Selling vs. Renting Your Home

Key takeaways:

• When buying a new home, deciding what to do with your current house is an important part of planning your next move.
• You have several options for your current home, including selling, renting it out, refinancing to access equity, or renovating to increase its marketability and value.
• Whether you sell or rent your home depends on several factors, including your financial situation, local real estate market conditions, potential tax implications, and long-term goals.

Should I sell or rent my house?

Buying a new home doesn’t always mean you have to sell your current one. Depending on your financial goals and local housing market, you may decide to sell the property, rent it out, or use the equity you’ve built to help fund your next move.

For example, renting your current home could provide ongoing income while allowing you to keep the property. You may also consider a cash-out refinance to access a portion of your home equity for a down payment on your next home or renovations to prepare the property for renters. The right choice depends on your finances, future housing plans, local market conditions, and long-term goals.

Consider the following questions as you weigh whether to sell or rent your home.

Are you planning to return to your current home?

Homeowners who leave town altogether typically opt to sell. But if you expect your move to be temporary, you may be more inclined to rent the property out to cover the mortgage and other carrying costs until you return. The only hitch is that you will need to act as a landlord, which can be time-consuming, or hire a property manager.

What are the market conditions in your area?

If you’re interested in selling, look at what you still owe on your mortgage compared to the current value of the house. The proceeds of the sale will ideally cover the loan balance and leave some money left over to fund the move and finance a down payment for a new property.

If you’re in a difficult housing market or have a new mortgage subject to prepayment penalties, renting may be a more enticing option.

How strong is your financial position?

Your finances can play a significant role in whether you sell or rent your current home. Consider whether you have enough savings and income to cover the costs of your current property while purchasing and maintaining a new home, particularly if rental income doesn’t fully cover your expenses. The equity you’ve built in your current home may also influence your decision. Selling could provide funds for a down payment on your next home, while refinancing may allow you to access some of that equity without selling the property.

What to consider before renting out your home

Before renting out your home, consider the potential income, ongoing costs, financial risks, and responsibilities that come with becoming a landlord.

What are the benefits of renting?

You may choose to rent out your current property if you plan to return to the home in the future or want to generate rental income while the property potentially increases in value.

Renting can help offset your mortgage and other ownership costs while allowing you to continue building equity in the home. How much income you could earn depends in part on your local price-to-rent ratio, which compares home prices with rental rates.

• A low price-to-rent ratio means buying is relatively less expensive than renting, which may create more opportunity for positive rental cash flow.
• A high price-to-rent ratio means owning is relatively more expensive compared with renting, which may result in narrower cash flow.

If you eventually sell the rental property, keep in mind that the tax treatment may differ from selling a primary residence.

Would the rent cover the mortgage payment and other expenses?

If you’re not sure how much you could reasonably charge in rent, examine properties with similar square footage, amenities and location to develop an idea. You do not need to limit your search to online rental listings and real estate databases. Walking or driving past similar properties or even taking tours can reveal valuable information.

Determine whether the rent you could charge would cover the mortgage payments and other costs of ownership along with the expenses of renting out the property. The state of the local real estate market could affect whether you make a profit or lose money. Renters in your area may not be willing to pay what you would need to cover your expenses.

How much should you budget for rental property expenses?

Your mortgage payment is only one of the costs to consider when determining whether renting out your home makes financial sense. Property taxes, maintenance, repairs, utilities, property management fees and periods without a tenant can all reduce your rental income.

Consider setting aside money for both routine maintenance and unexpected expenses, such as replacing an appliance or making an emergency repair. Building these costs into your rental budget can give you a more realistic picture of your potential cash flow and help you continue covering expenses when the property is vacant.

Do you need different insurance for a rental property?

Your insurance needs may change when you convert your primary residence into a rental property. A standard homeowners insurance policy may not provide the appropriate coverage once tenants occupy the home.

Depending on the property and how it will be rented, you may need landlord insurance, which can provide coverage for the home itself, certain property you own and liability risks. Some policies may also offer protection for lost rental income after a covered event. Before renting out your home, talk with your insurance provider about your plans and the coverage you may need.

What are the downsides of renting your home?

Turning your home into a rental property can create additional income, but it also comes with added financial responsibilities. If you purchase another home, you may need to manage two mortgage payments during vacancies or periods when rental income falls short of your expenses.

Before renting out your home, review your mortgage agreement for owner-occupancy requirements. Some loans require you to live in the property for a specified period before converting it to a rental. Violating these terms could have financial consequences, so consider discussing your plans with your lender or a trusted advisor.

If you’re buying a property specifically to use as a rental, financing requirements may also be stricter. Investment properties can require larger down payments, stronger credit, and higher interest rates than primary residences. In addition, FHA loans and VA loans generally require the borrower to occupy the property as a primary residence.

What to consider before selling your home

Before selling your home, consider your home equity, potential selling costs, current market conditions, and how the decision fits into your broader financial goals.

What are the tax benefits for selling versus renting a house?

Turning your current home into a rental property and selling your home are very different approaches to reaching a common goal: earning income from a property that you no longer plan to reside in. When it comes to taxes, it shouldn’t be a surprise that there are very distinct considerations to make in each of the two scenarios.

When selling your home, you may owe taxes on any profits that you earn on the sale. An IRS rule allows individuals who have owned and lived in the home for at least two of the previous five years to avoid paying taxes on the first $250,000 in capital gains. For married couples, the limit is $500,000.

When it comes to renting a home, the tax structure is vastly different. Rental profit is categorized as income and taxed based on your overall income tax bracket. Many expenses related to the property, from interest on your mortgage to the property management fee, may be used to lower the tax burden. Because real estate also depreciates over time and offers tax savings in this regard, the combined benefits can make renting out a home a financially rewarding choice.

If you sell a rental home and use the proceeds to purchase another investment property, you will have to address the additional expense of capital gains tax.

How much could you make from selling your home?

The amount you could make from selling your home depends on more than the sale price. Your remaining mortgage balance, closing costs, real estate commissions and other selling expenses can all affect how much money you walk away with.

Start by estimating your home’s current market value and subtracting your mortgage payoff amount and expected selling costs. This can give you a better idea of your potential net proceeds and whether selling supports your next financial goal.

What costs should you budget for when selling a home?

Selling a home can come with expenses before and during the sale. Depending on your situation, home selling costs may include repairs, improvements, staging, real estate commissions, closing costs and moving expenses. Consider these expenses when estimating how much you could make from the sale. Planning ahead can also help you decide which improvements are worth making and how much money you may have available for your next home.

How much equity do you have in your home?

Home equity is the difference between your home’s current value and the amount you still owe on your mortgage. If your home has increased in value or you’ve paid down a significant portion of your mortgage, you may have built equity that you can access when you sell.

Understanding how much home equity you have can help you estimate your potential proceeds and determine how much you could put toward a down payment on another home or other financial priorities.

Is it a good time to sell your home?

The best time to sell a house depends on your financial goals and local housing market. Consider factors such as home prices, buyer demand, available inventory and mortgage rates, as well as recent sale prices for comparable homes in your area. Understanding current market conditions can help you estimate what your home may sell for and decide whether now is the right time to sell.

Your next step: rent or sell?

Deciding whether to rent or sell your home comes down to your financial goals, current housing market and plans for the future. Compare the potential income and ongoing costs of renting with the equity and proceeds you could access by selling. If you’re planning to purchase another home, connect with a Fifth Third Mortgage Loan Specialist to explore your financing options and understand how your decision could affect your next home purchase.