Should I Lease or Sell?

Lauren NowackiOctober 16, 2019

This question was brought to my attention when speaking with a friend. He recently bought a new home only to be presented with the opportunity to move across the country. This left him the choice to either sell or lease his house. This dilemma isn’t an uncommon one. If you’re on the fence about leasing or selling your home, read on to learn the benefits and drawbacks of each to help with your decision.

Pros And Cons Of Leasing Your Home

When you lease your home, you become a landlord and have the opportunity to earn a passive income. But it’s not as easy as it sounds. As a landlord, you’ll be in charge of maintaining the property and keeping your renters happy. That may require more work than you want. Becoming a landlord isn’t for everyone, so take careful consideration of the benefits and drawbacks of becoming a property investor before you give it a try.

Benefits Of Leasing

You have a new source of income. If you can charge a rental price that’s enough to cover your mortgage payment and associated homeowner expenses (insurance, repairs and upkeep), then leasing your home is a smart way to gain a new stream of income.

You gain a new asset and lose a liability. As a rental property, your home will be considered an asset instead of a liability. This means you can take out a second mortgage.

It’s possible to get approved for a second mortgage if your home is reclassified as an investment. A residential property becomes an investment property when the owner leases the property to tenants for at least 1 year. After this 1-year mark, your mortgage lender no longer views your home as a debt but rather as a generator of income and therefore an asset. You’re now able to use this asset as a guarantee against your second mortgage.

You can give yourself more time. If your house needs renovations or repairs to sell at your ideal asking price but you don’t have the money or time to do it all at once, you may be able to rent out your home and make the upgrades little by little. In case you're trying to build more equity in the home or wait out the market to sell your home at a higher price without living there, you can rent out your home as you wait.

You may have an easier time finding renters. If you’re having a hard time finding people to buy your home, it may be easier to find people to rent it instead.Renters are less picky than buyers about the condition of their residence because their move is not permanent. If your neighborhood is a desirable yet affordable place to live, you may have an easier time finding tenants.

You may get possible tax deductions. As a rental property owner, there are several expenses you can write off on your taxes, which means more money in your pocket. Home repairs, local and long-distance travel, insurance and interest are all items that are either partially or fully deductible from taxes.Plus, you may be eligible for the capital gains tax exemption when you decide to sell your rental property. This means that you won’t have to pay taxes on the full selling price of your home. We recommend speaking to your financial advisor to see what tax benefits you can receive from leasing your property.

Drawbacks Of Leasing

You have more responsibility. Keep in mind that if you lease your house you’re still responsible for maintaining the home and managing your tenants. That means you’ll need to continue having homeownership responsibilities such as yardwork, routine inspections and repairs. Either you can make the repairs yourself or you can hire a reliable handyman, which will cost more money. You’ll also be in charge of finding tenants, showing them the home, making sure their rent is paid and dealing with any issues during their rental period.

If you prefer hands-off property ownership, you may want to consider hiring a property manager. Property managers can handle everything from start to finish. Their responsibilities may include showing the space, selecting the tenants, fielding complaints, organizing repairs, collecting rent and evicting tenants who don’t pay. But remember, a high-quality property manager comes with a price tag! Most property managers charge 8% – 12% of the monthly value of the property for their services.

You have more liability. As a landlord, you’re responsible for keeping the home a habitable place to live. That means making sure your property complies with building and health codes, is free of pests and other hazards and provides for basic needs. These include water, heat and electric.

You’ll also need to obey all of the local and state laws like notifying tenants before entering the home, providing notice of changes to the lease agreement and following the proper eviction process.

As the property owner, you may also be liable for incidents that happen on your property, especially if you’re negligent or slow to act on a tenant complaint. Here are a few things you could be held liable for:

·      Dog bites

·      Personal injuries

·      Bed bugs

·      Crimes

·      Damage to personal property

By being proactive, you can reduce the risk of these incidents or reduce or clear your liability if they do happen. For example, when it comes to dog bites, you can only allow dogs that pass a temperament test. For crimes, you can take basic security measures to protect your home and tenants like installing window and door locks, security systems and ample lighting. To avoid personal injuries, conduct routine safety inspections and respond with a sense of urgency whenever you’re notified of a potential hazard.

If the house sits empty, you pay. You’re responsible for paying your mortgage, property taxes and insurance whether you have someone living in the home or not. If you don’t have the money to pay the costs when you don’t have a renter paying them, you could default on your mortgage. The same goes for if you have a renter but they miss a rent payment. You’re still on the hook for the payment that month and your credit will be affected if you miss it.

Reasons To Sell Your Home Instead

Leasing isn’t for everyone. Along with avoiding the drawbacks of leasing your home, there are other reasons you should sell your home instead.

It’s a good time to sell. If the market is healthy and you can sell your home at or above the fair market value and within a short amount of time, you may want to opt for selling your home. If you can make a profit on the home and you’re in a good position to sell, put it on the market.

You need cash towards your new home. Most homeowners plan to purchase and sell a home at the same time, and they often need the money from the sale for the purchase.

But what about taking out a second mortgage? Unfortunately, it’s tough to get a second mortgage if you haven’t leased your home for a year because residential property is considered a debt to be paid and is therefore considered a liability. Without a sizeable down payment to bring to your lender, having mortgages on multiple residential properties may not be an option.

You don’t want your money tied up in a house. Many people prefer to hold their wealth in property because it’s a tangible asset that feels more real than buying stocks. That said, real estate is an illiquid asset, meaning that you usually can’t sell it right away. This illiquidity, along with a generally lower rate of return than stocks, deters people from leasing.

Get Assistance Selling Your Home

If you’re ready to sell your home, an experienced Rocket HomesSM Partner Agent can help you sell your home quickly and at the right price. Our agents are highly rated local experts who will guide you through the sale process.

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    Lauren Nowacki

    Lauren Nowacki is a staff writer specializing in personal finance, homeownership and the mortgage industry. She has a B.A. in Communications and has worked as a writer and editor for various publications in Philadelphia, Chicago and Metro Detroit.