Selling vs. Renting: Should You Sell Your Home or Rent It Out?

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The real estate market can be a tricky industry to navigate, especially for those who do not have a lot of experience in the area.  The sale of a home may be the result of the homeowner relocating, upgrading, a change in finances or any number of other factors.  In some cases however, a homeowner must consider whether selling their home is the best choice or if they might benefit more by renting the property to tenants.  There are several pros and cons associated with each option, therefore it is important to consider all potential consequences before making a final decision. Here we look at some factors to consider when comparing both options.

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Remember Your Home Is An Investment

Your house is an investment and any decision you make regarding the handling of that investment should be based on sound investment principles.  This is sometimes a challenge for homeowners who allow too much emotion to guide their decision.  When the time comes for you to move onto another location or property, your decisions regarding your house must be made based on how it will affect your finances.

How Uncle Sam Views Selling Versus Renting

For qualifying homeowners, one tax law allows for 100% tax-free on the profit resulting from the sales which can be a significant amount of money that could be used toward the purchase of your next home.  To qualify the homeowner must have resided in the residence for a minimum of two out the past five years.

There are also tax benefits to renting a property.  In addition to a steady stream of income from rental payments, homeowners are still permitted to deduct mortgage interest, property taxes, and any other expenses that result from operating and maintaining the property.  Net losses may also be deducted from the homeowners gross income, usually up to $25,000.

Homeowner’s Financial Situation

For many homeowners the decision to sell or rent will be based on their own financial situation.  Owning and maintaining more than one property requires serious cash resources.  This must be considered by homeowners who may be considering renting their property because they don’t want to take a loss in the current real estate market.  It is important to determine if the expenses you must incur in order to maintain both the rental and your new residence are worth the profit you might realize by holding onto the property and selling in a better market.

Are You Landlord Material?

Not everyone is cut out to be a landlord.  Renting a property involves much more than simply handing over the keys and collecting rent each month.  You must be able to handle any maintenance issues that arise, tenant complaints and other landlord-tenant issues.  There are also certain laws that you must understand which vary from state-to-state to ensure you are working within the bounds of those laws.

A Sunmmary of the Pros And Cons

Looking at both options renting and selling, the following is a breakdown of the pros and cons of each.

Pros of selling include

  • rolling over or freeing up equity that can be applied toward your next residence
  • tax-free capital gains to those who qualify
  • the simplicity of maintaining only one property

Cons of selling include

  • the loss of potential appreciation of property
  • taking a loss on that property if selling in a bad market

Pros of renting out include

  • benefiting from property appreciation
  • benefiting from certain tax breaks
  • a steady stream of income from rental payments

Cons of renting out include

  • potential problems with tenants
  • loss of tax-free capital gains when selling
  • property damage
  • a large cash commitment to more than one property
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Thomas Herold
Thomas Herold
13 years ago

In most cases your own house is not an investment, it is a liability. The illusion of an investment comes from ongoing raising house prices, which basically just leveraging out the dollar decrease. If your pay rent than that’s a liability. You may have some capital gain when you sell your house but people usually don’t use it to invest it, they move on to a bigger house and then pay more rent.

13 years ago

What a great list of pros and cons. I think the key is to understand if you can be a good landowner and what kind of commitment you can put into being one. It also depends on who you choose to rent too.

13 years ago

Great insight! The potential loss of equity today has to make us consider alternatives and you have laid out a good list of pros and cons of renting versus selling. Good job.

Terry Sprouse
13 years ago

My philosophy is that you should almost never sell your home.

According to the National Association of Realtors, the average person purchases about 7 homes during the course of their lifetime. If, when someone is ready to move on to another house, and they always keep their old house as a rental, they will build up a good stream of income along the way from rental income.

During tough econonomic times, when jobs are lost, rental income provides some real security.

13 years ago

I’ve written multiple times about my tenant. If you are planning on dealing with a tenant yourself, bone up on the landlord/tenant laws in your area. If not, factor in the cost of a management company. Just another thing to think about if you plan on renting the home out.

13 years ago

Tenants can be very difficult to get rid off. Something to think of befor you get in buisness. In Sweden tenants have way to much rights….

Pinyo Bhulipongsanon
13 years ago

@Sandy and Martin — Dealing with tenant always has been my biggest fear. If I am faced with this choich, I think I’d rather sell than rent.

Selling vs. Renting: Should You Sell Your Home or Rent It Out?

by Tisha Tolar time to read: 2 min
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