You’ve come down on orders and you own your current home – is it better to rent the home when you leave or sell it? It depends – there are both monetary and personal lifestyle considerations to take into account. Before making any decision, we need to fully explore and understand our options, so let’s take a look.
If you’re only concerned about the money, then this shouldn’t be a very tough decision to make; it boils down to this question: if I sell this house, will I be able to use the check I’ll get at the closing table to make more money than I would make if I kept the house and rented it out instead? If the answer is yes, then sell. If not, then it’s better to rent it out.
But finding the answer to that question can be tricky, especially if you’re new to real estate investing, so let’s look at an example.
Let’s say you can…
a) sell your home and put $50k in your pocket, or
b) rent it and make $5000 in profit each year. This equates to a 10% return on your equity, which is pretty decent.
If you can put that $50k to work making more than 10%, then perhaps you should sell. If not, look toward renting it out.
You might be thinking at this point “well how do I know exactly how much equity I have, or what my property will rent for?” Glad you asked – the easiest thing to do is to seek the advice of a trusted real estate agent. Keep in mind that an agent will have a significant monetary incentive to convince you to sell the house (that’s how agents get paid!), so make sure that this person is someone you really trust. If you don’t have someone like that, ask around for some referrals and interview two or three to get their opinions on market sale price vs rent price. Then, when you’re ready to run your numbers, check out our blog on running the rental numbers.
But, it’s not usually all about the money. We all have a personal preference. I like to be a landlord, and I don’t like selling houses once I own them. I’ve held onto homes even when I have a lot of equity in them that could better be put to work elsewhere. In cases like this, you might want to explore doing a cash-out refinance of the home, or even using a home equity line of credit (HELOC) to access some of that home’s equity if you don’t want to sell it. This will, of course, make your payment go up, but it may be a great option to access some equity.
Other folks just don’t want to be landlords, and I understand that. I sometimes get frustrated answering tenant questions and maintenance requests, especially when they call me at an odd hour to ask a dumb question (one time I had a tenant who didn’t understand that you’re supposed to brush the toilet bowl every once in a while and complained about mold in the toilet!)
There are ways to mitigate this hassle, the best being to hire a great property manager. A good manager will only bring the most important issues to your attention, but they will typically cost you 10% per month and also charge tenant placement fees.
In addition to the occasional late-night call, a landlord also has to be prepared to fix tenant issues quickly. You NEED to have a reserve fund set aside to cover major maintenance items that come up from time to time. In Georgia, for example, if the heat goes out, you must fix it ASAP (even if that means paying a few thousand dollars out-of-pocket to replace the HVAC system). So even if you do want to keep the house and it makes sense as a rental, make sure you can cover a major expense. Even home warranty companies do not always come through like they promise, so don’t rely on them.
As a practical matter, it is pretty difficult to self-manage after you PCS to a new duty station. But more on that in the next blog of this series!
Until then – need some questions answered? We love nerding out about this stuff! Reach us at our contact page.
Written by: Pat Wilver