Why You Should Rent Your First Home If You Buy A Second
Hanna Kielar4-Minute Read
October 15, 2021
Unless you’re a first-time home buyer, one question you’ll need to ask when shopping for homes is “What should I do with my current property?” Should you sell or rent your current house?
Renting your first home out can help you cover your own living expenses and break into the world of real estate investing. Selling, on the other hand, could potentially return a more immediate profit with fewer responsibilities down the road.
Should I Sell Or Rent My House?
When it comes to wealth building, it’s hard to beat owning real estate. And, of course, you have to start somewhere. That’s why one smart strategy toward building your real estate portfolio is to hold onto your first “starter” home once you buy your second home.
“Anyone who can afford to keep their home and rent it out while moving into another one should do so,” says Cedric Stewart of Entourage Residential Group in Rockville, Maryland. “In a healthy market, you are likely to build equity year-over-year, while having your mortgage covered by a renter.”
The hardest part is getting started, because most people aren’t accustomed to being landlords and dealing with tenants, Stewart notes. Here are some tips for successfully finding your own rental gold mine.
Hold On To The Right Property
Of course, when you bought your first home, you likely weren’t considering its future rental income potential (if you were, good for you!). And while almost any home can become a rental, price and amenities are the two main elements most likely to ensure rental success.
First, let’s examine the price point: You want to make sure that it will manage your cash flow well. In other words, in a perfect world the rent you’re able to charge will at least cover your mortgage, taxes, insurance and general maintenance costs.
While your local market matters, in general, a strong rental home will be in the $75,000 – $200,000 price range, says Mark Ferguson, a real estate broker and investor who runs the site InvestFourMore.com.
“With a more expensive home, the rent that someone is willing to pay often won’t keep up with the value, which means you may begin to lose money. And with a cheaper rental, you may run into maintenance and turnover issues,” he says.
To decide where to set the rent, look for comparable properties on Craigslist and other rental sites. Try to determine a cost per square foot in line with the market – ideally one that will cover your expenses.
And remember that you’ll need to cover your mortgage bills even if your property is vacant, so you should take care not to price yourself out of the market.
The second key to a successful rental is proximity to amenities, such as shopping, dining and public transportation, says Stewart. Homes near public schools, military installations and hospitals are particularly good rentals because they can be attractive for people who work in those facilities or prefer to be near them.
A location near a major corporate headquarters can offer the same benefits, since executives often choose to rent before buying in an unfamiliar region, he says, adding that this is a strategy he often sees in the D.C. area.
Make Sure The Property Is Improved – But Not Too Much
First, be aware that a rental must adhere to strict code requirements, so make sure that you have covered all the safety bases, says Stewart.
And then, focus on improvements that will bring the most bang for the buck by giving the rental an inviting look. Start by making sure your home has adequate curb appeal.
You don’t have to go all out on landscaping, but you should ensure the lawn is freshly mowed, and consider planting flowers and touching up the front door for a pop of color.
On the interior, choose a fresh paint color for the walls and new hardware on cabinets for an easy and inexpensive face-lift. But don’t go overboard, Stewart warns. “It’s tempting to make the kinds of upgrades you see on HGTV, but focus on the basics first.”
And of course, you should make sure the entire property shines from a professional cleaning, which can reap more ROI than many fancier finishes.
Know The Laws
Aside from bringing your property up to safety and building codes, there are a host of federal, state and local laws that involve a wide variety of issues from leases to tenant communication.
You may want to work with a real estate attorney to assist you in drawing up the lease and other documents, to ensure they protect you and are enforceable.
In addition, remember that you can be held liable for tenant or visitor injuries, so it’s important to have adequate insurance, such as landlord liability insurance and landlord property insurance.
Market Your Rental To Get The Right Tenant
Sometimes the old standbys are the best for finding tenants, says Stewart, who sees Craigslist and Facebook Marketplace still among the top sites potential renters flock to.
Another option is to list your home for rent with a real estate professional. “They will charge a fee for their services, which varies depending on the individual broker, market conditions, etc., but they can save you a lot of hassle in finding good tenants,” he says.
And what makes a good tenant? Make sure to meet them in person to get a general read, but then find out about their finances by looking into their employment history and credit score.
You also might want to consider conducting state and federal background checks – it’s a smart way to make sure the person isn’t hiding something. And talking to past landlords, if possible, is always beneficial.
Consider Hiring A Property Manager
If staying abreast of the many laws and codes, as well as finding and keeping tenants, sounds daunting to you, consider hiring a property manager or property management company – especially if the rental home isn’t local, says Ferguson. And even if it is, do you really want to drive across town at 2 a.m. to investigate a leaky pipe?
A property manager can help find tenants and make sure that rent is collected each month. They also deal with other assorted issues that come up. “Sometimes you have to be tough with tenants on late fees, code violations or other problems,” says Ferguson, who adds that a property manager is also helpful for handling routine checks to ensure the property is being kept up.
Of course, this service is another expense – approximately 8 to 12% of the monthly rental – but that might be a small price to pay for the peace of mind. When you’re choosing a manager, consider their fees, but also make sure to get client references to double-check they’ve been responsive in the past.
Although you shouldn’t minimize the work involved in managing a rental, it’s still a smart financial move, says Ferguson. “When you sell a home, that’s the extent of the money you will make on the property,” he says. “But if you hold it as a rental, you could continue to earn money every month, realize tax advantages and, ideally, see appreciation.”
When Does It Make More Sense To Sell?
New investment opportunities and passive income streams can help you achieve your financial goals, but in some cases, it may make more sense to sell your home versus keep it as a rental property. Here are a few situations where selling might be the better path for you:
You need the money from your home sale to buy your next home. This is why most people sell their homes instead of renting it out. If you want to afford your forever home, or even just your next home, renting your current home out may not be an option.
You’re in a seller’s market. In a seller’s market, the demand from home buyers surpasses the supply of homes on the market. That means you’ll have the “higher ground” and the opportunity to choose the best offer. If you sell outright instead of keeping the home as a rental, you could walk away with more than you would if the market shifts.
You’re not in a rent-friendly area. Even if you’re interested in converting your first home into an investment property, you may not have the opportunity if you can’t find any tenants. Before you decide one way or another, research your local rental market or reach out to a real estate professional.
Local restrictions prohibit renting out your home. Some restrictive communities and neighborhoods may prevent homeowners from converting their homes into short- or long-term rentals. In these situations, selling could be your only option.
You want to capitalize on the tax benefits. Selling and renting out a home both carry tax implications. If you’re planning on eventually selling the home, doing so while the home is your primary residence can mean you won’t have to pay capital gains tax. If you sell the property years after you moved out, you may be subject to pay capital gains tax on it. Plus, selling the home means you won’t be on the hook for property taxes.
The Bottom Line: Should I Sell My House Or Rent It Out?
From generating new income streams to building up your equity, you can enjoy several benefits as a home buyer that make renting out an existing home an exciting opportunity.
On the other hand, your unique circumstances could make selling the wiser decision. Before you sign your first tenant or stake up a “for sale” sign, make sure you consider your needs and choose whichever option best aligns with your life.
Ready to start shopping for your second home? Search houses for sale in your area.
Table of Contents
How To Increase Your Rental Income With 6 Cost-Effective Property Improvements
When you increase the value of your rental property, you can increase rental income. Read our six home upgrades that will put more money in your pocket.
How To Lease Your Home
Leasing your home can be a great way to continue building equity. But before you start drafting the home lease agreement, you need to decide if this is the best move for you.