Should you sell or rent your first home if you buy a second?

Relocating for work, growing your family or finally finding your dream home … No matter what’s causing you to uproot, you may be asking yourself, “What should I do with my home?”

Depending on your financial situation and the housing market, you may be leaning toward selling or renting out your house.

Both options have their benefits, but you’ll need to figure out whether selling or renting out your home best fits your needs. Let’s take a look at some factors to consider before you list your home or become its landlord.

Should you sell your house or rent it out?

With wealth building, it’s hard to beat owning real estate. And, of course, you have to start somewhere. That’s why one smart strategy for building your real estate portfolio is holding on to your first home or “starter” home once you buy your second home.

Renting your first home can help you break into real estate investing and potentially make enough to cover your living expenses. The hardest part is starting a rental because most people aren’t used to being landlords or dealing with tenants.

On the other hand, selling can potentially return a bigger, more immediate profit that releases you from the responsibilities of your first home. Once you hand over your keys to the new owners at closing, you no longer have to worry about the property or its issues.

Current market conditions will play a role in helping you decide whether renting versus selling your house makes the most sense. But you should also take your finances, lifestyle and long-term goals into account before deciding whether putting your property on the market or becoming a landlord is right for you.

Signs you should sell your house

New investment opportunities and passive income streams can help you achieve financial goals, but in some cases, it may make more sense to sell your home rather than keep it as a rental property.

Here are a few situations where selling may be the most financially savvy path:

You need the money to buy your next home

Homeowners usually find it challenging to buy a new home without using the proceeds from selling their current property. Most homeowners sell their homes rather than rent them out to help purchase a new home. If you want to buy your forever home – or the next home on your journey to your forever home – but can’t afford it without selling your current property, you can list your home for sale.

You’re in a seller’s market

In a seller’s market, there are more buyers than homes available for sale. You’ll have a lot of leverage over buyers, and in a hyper-competitive market, you can practically wait for the best purchase offer to appear as buyers try to outbid each other. You may walk away with more money in a hot seller’s market than you would if you kept the home and rented it out.

You’re in an undesirable area

Even if you’re interested in converting your first home into an investment property, you may find it hard to find tenants. Before making any decisions, research your local rental market or contact a real estate professional. If other homeowners are struggling to rent out their properties, it may be a sign that selling your home will be a better move.

You’re prohibited from renting the property

Some homeowners associations (HOAs), communities and neighborhoods prohibit homeowners from converting their homes into short-term or long-term rentals. In these situations, selling may be your only option. Check with your HOA and review any community rules and regulations before you decide.

You want to capitalize on the tax benefits

Selling or renting out a home has tax implications. For instance, you’re no longer on the hook for property taxes when you sell a home. If you plan on selling your primary residence, you may not need to pay capital gains tax. If you moved out years ago and have decided to sell the property now, you may be subject to capital gains tax.

How to rent your home the right way

Whether it’s best to sell or rent your house largely depends on how successful and lucrative renting the property can be.

While there are no guarantees you’ll turn your home into a profitable rental, you can take a few steps to increase your chances of success.

Here are some tips for successfully creating a rental gold mine:

1. Make sure renting is the best option

When you bought your first home, you likely weren’t considering its rental income potential. Almost any home can be turned into a rental, but the rent price and surrounding amenities are the two main elements most likely to ensure rental success.

Resist the urge to charge the highest rent you think you can get. To increase your chances of attracting potential tenants, try to match the market rate. You can also work with an experienced real estate professional who can provide realistic estimates based on your home’s condition, location and amenities.

2. Prepare the property

A rental must follow strict code requirements, so make sure you’ve covered all the safety bases. The property’s plumbing, electrical and structural components should be in good working order before you put the house on the rental market.

Next, make sure your home has curb appeal. Give the rental an inviting look by adding improvements that bring the biggest bang for your buck.

For an easy and inexpensive face-lift inside the home, apply a fresh coat of paint to the walls and install new hardware on cabinets. You don’t need to go overboard with the upgrades – just focus on the basics.

And, of course, make sure the entire property shines from a professional cleaning, which can reap more return on investment than many fancier finishes.

3. Know the laws

Aside from bringing your property up to safety and building codes, there are a host of federal, state and local laws you’ll need to follow and stay up-to-date on to be a successful landlord. These laws cover topics such as:

• Property access
• Security deposits
• The notice period before ending a lease
• Safety standards
• Rent increase caps

In addition to local and state laws, landlords must observe federal laws, such as the Fair Housing Act, which protects people from being discriminated against when they’re renting or buying a home, applying for a mortgage, seeking housing assistance or involved in other public or private housing-related activities.

You may want to work with a real estate attorney who can assist you in drawing up a lease agreement and reviewing other documents, such as your insurance policy.

Although landlord insurance isn’t required by law, without adequate insurance, you can be liable for tenant or guest injuries on the property. A standard homeowners insurance policy won’t cover you if you’re renting your home out.

4. Market your rental to get the right tenant

Once your house is move-in ready, put it on the market – and publicize the listing everywhere. To get more eyes on your property, advertise the listing on different online marketplaces, rental listing sites and social media. Include the following in your listing:

• The monthly rent
• High-quality pictures of the property
• The number of rooms in the house and its square footage
• A list of the area’s amenities

5. Start screening tenants

Schedule tours with potential tenants and start the interview process. As you get to know each applicant, you'll get a better sense of whether they’re the right tenant. Ask about their renting history, how many people they'll live with and whether they have pets. Once you've selected a potential candidate, you should run a few background checks:

• Reference checks: What do past landlords or their colleagues say about them?'
• Credit report: Do they have a consistent or spotty payment history?
• Paycheck: Do they have a steady job or enough income to afford the monthly rent?
• Criminal record: Have they ever been convicted of a crime?
• Eviction history: Do they have any past evictions?

Generating these reports will take time, but it’s worthwhile because they can help you make an informed decision about the person who may live in your home.

5. Consider hiring a property manager

With everything in place, it’s time to focus on managing your investment.

If staying updated on laws and codes and managing tenant vacancies and turnover sounds exhausting, consider hiring a property manager or property management company – especially if the rental home isn’t local.

A property manager can help recruit tenants and make sure rent is collected each month. They deal with an assortment of property-related issues, including property maintenance.

Rent vs. sell: Pros and cons

While owning a rental house may earn you thousands in passive income, it requires a significant upfront investment.

Let’s review some pros and cons of renting versus selling your house:

The bottom line: Carefully consider your situation when deciding to sell or rent your house

From generating new income streams to building equity, renting out your current home is an exciting opportunity that can launch you into the world of investing or diversify your investment portfolio. But the economy, the real estate market or your new house ambitions may make selling the wiser decision.

Before you sign on your first tenant or put a “for sale” sign in your front yard, consider your needs and choose the option that best aligns with your financial situation.

Ready to list your home and start the search for your new dream home? Get connected with an experienced agent today!