One of the biggest questions homeowners face when moving on from a property is whether to rent it out or sell it. As someone who owns rental properties myself, I genuinely believe they can be a fantastic long-term wealth-building strategy. That said, it is definitely not without challenges!
Both renting and selling your home can be smart moves, and each comes with unique financial implications, responsibilities, and risks. The right choice depends on your goals, your cash flow, and your tolerance for the unexpected.
Here are the key factors to help you decide.
Understanding the Rental Market
Before weighing the pros and cons, it’s important to understand that rental pricing is not always straightforward.
The amount you can charge is shaped by local supply and demand, which can shift quickly. A strong rental market in one season might soften the next, so timing really does make all the difference.
You may land a great deal with the perfect tenant, but you also need to prepare for the possibility of lower offers or longer vacancy periods.
Just make sure to research your local market, position your home competitively with strong marketing and professional photos, and have a financial cushion. It will help you navigate the ups and downs without stress.
We recently had a great success story at 88 Edward Place. We listed it for $8,500/month and ended up renting it for $11,000/month. This is a strong example of how market expertise can really pay off, as we spent time and money in the right places and helped the client earn $30,000 more per year than they expected.
Pros of Renting Your House
Renting out your property can be an excellent wealth-building strategy. Here’s why:
Steady Income Stream
A reliable tenant provides consistent monthly income that can cover your mortgage, property taxes, insurance, and other costs.
If the numbers work out, you could even generate positive cash flow each month, adding a solid revenue stream. There is also the potential to consistently increase rental rates in accordance with the market and lease terms.
Potential Tax Benefits
Rental properties have unique tax advantages. Depreciation, for example, lets you deduct a portion of your property's value from your rental income each year, a non-cash deduction that can lower your tax bill.
*As always, talk to and confirm with your CPA on how these benefits apply to your specific situation.
Long Term Appreciation
Holding a property lets you benefit from potential long-term appreciation in value while your tenant helps you pay down the mortgage and steadily build equity. But keep in mind that real estate values can fluctuate year to year, and short-term dips are possible.
Flexibility for the Future
Renting allows you to return later if your move is temporary or if you are not ready to part with a home in a neighborhood you love. It keeps your options open.
Cons of Renting
While the rewards can be great, being a landlord is not a passive activity. It comes with significant responsibilities and risks.
Tied-Up Equity
Real estate is not liquid! If you don’t have a lot of accessible cash in the bank, pay close attention to this. Your home equity is a substantial financial asset, but it’s not easily available when you need it. Unlike money in a brokerage account that can be sold and accessed quickly, the cash in real estate is locked into the property. You can’t just liquidate it when you need funds.
This is one of the key disadvantages of owning property, even though I’m still a strong believer in it overall. It’s something anyone considering renting should keep in mind, especially if they might need liquidity down the road.
Not Completely Passive
Many people underestimate the work involved in managing a rental property. Even if you hire a property manager to handle day-to-day operations, you still need to make decisions about how issues are handled.
You're the one writing the checks. And if there's a major emergency, like a flood or a furnace dying in the middle of winter, you may still get that call in the middle of the night. Most of the time a good property manager can shield you from those situations, but not always.
Opportunity Cost
Your home equity is a substantial financial asset, and by keeping it tied up in one property, you may be missing out on other investment opportunities. That money could be invested in the stock market, used to purchase another property, or even help fund a new business venture.
It’s important to look at the bigger financial picture and ask yourself where your capital can work hardest for you over time.
Tax Considerations
Selling a primary residence comes with a major tax advantage. If you have lived in the home for two of the past five years, you can often exclude up to $250,000 of capital gains from taxes ($500,000 for married couples).
If you convert the home into a full-time rental for too long, you could lose this valuable exemption. Again, talk to your tax professional about your specific situation.
Tenant Risk
Finding a great tenant is crucial but never guaranteed. Even with strong screening processes, you can still face issues like late payments, property damage, or the costly and stressful process of an eviction.
One difficult tenant can quickly erase years of profit.
Hidden Costs to Budget For
Many first-time landlords are surprised by the hidden costs of renting. That’s why a successful rental strategy requires careful budgeting for costs that go far beyond the monthly mortgage payment.
Repairs and Maintenance
You are responsible for keeping the property in good condition, including small fixes like a leaky faucet, to larger jobs like foundation cracks.
Capital Expenditures
These are the big-ticket items with a limited lifespan. Think about the roof, HVAC system, or water heater. You will need to set aside funds to replace them eventually.
Vacancy Periods
Your property will not be occupied 100% of the time. You should budget to cover all housing costs for at least one month between tenants each year.
Turnover Costs
When a tenant moves out, you will have expenses for things like fresh paint, professional cleaning, and flooring repairs to get the home ready for the next resident.
Leasing and Management Fees
If you hire a property manager, their fee is typically a percentage of the monthly rent. This is a direct cost that impacts your bottom line.
Liability
As a landlord, you have increased liability, so it’s wise to consider an umbrella insurance policy or placing the property in an LLC to protect your personal assets. Make sure to speak to your attorney, CPA or other professionals to make sure you are set-up correctly.
Rent or Sell: What’s Right for You?
Renting can be a fantastic long-term wealth builder, but it is not a guaranteed slam dunk. It requires careful planning, a solid financial cushion, and a willingness to actively manage your investment.
Selling, on the other hand, can provide significant tax advantages and free up capital for other goals.
The best move depends entirely on your goals, risk tolerance, and financial situation.
Deciding what to do with your home can be tricky. Let’s talk through the options and find the one that works best for you.