Whatever your reason for moving, figuring out what to do with your current home might not be as easy as listing it. Depending on your financial situation and your local real estate market, you might be better off renting it than selling it, or vice versa.

If you get caught up in the “Should I sell or rent my house?” Debate, let’s take a look at the factors to consider, including costs.

Should I sell or rent my house?

The decision to sell or rent your home shouldn’t be taken lightly. Take a look at the following scenarios and weigh the pros and cons of each to help you determine the way forward.

If your move is temporary

If your move is short-lived and you plan to return to your current city in the future, you may want to rent your home. It can give you some security in knowing that there is a place to live when you return, and it may cost less than selling it and buying another home at a later date.

On the other hand, if you are leaving the area permanently, then selling to free up your home equity for a new home in a new location can be a good idea. This brings us to …

If you need access to equity in your home

If your ability to buy a new home depends on access to the currently locked-in equity in your home, then selling it is the best way to go. That way, you can take the proceeds from the sale of the house and use it as a down payment or moving expenses.

If you have no interest in owning

Management of a rental property can be time consuming and difficult. Are you a handyman and able to do some repairs yourself? If not, do you have a network of affordable entrepreneurs that you can reach out to in the blink of an eye? Consider whether you want to take on the added responsibility of being a landlord, which means screening tenants and sorting out issues, among other responsibilities, or paying a third party to take care of things instead.

If you want to buy one house while you rent the other

If you decide to lease your current home and want to buy another with a mortgage, keep in mind that lenders will take rental income into account when determining your financing. In some cases, a lender will only allow a portion of your rental income, typically up to 75%, to be recognized as a source of income.

If you expect home values ​​to increase in your area

It is impossible to predict with 100% accuracy what the real estate market will look like in your area. That being said, you may be able to make an educated prediction. If you expect your current home to increase in value in the next few years or less, you may want to consider renting it out and then selling it later to take advantage of the appreciation.

If you pay capital gains tax

If you plan to sell your home instead of renting it out, you will be able to exclude up to $ 250,000 in capital gains from the sale (or up to $ 500,000 for married filers) from your income, if the home was your main residence for two of the last five years.

If you’re underwater on your mortgage

You may not be able to afford to sell your house because you are underwater on your mortgage, which means that your loan balance is greater than the current market value of the house. You may not have enough equity to sell the house unless you are willing and able to pay off the loss in cash. In this case, turning your home into a rental property may provide the opportunity to gain some equity before selling it in the future.

Renting vs. selling: the costs to consider

Both rental and selling a house will incur costs. One of the most important considerations to take into account is whether the rental income you will receive for your home is sufficient to cover the mortgage and maintenance. Owning and maintaining a rental property comes with costs, and you want the effort to be as profitable as possible.

To determine how much rental income you can reasonably expect to earn, take a look at what other similar properties charge and compare it to the costs of owning and maintaining the property – mortgage payments, maintenance, repairs, taxes, hiring. a real estate management company. . From there you can assess whether you will be able to recoup your expenses and then some.

Here is an overview of the costs so you can see what is best for you financially.

Rental costs of accommodation

• Mortgage: Even if you are going to rent out your home (and likely generate income), you are still responsible for making sure the mortgage is paid, which may not be fully covered by the rent you receive.
• Home maintenance and repairs: You still own the house, so you will need to perform routine maintenance to make sure it is suitable for tenants. As a rule of thumb, set aside at least 1% of the home’s value each year (more if it’s an older property) to pay for maintenance. You will also need to budget for repairs and replacement of essential parts of the house, such as appliances, doors, windows and the roof.
• Property taxes: Property tax rate vary widely by location, but at a minimum, you can expect the rate to increase as your home’s estimated value increases.
• Advertising: To find a tenant, you have to spread the word. The cost to do this will vary depending on where you are advertising, such as on a website or in the newspaper, and whether you are working with a real estate agent to market the property.
• Background and Credit Checks: Every credit and rental history report you run for a potential tenant (also known as tenant screening) will cost you, although you may be able to pass this expense on to the tenant. The cost typically ranges from $ 15 to $ 40.
• Property management fees: If you have to hire a property manager, that will cost you as well. These companies tend to charge a percentage of the rent price, usually 10%.
• Tax declaration and accounting costs: Even if you do your own accounting for rental-related expenses, you will likely have to incur costs for filing your taxes using tax preparation software or if you hire an accountant.
• HOA Fees: If your accommodation belongs to an association, you will also be in charge of HOA dues, which can range from $ 25 to $ 1,000 or more per month.
• Owner insurance: Owner insurance may cover some costs, such as damage to the home or injury to property. You can expect this to cost around 25% more than the typical home insurance policy.
• Vacant jobs : Also consider the cost of vacancies between tenants. If a tenant moves out and you don’t have a replacement, that’s income you’re losing.

Costs of selling a house

• Home Improvements: To get your house ready to sell, you will likely have to pay a few fees. It may be the cost of enhance the attractiveness of the property and make the necessary repairs. You may also want to consider doing a home inspection (also known as a pre-registration inspection) to determine what fixes you’ll need to make, which will increase your costs.
• Real estate commission: Up to 6% of the selling price of your home, the commission you pay your listing agent could be your biggest expense when selling your home.
• Home staging: Although it is not necessary, stage your house can increase your home’s appeal to potential buyers and earn you more as a result. Depending on the size of your home and other factors, the staging can cost anywhere from $ 1,000 to $ 8,000 or more.
• Utilities: You will still be responsible for paying your utility bills until the closing date.
• Repayment of the mortgage: Once you sell the house, the proceeds will need to be used for the remainder of your mortgage.
• Closing costs: In some cases, you may be required to take care of some of the closing costs, such as property taxes and pro rata attorney fees.

At the end of the line

Deciding whether to rent or sell your home depends on both monetary and lifestyle factors. To help you make your decision, think about your financial situation, whether you will be returning to your current location, or if you are interested in owning a home.

Once you’ve decided to rent or sell, be sure to compare different types of services, such as mortgage lenders and property management companies, to make the most strategic moves with your money.

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