Recently, everyone –– from self-proclaimed financial gurus to working-class Americans –– seems to be looking for ways to achieve financial independence so they don’t have to worry about how much is needed to retire later down the line. Be it through disciplined saving, smart investing, expert planning, or some other strategy, more and more people are exploring pathways to accomplishing this future goal. While some may take up day trading or work on launching a side hustle (or two), most are after the same thing: passive income.
Passive income refers to consistent income that does not require regular effort1 in the way many standard income sources do. Income from a 9-5 job, for example, is not passive, as it is the result of the routine, hourly labor. Things like rental properties, on the other hand, are some of the best examples of passive income out there. With that said, renting out your house (or even selling it) might not be the best path to financial freedom for you. If you’re asking yourself, “should I rent or sell my house?” keep reading for the answers you’re looking for from Truehold.
How Do I Decide If I Should Rent or Sell?
Deciding to rent or sell your home may not be an easy one. Nor should it be! Homes are significant investments and can house countless precious memories. For some, the thought of selling a home quickly where you’ve watched your children grow up or putting this precious investment in the hands of renters can be daunting. Like most things, however, there are definite pros and cons when asking, “should I rent or sell my house?”. And knowing the right time to rent or sell your home can make all the difference.
The Right Times to Rent
- When You Want a Consistent Passive Income Stream: As mentioned before, rental properties are some of the best ways that homeowners can earn passive income and make strides toward financial independence. In many cases, homeowners will move into a different home before renting their existing property out, but owners of duplexes (or even those with a single available room) can still earn some additional rental income. If you want to hold onto your current home while diversifying revenue streams, renting might be the way to go –– just be sure that the rental value exceeds your existing mortgage, and be wary of property tax nuances.
- When You Expect Your Home to Appreciate in Value: Try as some might to convince you otherwise; no one knows for certain what the housing market will do next. If you believe, like many do2, that housing prices are going to continue to climb, renting your home as opposed to selling may be the better option. If you have a second residence or can continue living on your rental property, renting will enable you to profit off of ownership while allowing your property’s value to continue climbing.
- When You Plan on Returning to Your Rental: Following the impact of Hurricane Ian in Florida, many “snowbirds” who owned second properties in Florida decided not to return to their oceanside homes for the winter season. For some, this was due to serious property damage due to the storm. However, those who weren’t directly impacted have begun renting out these properties (sometimes at a friendly rate) to those who sustained serious storm damage. In effect, these property owners can lend a hand while earning some additional income until Florida’s beaches are once again vacation-ready. All this is to say: If you plan on returning to your home, renting may be a better decision than selling — and it might end up doing some good.
- When You Need the Extra Income: With the economy in flux, some Americans have fallen on hard times and are actively looking for temporary (or permanent) ways to make ends meet. For some, renting out a room to a friend, family member, or trustworthy stranger can be a great way to make up for lost income tax or pad family emergency funds. As opposed to downsizing and selling your home, renting is a short-term solution; when the tides turn, and you’re back on your feet, you’ll still have a home of your own.
The Right Times to Sell
- When the Market Conditions Are Right: If you own a home right now, there’s a good chance it’s worth more than you ever imagined. That’s why, at the time of writing, homes are still selling rapidly and fetching best-ever sale prices3. As opposed to renting, choosing to sell your home at the best possible time will net you a lump sum that might be too significant to pass up. Of course, a thriving market will also raise potential rental prices, but if the market dips, you may have missed out on a potentially record-setting sale.
- When Renting Isn’t for You: In theory, turning your home into a rental means adding a perfect passive income stream and taking a leap toward financial independence. In practice, it can mean vetting potential renters, chasing down late rent checks, and potentially having to break some bad news. If putting on your landlord that isn’t something you’re interested in, cashing out and selling your home outright might be a far preferable alternative.
- When You’re Ready to Downsize: Among the top reasons why homeowners make the decision to sell, life-cycle changes are some of the most compelling4. For some growing families, more space is an absolute must. However, for families who have already done their growing — and have now left the nest — the extra space can feel uncomfortable and lonely. If you’ve found yourself with more space than you know what to do with, selling your home to purchase a smaller one can be a great financial decision. Whether the proceeds of downsizing allow you to look in new neighborhoods, put money toward home improvement projects, or use the extra cash to see the world, downsizing is a top reason for selling.
- When You Need the Down Payment: In a 2018 survey5, only 6% of respondents from 30-49 and 4% of respondents aged 50-64 said they owned a second home. So, while some homeowners are able to comfortably purchase a second property without using the proceeds of a separate sale, it’s far more common to sell a home in order to fund a downpayment for another. If you’re like most Americans, selling your existing home might be the only way to move into another, making renting impossible.That said, using the sale proceeds to purchase a duplex that can double your residence and a rental property may be a way to get the best of both worlds.
See related: How to Use Home Equity to Build Wealth
Do You Make More Money Selling or Renting a House?
Whether you decide to rent your home for passive income or sell your home outright, there are a number of ways to ensure you get the most bang for your buck. Before we determine which way can make you more money, let’s look at ways to make the most out of each.
Maximizing Your Home’s Sale Price
There are countless ways that homeowners can increase the value of a home. Be it through sizable renovations (like finishing basements, adding bathrooms, or installing swimming pools) or minor ones (like elevating curb appeal or sprucing up your home’s decor,) putting the time and effort into improving your home can pay off when it comes time to sell.
Maximizing Your Home’s Rental Value
When it comes to renting, many of the same value-adding tips listed above also apply. However, homeowners that choose to sell will see a near-instant return on their renovation investments. Those that choose to rent, on the other hand, will have to be patient to see a full return on their investment. With a little bit of strategic thinking, a rental property owner can give their property a boost without hefty out-of-pocket costs.
Here are some sub-$1000 improvements homeowners can make to maximize rental value:
- Paying for a professional pressure washing
- Maintaining the lawn
- Painting the exterior
- Installing new fixtures
- Upgrading some home appliances
Which Is the More Profitable Choice?
Beyond the emotional connections to your home, the answer to the question, “should I rent or sell my house?” will likely come down to the potential financial benefit. At face value, the decision to rent or sell may remind one of the adage, “a bird in the hand is worth two in the bush.” Selling, in this case, is the guarantee, and renting is the potential for more. However, the decision is far more complicated than that.
- Tax Implications: When selling or renting a home, potential taxes should be taken into consideration. Selling a property outright can incur a capital gains tax6 if you have not lived in the property recently or if the property exceeds a certain value. Renting, on the other hand, can come with several tax benefits and potential deductions, but if the post-tax amount does not exceed the cost of the mortgage, then you may ultimately incur a loss.
- Maintenance Costs: Regular home maintenance can be a burden, but it’s worth it to those looking to protect their investment. Once the home is sold, that responsibility is no longer yours — and the meticulous care you put into maintaining the home over the years will hopefully pay off. With a rental property, however, the responsibility to protect your investment remains on you. Depreciation is bound to happen with even the most respectful tenants, and the costs of maintaining the property can quickly begin to eat into your monthly rental earnings.
- Rental Personnel: With a rental property, many homeowners will take it upon themselves to field phone calls from prospective tenants and anticipate repair needs or hire someone else to do this for them. A property manager (or property management company) will fill this role, often for a sizable percentage of the monthly rent. While this can be relieving for some homeowners who will gladly trade proceeds in exchange for peace, others may find that the existing mortgage paired with property management fees make renting the home no longer worth it.
- Real Estate Fees: There’s still costs of selling a home, too. Though some homes are sold “by owner” in 2022, many homeowners choose to let a licensed real estate agent carry the responsibility of scheduling with potential buyers, leading showings, staging the home, and communicating with buyer’s agents. Considering the commission for real estate agents is 6% on average7, homeowners looking to walk away with as much of their home’s sale proceeds as possible may question whether it’s worth it after all.
- Selling a Home After Renting It: As mentioned earlier, homeowners that sell a property after an extended period of not occupying it may take a significant tax hit. Although a rental property is technically occupied by a tenant, sales of this type of property will still incur a tax. So, if you stand to make a tidy profit off of your home’s sale, selling may be the better option than choosing to rent it.
Ultimately, whether you stand to make more money off the rental of your current home or the outright sale will come down to how well you are able to take advantage of tax incentives and the conditions of the market. However, having the cash in hand may be the better option for many homeowners currently experiencing the “should I rent or sell my house?” dilemma.
The Bottom Line: Should I Sell My House?
As evidenced by the above, the decision to sell your home — this year or any year — is a deeply personal one. If you have a strong, emotional attachment to the investment property, renting is a way to keep the home (and the memories it contains) in your possession while diversifying your revenue streams. If you’re at a point in your life where the proceeds from the sale mean more to you than the memories made, decades’ worth of home equity can fund equally-memorable trips around the globe. Given the current market conditions and the relative uncertainty ahead, cashing out by selling your home may be the right financial option for you. Factor in the unexpected costs, labor, and frustration that can come from being a landlord, and a straightforward sale become all the more appealing.
With that said, a straight sale isn’t the only option. A residential leaseback agreement allows you to sell your home at market value, cash in on your hard-earned home equity, and continue living in the familiar environment while paying market rent. The depreciation, maintenance costs, utilities, and everyday expenses become our responsibility — meaning you can enjoy the comfort of your home without the headaches. Plus, with your home equity in hand, you can apply it toward living the life you’ve always dreamed of.
To learn more about Truehold’s Sale-Leaseback and discover an alternative to the traditional sale process, request our free residential leaseback agreement.
1. Indeed. All You Need to Know About Passive Income and How to Build It. https://www.indeed.com/career-advice/pay-salary/passive-income-options#:~:text=Having%20a%20passive%20income%20ensures,as%20securing%20funds%20for%20retirement
2. Ramsey Solutions. Housing Market Predictions for 2022. https://www.ramseysolutions.com/real-estate/housing-market-forecast#:~:text=Real%20Estate%20Market%20in%20the%20Third%20Quarter%20of%202022&text=And%20since%20there's%20still%20strong,the%20start%20of%20this%20year
3. Forbes. Housing Market Predictions In 2022: Will Prices Drop? https://www.forbes.com/advisor/mortgages/real-estate/housing-market-predictions/
4. The Balance. Why Do People Sell Their Homes? https://www.thebalancemoney.com/why-home-owners-sell-1799021
5. Statista. Share of Americans Who Own a Second Home in 2018, by Age. https://www.statista.com/statistics/228894/people-living-in-households-that-own-a-second-home-usa/
6. Upnest. Selling vs. Renting: The Pros and Cons. https://www.upnest.com/1/post/selling-vs-renting-the-pros-and-cons/#:~:text=The%20general%20guideline%20is%20that,with%20renting%20out%20a%20home.
7. Redfin. How Real Estate Commission Works. https://www.redfin.com/guides/how-much-is-real-estate-agent-commission-buyer-seller