Many people don’t stay in the same home forever. Maybe you’ve obtained your dream job, which requires you to relocate, or your growing family needs more space. Owning property is a fantastic way to build equity and create financial security.
Whatever the case is, you’ll want to make the best return on investment on your property. If you’re wondering, “Should I rent or sell my home?” these eight factors can help you evaluate your unique financial situation and local market to make the right decision for you and your family.
1. How Are Your Savings?
When considering whether to sell or rent your home, the best place to start is by looking at your savings account. You may be excited about the prospect of rental income; however, you’ll still be responsible for maintenance and repairs if you decide to rent your property. On top of that, you may have months without a tenant, during which you’ll still be responsible for meeting your mortgage payments.
Financial advisors recommend having an emergency fund with a minimum of six months’ worth of expenses if you decide to rent out your home.
2. Do You Need The Home Equity to Buy Your Next Home?
To move out of your current home to make way for potential tenants, you’ll need to move out – which means you’ll need a new place to live. Compare your current savings and income to the housing market in your area. Selling your home may make more sense if you need the equity tied up in your existing home to put a down payment on the next one.
3. Are You Willing to Be a Landlord?
Some people consider owning a rental a passive income, but renting a property is challenging and requires daily effort. You’ll have to find tenants, ensure they have good credit, and evict people if they cannot meet their payments on time. Some people excel at owning and managing rental property. If you are detail-oriented and see it as a potential career opportunity, renting out your current home may be for you.
4. What is the Market Like in Your Area?
The local market will influence your decision to rent or sell your home. In many cities, rents are steadily rising – rents rose by 16.9% in 2022 and are forecasted to continue to increase.
Check out what similar homes are renting for in your area. Can you charge enough rent to cover your current mortgage and provide additional income? Also, consider how long similar rentals have been listed. If you own property in a city or close to a university, you may have an easier time finding tenants compared to a more suburban or rural area.
Estimate how much income you could make from your rental and compare that to the profit you’d make from selling your home. If the market is hot in your area, you may earn more money in a shorter period by selling.
5. What Might Capital Gains Taxes Look Like?
If you decide to sell your home, you’ll have to pay capital gains taxes on your earnings. The more your property value has increased, the higher these taxes will be. If you decide to sell your home and have been using the property as your primary residence, you can avoid paying capital gains on the first $250,000 or $500,000 for married couples who file jointly.
Holding onto your property as a rental and selling it later could increase the amount you pay in capital gains taxes. Your equity will continue to appreciate, which may raise the amount you owe to the IRS. However, as long as you can claim the property as your primary residence for two of the five years it was in your possession, you can still qualify for the capital gains exemption.
6. Is Your Move Permanent or Temporary?
Renting your property can be a great way to continue to pay your mortgage if you have to relocate temporarily for work. Then, your home is still there for you when you return. This can be much easier than selling your home and purchasing a new one once you move back.
However, it can be challenging to manage a rental property if you also live in a different city. If you are moving out of town permanently, ensure you can manage the property from wherever you plan to relocate.
7. How Old is Your Property?
Finally, it would help if you considered the age of your property. Older buildings are more likely to require expensive maintenance. Will you likely replace the water heater, roof, or plumbing in the next few years? It may be more beneficial to sell than assume responsibility for these significant expenses.
