Hanna Kielar4-Minute Read
UPDATED: May 23, 2023
Unless you’re a first-time home buyer, one question you’ll need to ask when shopping for a home is, “What should I do with my current property?” In other words, should you sell or rent your house?
Renting your first home out can help you cover your 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.
Both options have their benefits, but you’ll need to figure out if selling or renting out your home is the best fit for your individual needs. Let’s take a look at some factors you’d be wise to consider before taking the proverbial plunge.
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 onto your first “starter” home once you buy your second home.
The hardest part is getting started, because most people aren’t accustomed to being landlords and dealing with tenants.
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 finding your rental gold mine.
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 rental price point: You want to make sure that it will manage your cash flow well. More specifically, in a perfect world, the rent you charge will at least cover your mortgage payment, taxes, insurance and general maintenance costs.
To decide where to set the price of rent for your property, look for comparable properties on Craigslist and other rental sites. Try to determine a cost per square foot that’s in line with the market but that will allow you to cover your expenses.
And remember: You’ll need to cover your mortgage payment even if your property is vacant, so you should work hard 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. 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. Pay attention to the types of amenities around your current home. If they’re in demand, your property will likely be a great rental.
First, be aware that a rental must adhere to strict code requirements, so make sure you’ve covered all the safety bases. This means the plumbing, electrical and structural components of the property should be in good working order before you put the house on the market.
Then, give the rental an inviting look by adding improvements that will bring the biggest bang for your buck. 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. Also 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. Instead, focus on the basics.
And, of course, you should make sure the entire property shines from a professional cleaning, which can reap more return on investment than many fancier finishes.
Aside from bringing your property up to safety and building codes, you’ll need to follow a host of federal, state and local laws if you’re going to be a successful landlord. These laws cover a wide variety of issues, from leases to tenant communication and beyond.
You may want to work with a real estate attorney who can assist you in drawing up the lease and other documents. This will help ensure the documents 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. At a minimum, you’ll want landlord liability insurance and landlord property insurance. A standard homeowners insurance policy won’t cover you if you’re renting the home out.
Sometimes the old standbys are the best for finding tenants. Websites like Craigslist and Facebook Marketplace are still among the top places that renters go to find prospective properties.
Another option is to list your home for rent with a real estate professional. Keep in mind that real estate agents may charge fees for their services, and these fees can eat into your profits.
And what makes a good tenant? Make sure to meet any potential tenant in person to get a general read on them, but then find out about their finances by examining their employment history and credit score.
You also might want to consider conducting state and federal background checks. Background checks are a smart way to make sure the person isn’t hiding something like an extensive criminal record or a history of evictions. If you can, talk with their former landlords, who can give you insight into how they behaved as a tenant. This will help you choose a responsible renter to occupy your home.
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. 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 and can handle routine checks to ensure the property is being properly maintained.
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 extra peace of mind. When you’re choosing a manager, consider their fees but also make sure to get client references to double-check that this person has done good work in the past.
New investment opportunities and passive income streams can help you achieve your financial goals, but in some cases, it will make more sense to sell your home than keep it as a rental property. Here are a few situations where selling might be the better path for you.
For many homeowners, buying a new home without the proceeds from selling their current property isn’t possible. This is why most people sell their home instead of renting it out. If you want to afford your forever home – or even just your next home – but can’t do it without selling your current property, put it up for sale.
In a seller’s market, the number of buyers exceeds the number of homes for sale. That means you’ll have the “higher ground” and the opportunity to choose the best offer. In market conditions like these, you could walk away with more than you would if you chose to rent your home out.
Even if you’re interested in converting your first home into an investment property, you won’t have the opportunity if you can’t find tenants. Before deciding one way or another, research your local rental market or reach out to a real estate professional. If other homeowners are struggling to rent out their properties, listing yours for sale will be a better move.
Some homeowners associations (HOAs), 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. Check with your HOA and review any neighborhood covenants before making your decision.
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 moving out, you may be subject to paying capital gains tax on it. Plus, selling the home means you won’t be on the hook for property taxes.
From generating new income streams to building up your equity, you can enjoy several benefits as a homeowner that make renting out your current home an exciting opportunity.
On the other hand, your circumstances could make selling the wiser decision. Before you sign your first tenant or put a “for sale” sign in the yard, make sure you consider your needs and choose whichever option best aligns with your financial situation.
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