Should You Sell Your House or Rent It?

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Remember that old high school girlfriend — the one with the annoying laugh? You put up with her because she was nice enough, but one day you met that new girl, and she was everything you ever wanted. Best of all, your new romantic target showed definite signs of interest and wanted to date. But you had a problem: You still had the old girlfriend.

While this drama doesn’t take place in the life of every high school student, something similar does happen to most adults. But, rather than girlfriends . . . it’s houses.

You buy a house and it’s fine, but then you need to move on to another property. Maybe that’s by choice or work is forcing you to relocate. Either way, you have the same problem as that high school Romeo: What to do with the old house?

While trying to date two girls at once may prove difficult, owning two homes can actually work and be profitable if you rent out the previous home. By keeping the house, you can begin building serious wealth through cash flow and equity. But how do you know if that’s the right move?

Sell the house and move on? Or rent it out? As with most real estate questions, these are not universal “right or wrong” questions, but once you understand the options, you can make the best choice for your situation.

Here are five factors to consider when deciding whether to sell or rent out your house.

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1. Will this property generate cash flow?

The first thing to look at when deciding whether to rent or sell your house is the math. I know, math was likely not your favorite subject in school, but luckily all you need is a fifth-grade mind to understand real estate investment math.

First, ask: Will this property produce positive cash flow?

In other words, when this property is rented out, and you deduct all of the associated expenses (mortgage, taxes, insurance, utilities, management, vacancy, repairs, HOAs, etc.), will the property produce a monthly profit or a loss? If it’s a loss, consider selling.

For more on analyzing properties, read my Ultimate Guide to Analyzing Rental Properties.

Related: How To Rent Your House: The Definitive Step by Step Guide

2. What about the return on investment?

Next, consider how much you would profit if you sold the property today, assuming you’d lose around 10 percent to agent fees, closing costs and other sales expenses. If you would make little or nothing, it may be advantageous to hold on to the property and wait for the market to improve over time. This is especially true if the property will provide positive cash flow in the meantime.

If you would make a profit by selling, consider your return on investment. For example, if you could make $100,000 in profit by selling your house and achieve only $1,000 per year in cash flow, that’s a 1 percent return on investment. Better to take that $100,000 profit and invest it in something else that could produce a higher return.

3. Consider the taxes.

The U.S. government does a lot of things I don’t agree with, but one thing it does that I absolutely love is the potential exclusion from paying capital gains tax that’s allowed on the sale of your primary residence.

Normally, if you sell real estate and make a profit, you have to pay capital gains tax on the sale, up to 20 percent, depending on your tax bracket. However, the IRS allows homeowners (sorry, investors!) to exclude the sale of up to $250,000 (or $500,000 if married filing jointly) of a primary residence if you lived in the home for at least two of the last five years.

Let’s look at another example where this might come in handy. Consider the fictional case of Bob and Marge, who bought their home in 1990 for $150,000. Today, they can sell the property for $500,000, clearing $300,000 after the sales expenses.

If they keep the home as a rental for, let’s say, five years and then sell, they’ll potentially owe $60,000 in taxes. But if they sell now, they can potentially keep that $300,000 in profit without paying any capital gains tax.

Of course, by keeping the property, there is always the likelihood that it will appreciate in value to a level higher than what the tax would have been, but there are no guarantees when it comes to real estate values.

(And I’m not a CPA, so to learn more about this possible capital gains tax exclusion, consult a tax advisor or read the IRS’ rules on the topic.)

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4. Does the future look bright?

Another important factor to consider when deciding whether to rent or sell your house requires gazining into your your crystal ball for the future. What do the next five, 10, 20 years look like for your home’s location? Are things improving? Will your neighborhood decline in value? If the future looks dark, consider selling now to avoid problems later on.

Of course, we don’t have crystal balls, but trying to gauge where the market’s going is not impossible. Take a look at the growth of your city — is it moving away from you or toward you? Are businesses moving into your area? Are homes being fixed up or left to rot? You can’t know with 100 percent certainty, but by analyzing the current trends in your market, you can make a more informed decision on whether to hold on or sell now.

Related: 4 Reasons Your Home Would Probably Not Make a Good Rental

5. Can you handle tenants?

Finally, ask yourself: Are you willing to be a landlord? Because, honestly, many people are simply not cut out for the life. While some tenants are a dream to manage, others require significant time and patience to deal with. Last week, I had to deal with the eviction of a “garbage hoarder.” It wasn’t pretty.

Luckily, landlording is a skill that can be learned and improved upon. All new landlords make mistakes, but if you are the kind of person who is willing to learn, you’ll do fine.

Also, just because you own rental properties does not mean you have to be the person dealing with the tenants. Professional property management companies exist in nearly every city, and if you can find a great manager, he or she can cut the stress of rental property ownership down to a minimum (for a fee, of course!).

So, once again, should you rent or sell your house?

Unlike what happens with high school girlfriends, real estate allows you to keep both the old and the new. But deciding whether to rent or sell is a choice only you can make after weighing all the options.

If you are trying to make that decision right now, take a look at the five factors outlined above and make the choice that works best for you, your family and your financial future.

[This article originally appeared on Entrepreneur.com.]

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like... seriously... a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of "The Book on Investing in Real Estate with No (and Low) Money Down", and "The Book on Rental Property Investing" which you should probably read if you want to do more deals.

8 Comments

  1. Curt Smith

    Tnx Brandon for a good topic, selling a residence. If for some reason you don’t qualify for or you can’t put the roll over tax scheme to use. IE you won’t be buying another house to roll over the gain. Then last the thing I’d do is sell outright for cash (financed). This nets you the least after taxes.

    #1 offer seller financing and pick a top of the range price. You can advertise in craigslist and zillow and easily find buyers with good downs and avoid an agent and get top dollar. No break on capital gains but you make tons on the interest earned over the years plus higher price and no agent fees.

    #2 seller rent to own. You earn rent plus push the sale down at least a year to get into long term capital gains. I’d put the price in the option agreement as: to be determined by an appraisal.

  2. margaret smith on

    This is your own home- so presumably, you now need another one. Please don’t forget to calculate what your living/ownership expenses will be compared to what they are now, and add that in to your cash flow numbers. IF you buy again, you will need to start over with homestead benefits in your new place- and taxes generally go up on Day 1!

    There is no other way I know to have such a great tax advantage, so use your personal residence for those specific benefits- the $250/500K tax break, the owner financing (mortgage, lease/option) of a primary residence to a real homeowner (not so easy to do with investment properties since Dodd-Frank). Dealing directly with a buyer, you could even carve out a little space for your own storage, or a parking space, or one suite during the big town parade every year, or other goodies, with this property.

    A check coming in the mail each month is a wonderful thing. Try it out! Get the contract done by a professional in your locale, though. It is very difficult to get a buyer who doesn’t buy out if he doesn’t want to budge– Ask me how I know!!

    Great article, Brandon.

  3. James Masotti

    Brandon – My wife and I are actually going through this right now. We’re considering buying a new primary residence, however our current home doesn’t fit either scenario. If we rent it we will lose money each month compared to my other rentals which cash flow great. And likewise there’s been a market adjustment in my area since having purchased the home, so that if I sold it I would also lose money.

    For this reason I’m thinking of just keeping as a rental and take the smaller losses as additional tax write offs in addition to the other rental income until I can either refinance the property where it cashflows, or sell it without losing any money.

    What are your thoughts on this?

  4. Mike Bolen

    I feel in almost all cases selling the property that was a primary residence is preferred. Even in the rare case where you would be taking a loss. The home sale tax exemption is one of the best tax shelters available to the average U.S. taxpayer and rarely would a rental property have a rate of return to offset such a golden tax saving. Additionally for most people their primary residence rarely makes an ideal rental property.

  5. Colin Storm

    The piece presumes one of the most determinate factors does not exist, which is the necessity of the proceeds in order to purchase the next home in the first place. In our market where a starter, detached home, is $700,000+ a lot of people need all the equity they can get from the sale in order to afford the next home. Beyond that the piece is spot on, particularly in item 5. I see often where, if folks could get over this hurdle, they could have significant passive income, even if it is just for 3 years before selling to keep the capital gains exemption. If your mortgage is for a $250,000 house and the house is now worth $850,000 just 15 years later, renting that out for 3 years before selling can mean HUGE gains.

    • Rick Owens

      Great points Colin. This is where we sit… we live in a home we bought 15 years ago for $400K, we had a long time interest only, to buy our other rental property. We paid the home down to a $300k mortgage balance. The house is big, at 3600 square feet, plus an 1800 square foot unfinished walkout basement. It is worth $850K (great mountain view, even from the basement). We could rent it for $5000 per month, more if we finish the basement. We have a $2500 P&I mortgage, so we could cash flow roughly $2500 per month. Over 3 years that could be $75,000 positive cash flow, before we sell outright and keep the tax break. We have another rental already that cash flows $1000 per month. We’re also looking at a 32 unit multi-family, so having both of these properties working, we think will help us get the multi-family financed. I’m just worried about doing this while working full time. Bigger Pockets is a good source of ideas. Thanks Colin.

  6. Celia B. Rudder on

    Number 6 should be, do you need the equity to purchase your next home. In my case I do, but I read the article looking for something that could possibly change my situation. Unfortunately, I am cash poor and can’t qualify for a mortgage so selling is my solution. I am a big proponent of owner financing and I am considering it, however I need a big enough down payment to pay for my next home. Not impossible but not easy and most likely will involve moving again. I am also planning on using some of the money to finance my real estate investment dreams. So, it seems that for my situation , selling outright is the best scenario. The struggle is very real.

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