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If you own the home you're living in but you're looking to move, you may be faced with the choice of whether to sell your home and collect the profit after the mortgage is paid off or turn it into a rental property and collect rent from tenants.
The right answer depends on a few different factors, and it's important to thoroughly understand each option to determine which path is right for you.
Selling vs. Renting: Factors to Consider
If you're planning to move to another home, you may be in the financial position to sell or keep the one you're currently living in. In fact, many people become real estate investors this way, opting to rent out the home and collect rent payments instead of selling it.
If you're faced with the dilemma of trying to figure out which option you should choose, here are some factors to keep in mind.
Down Payment vs. Income
If you're planning to buy your next home, you'll need enough cash to make a down payment. Many people use the proceeds from the sale of their previous home as a down payment, but if you're planning to keep the home as an investment property, you'll need to come up with that money another way.
If you've already saved up your next down payment, keeping the property as an investment can provide you with a consistent monthly income. Depending on how long you lived in the home and your monthly payment, you may even be able to collect more in rent payments than what you're paying on your mortgage loan.
Also, note that if you keep the home as an investment property, you can still access some of the equity in the home via a home equity loan or line of credit. However, that adds more costs to the mix.
Expenses
Maintaining a rental property isn't cheap. While you're getting paid by your tenants, you'll need to cover the cost of most of the repairs and maintenance around the house. These expenses will be on top of your expenses for your new primary residence. If you just sell the house and move on, though, you'll only have to worry about those costs for one property.
Also, if you have a vacancy, you'll still need to make your mortgage payment and pay property taxes and insurance, even if you're not collecting rent. And if the tenant damages the property, your expenses can skyrocket.
Selling a home can also be expensive, however, as you're required to pay the commission for both your and the buyer's real estate agents.
Taxes
When you sell a home, you may qualify for an exemption on your tax return. More specifically, if you've lived in the home for at least two out of the past five years, you can exempt up to $250,000 of your proceeds from income taxes ($500,000 if you're married and filing a joint return).
If your proceeds fall below the applicable threshold, you don't have to worry about a big tax bill. But if you make more than the threshold allows, it could be worth it to delay that tax bill by renting out the home. Just remember that the income you receive as a landlord—minus expenses—will be subject to income tax every year.
Management
When you turn your home into an investment property, you'll need to manage it on your own or hire a property manager to do it for you. Either way, an investment property isn't something you can just set up and forget.
If you don't want to be bothered by dealing with tenants, or your profit wouldn't be much after property management fees, it may be best to just sell the property and save yourself the trouble. However, if you don't mind the legwork required to be a landlord, the income may be worth it to you.
Flexibility
If you're buying a new house but want some flexibility with the old one, you can opt to use it as a short-term rental instead of a standard investment property with a long-term tenant.
Putting the home on Airbnb or Vrbo can potentially result in higher monthly incomes, and it can also give you the chance to use the property as a vacation home when you're not renting it out. If you sell the property, you won't get the same level of flexibility.
All the while, your home may continue to appreciate in value and be worth even more when you decide to sell it in the future.
Credit
Keeping your existing mortgage loan on your credit report could make it difficult for you to qualify for a new mortgage loan due to how it impacts your debt-to-income ratio.
It's possible to avoid this by refinancing the loan into the name of a business that you want to use to manage the property, but that can be tough if the business doesn't have a credit history, and you may need to cosign the loan, which will impact your credit. Also, that process can be costly, as it requires closing costs and the interest rate on an investment property is typically higher than it is on a primary residence.
How to Sell Your House
If you've decided that you want to sell the home, start by finding a real estate agent who can help you with that process. They'll help you get the house cleaned up and ready for staging and can handle the photographs and listing process. They'll also perform a comparative market analysis to help determine your asking price for the home.
Once your home is listed, your agent will help you manage walkthroughs and communicate with prospective buyers. They'll also help handle offers and counteroffers, though you get the final say on which offer to accept and when.
As you look into selling your home, make sure you're also looking for a new one so that the sale of your current home and the sale of the new home close around the same time.
How to Rent Out Your Home
If you want to rent out your house instead of sell it, you'll need to first get rid of your furniture and other belongings and clean up the property. Then, you'll take pictures and list the home on rental websites. You can even put a sign in your yard notifying passersby.
To determine how much to charge, analyze similar properties in your area to find out how much others are charging. You'll need to determine whether utilities and HOA fees (if applicable) are included in the rent or if the tenant will pay them separately.
As you start getting interest from prospective tenants, you'll want to screen them using their credit reports, income and employment, references and other factors. You may also want to meet them in person to determine your comfort level.
In some cases, it might make sense to hire a property manager who can do all of this on your behalf. They can also help you put together a contract that will protect your property. Shop around and compare services and fees to find the best fit.
Make Sure Your Credit Is Ready for Your Next Home
If you're planning to move, it's important to ensure that your credit is ready for your next home purchase. Use Experian's free credit monitoring service to gain access to your FICO® Score☉ powered by Experian data and your Experian credit report.
With this information, you'll be able to address potential issues that could keep you from getting the terms you want. You'll also be able to track your progress and get real-time alerts when changes are made to your report throughout the homebuying process.
