As you survey the rooms in your house, with the immaculate space sparkling with real estate possibilities, you contemplate the probable paths for the future of your current home. One decision many homeowners have to make is whether it is in their best interest to rent or to sell their home. Whether you are relocating, wanting to keep it as an investment property, or needing funds for a down payment on your next home, this dilemma can involve many financial decisions, stress, and unexpected expenses. These pros and cons of renting and selling both weigh in on the financial gains and convenience.
Renting Your Home
Pros of Renting your Home
Home Value Appreciation
You may want to refrain from selling your house right away if there is a possibility of your property value increasing throughout time. Waiting for your property value to appreciate and selling it then could bring you a profit. In the interim, renting out the place could be a good way to earn additional income. There are several ways to determine your home value.
Renting out your property can bring in a steady flow of cash. Being a landlord can serve as a job while offering more flexibility in your schedule and still providing passive income. This is useful if you are in need of monetary funds for future investments or to pay off expenses in other areas of your life. You can determine what rental rate is best for your property in the area.
Similar to earnings from any other job, you’re subjected to income taxes for the income you collect from your rental. Fortunately, you may be exempted from the costs that are associated with renting out the property. Read more on tax benefits.
The additional income from your rental could also be used to meet some of your other goals such as home improvements. For rental property owners, these repairs are typically tax-deductible as well.
Maintain Home Ownership
Renting your property can offer you more flexibility. If you are changing locations or traveling and still have a plan to return to your property this option allows you the freedom of moving back anytime you decide.
Cons of Renting your Home
Time and Stress
Being a landlord brings a lot of responsibilities to the table. This includes maintenance of the house, repairing appliances, managing rent payments, and handling difficult tenants. All of these responsibilities could eat up a lot of your time and could carry weight as a second job. In addition, if you don’t live near your rented out property managing problems could be more challenging. To deal with issues on the property promptly, you might have to hire a property management company or pay travel costs.
Unexpected expenses and maintenance
Sometimes you don’t know what kind of tenant you will have until a few weeks or months into the lease. Issues are bound to occur, perhaps a tenant breaks a stove or toilet, now it can cost hundreds of dollars out of your pocket to repair. In some cases, the tenant could bring financial losses on your behalf if they don’t pay rent. It can be difficult to forecast these unanticipated damages and costs that might throw you off your financial budget.
Other potential expenses
Since you still hold ownership of the property, there are still expenses associated with it. This can include mortgage payment, property taxes, landlord insurance, and accounting and property management fees.
Possibility of damaged property and losses
When you’re renting out your property for others to live in, you risk it being damaged. As a landlord, you never know what to expect when it comes to putting your property under the care of someone else. If faced with a difficult tenant, they may even damage and destroy the property, incurring even more costs. Repairing and renovating the property takes up a lot of time and could affect your timeline of wishing to rent out to future tenants or selling to future buyers. Tiffany C. Wright, the owner of a real estate investment firm and The Resourceful CEO, shares her advice on preventing a bad tenant experience,
My philosophy is to screen well. Furthermore, I document everything and request the tenant’s signature whenever possible. I use applications, security deposit receipts, move-in condition forms with photos or a video, a 6-8 page lease agreement, rent reminder phone calls, thank you calls or cards, rapid follow-up to repair requests, occasional drive-bys and immediate and full enforcement of infractions. This enabled me to find tenants that lasted and to quickly get rid of tenants that did not.
Wright’s words take a practical look at the amount of responsibilities and work a landlord must carry, which you should take into consideration before deciding to rent out your property. If you wish to rent your property, be sure to have a lease agreement and rental application ready to go.
Selling Your Home
Pros of Selling your Home
Cash Out Right Away
If it seems that the market value of your property is at its optimum, then it could be a good idea to sell it while it’s still worth its maximal value. In the case that you are planning to buy a new property, then receiving this upfront payment could ease some financial stress.
Less Responsibility Afterwards
Once you sell your house, the responsibilities tied to it are minimal compared to renting it out. You would not have to deal with the maintenance of the property or payments such as the mortgage for the house.
Costs are Usually More Predictable
There are many expenses involved when selling a property including real estate commission, title insurance, closing fees, and more. Knowing these costs upfront can make the process much easier to plan and less stressful when budgeting.
Don’t Have to Worry About Damages Caused
When you sell your property to someone else, you no longer have to worry about it being damaged. Although renting offers a steady cash flow, the potential damages caused lead to charges for repairs and maintenance. Selling your house will not only give you the capital upfront, it also means you can wipe your hands clean of any problems or stress in the future.
Cons of Selling your Home
Sometimes there are uncontrollable factors that make it difficult for your house to sell. This can include the home having a problematic history or being located in an unpopular area. It takes a lot of effort and work to sell a house since it is a huge financial commitment for the buyer. This involves establishing a value for the home, determining an appropriate price, hiring a real estate agent, upgrading the property, and advertising properly. This all requires a lot of time and research to make sure things are in place for the most profitable outcome.
For some homeowners, they have to take a loss to sell their home. Perhaps your house is worth less than what you bought for it years ago. This loss can be tens of thousands of dollars. However, in some cases, a capital loss could reduce your taxes.
Once you sell your house, there is no going back. Perhaps you have a sudden change of plans and realize you wish you could still reside in your former location. As selling your house is a big decision and commitment, it should take any possibility into account.
More expenses at closing
These expenses can include real estate agent commissions, transfer taxes, home warranty for the buyer, capital gains tax, and closing costs for the buyer. Some of these you might be exempted from but still cost a great deal of money. Moreover, even after the sale, as the previous homeowner, you may still be liable for repairs as it is common for home buyers to also request the sellers to cover for any defects discovered after closing. Still vacillating between decisions? Check out this calculator to see whether renting or selling out is financially best.