent: Have someone pay your mortgage
It may sound interesting, but it’s true. If someone else is paying you rent to live in your home and you don’t live with them, it makes sense to charge them enough to cover your mortgage. It’s good. For many, paying one less invoice helps relieve stress while allowing them to maintain their property.
We have discussed the reasons for renting your second home. Now it’s time to consider why selling is the best option.
Sales: Improving ROI through sales
When selling and making a profit, consider your return on investment (ROI). For example, if you sell a home and make a profit of $ 100,000 and you can only achieve $ 1,000 a year in cash flow, that’s a 1% ROI. It would be better to take that $ 100,000 profit and invest in something else that could generate higher profits.
Sell: Pay less tax
Keep in mind that homeowner tax incentives usually count only for the primary residence. Unfortunately, you can only have one at a time. We’re talking about a second property here, so these benefits don’t help.
Also, consider how much you will pay for both homes. For many, it will be difficult to maintain both. And, depending on where you live, you may pay a lot of property tax alone. Think about the taxes you have to pay not only for primary homes but also for secondary homes. Do math even if you don’t want it, and make the best choice for yourself.
Consider the fictional case of Bob and Marge, who bought a house for $ 150,000 in 1990. Today, they can sell the property for $ 500,000 and liquidate $ 300,000 after deducting the selling costs. For example, if you rent a house for five years and then sell it, you could incur a $ 60,000 tax. But if they sell now, they could sustain their $ 300,000 profit without paying capital gains taxes.
Sale: No need to deal with tenants
To be honest, many people are not cut out for the life of the landlord. Some tenants dream of managing it, while others need a lot of time and patience to deal with it. Indeed, being a landlord is a skill you can learn, and just because you are alone does not mean that you have to be directly involved with the tenant. But if you choose to keep that distance, you’ll need to hire someone else to fill that gap. This is another cost. Property managers can do it for you, but if you’re trying to save money, it’s best to avoid extra costs.
Also, consider what kind of person you are. Do you depend on the story of sobbing? Do you postpone the eviction of the submission because your tenant has called you? You may say no, and you may say that you can keep your position, but be honest with yourself when you answer this. Residents can push your limits and spend more time paying rent. The landlord must keep those boundaries and run the business smoothly and efficiently. If someone is late for payment, there are two consequences: late fees and submissions to initiate the (long) eviction process. If you can’t do that, it’s perfectly fine. But you’re probably not cut out to be a landlord.
On top of that, you need to understand that renting is not a guaranteed form of income. If you and your tenant have some problems or they choose not to renew their lease, you can lose that income for months.
Sell: Avoid extra costs
Besides paying principal, interest, taxes and insurance mortgages, there are many other costs associated with renting.
- Property management fee
- Capital spending and repairs
- Management, bookkeeping, and more
- Other charges depending on the property and the place where you live
With the 50% rule, the cost is about 50% of the rent. This does not include funds such as principal and interest to be paid. If your rent is $ 1,000 and your mortgage payment (principal and interest) is $ 400 per month, the additional cost is expected to be about $ 500, leaving you with cash flow of $ 100 per month.
The golden rule of rent cash flow is that it is based on the long-term average of costs, not what happens in a normal month. In a normal month, you just pay your mortgage. Then suddenly you’ll be slapped for $ 3000 in roof repair costs.
Get used to the numbers in your neighborhood. How much can I rent a property? What is the average vacancy rate? If your property has carpets, how much does it cost to exchange carpets between tenants? These are some of the most important questions that need to be answered reliably and honestly. Also, you need to have the answer that you are comfortable with before you decide to rent your second home.
Sell: Escape from the buyer’s market
The housing market may or may not rise. If many people sell their homes in the same area as you, it may be a sign that you should consider selling too. However, having a lot of sales at one time can lead to a rapid decline in the value of real estate and a decline in economic status. If you are looking at that possibility, selling may be a good option for you.
Sell: The rent of the property is cheap
Be honest with yourself and your property. Is it best for rental? Or have you invested elsewhere? The last thing you want is to keep your old home as a rental property and make it inadequate cash flow. And you raise your hand and say, “Rental is not for me.” These types of investments are both arts and science, and it may not make a good rent just because real estate has made a good home for you.
Run the numbers. If you like what you are looking at, move forward. If not, sell the property and invest your proceeds elsewhere. And if you decide that becoming a landlord isn’t for you, you have other options for investing in rental real estate. You can buy it and hire a real estate manager. You can become a silent partner and let the partner take care of everything. Or you can take it one step further and invest in a private notebook or real estate investment trust.
Sales: Funding Better Rental Investment
Just because your old home may not be your first choice for a rental investment doesn’t mean you shouldn’t be a landlord. Imagine you sell a house and leave for $ 50,000. Use $ 25,000 as a down payment for Fourplex. This down payment is a monthly cash flow of $ 500. Then do the same for the other $ 25,000. If you can rent all the space quickly, you can easily earn thousands of rental income a month.
Of course, this may not be the case for you, as the homes you already own are actually the best properties to use for rent. You may also be unsure of your ability to buy cash-flowing rental properties in the market. Anyway, these are all the questions you need to ask yourself before deciding to keep or sell your second home for rent.