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April 12, 2021

Is it better to sell a house or rent it out?

Homeowners move to another property for various reasons. They may be first time owners who need more space for their growing family. Urban professionals might move to quieter neighbourhoods now that work from home is an option. Older couples might want to downsize and move to a smaller home now that their children are out of the house.

Whatever the reason, one question that comes up time and again is should they sell their current home or rent it out.

There is no right or wrong answer to this question. Essentially, it all comes down to personal financial circumstances, your investment appetite, and your willingness to manage tenants.

Let’s unpack these factors and see if you should sell your house or rent it out.

 

Affordability and cashflow

The first and probably most crucial factor in deciding if you should sell your house or rent is affordability. Even though you will be receiving rental income for your home, there are other financial elements to consider.

 

1 – Do you need to sell your house to purchase your next one?

Often, homeowners need to sell their current home to obtain the deposit they need for their new mortgage. If you can finance your new home without selling your current house, then renting is an option.

 

2 – Do you qualify for a second mortgage?

Purchasing a new home will most likely require you to obtain a mortgage from a financial institution. If your debt-to-income ratio qualifies you for a second mortgage, then renting instead of selling your current home is a financially viable alternative. However, investment property mortgages offer various options that significantly impact what you pay, your taxation gearing, and other related financial factors. If you qualify for a second mortgage, you need to consider these various options.

 

3 – Will the potential rental income cover the property’s expenses?

If you rent your home, there are property-related expenses that you need to pay. These include the mortgage, any rates and taxes, ongoing repairs, and general maintenance. In some instances, market conditions may force you to agree to a rental that does not cover the property’s expenses. If you cannot afford to absorb these additional costs into your monthly budget, then selling your home may be your only option.

 

4 – Is it the wrong time to sell your home?

For many people, their home is also their largest financial asset. If the property market has significantly depreciated since you purchased your house, selling it may result in a net asset loss. In this scenario, renting may be a better alternative.

 

5 – Will I get a decent return on investment?

In some circumstances, selling your home may offer an insufficient return on investment. This scenario is particularly relevant if you have spent time, effort, and financial resources renovating your property. If your home’s potential selling price does not meet your return on investment expectations, then renting may be a better financial option for you.

As with every other life choice, the answer to whether you should sell or rent comes down to affordability. If you can purchase your new home without needing to sell your current house, qualify for a second mortgage, and the potential rental income covers the property’s expenses, then renting is a viable option. However, it would help if you also considered your net financial state after your home’s potential sale. In some instances, renting is a better option. If you will make a net loss on the sale or not receive the return on investment you need, then holding onto your home may be the better alternative.

 

Taxation

Another factor that can influence your decision to sell your house or rent it out is tax. As you will be receiving an additional taxable income, your tax liability will increase. That means you will be paying more tax each year. Again, this element raises the question of affordability. If you have the budget to pay this additional expense, then renting is an option.

However, the opposite is also a factor that requires careful consideration. If you make a net loss on your rental property, your taxable income decreases, resulting in you paying less tax. Depending on your circumstances, paying less tax and holding onto your property may be the best option for you.

 

Property market trends

Your home’s location can also play a part in determining if you should sell or rent it out. Certain areas are better for renting than others. You also need to consider the state of your home. Can you rent it from day one, or do you need to attend to some repairs or renovations first? If you need to renovate, how much will it cost, and can you afford it?

If the market is experiencing a low vacancy rate, renting your home will be much easier. However, if there is a significant amount of rental stock available, you will need help marketing your property effectively. The other factor to consider is what you will do if your rental property stands empty for a few months? Owning an investment property requires you to keep an eye on market trends. As with any investment, it comes with a certain level of risk. It would be best if you considered all these factors before deciding to sell or rent.

 

Sentimentality

Any financial decision needs you to think with your head and not your heart. However, one cannot deny that a person’s home will always have some form of sentimental value. We make memories where we live, and some of us form an emotional attachment. If you have also spent a great deal of time renovating and fixing your home, the emotional attachment could be even stronger. If you would find it difficult seeing another family live in your home while you rent it, then selling it and letting go may be a better option for you.

 

Management time and effort

Renting your property will take some of your time and effort. Dealing with tenants is not for everyone, especially when there are challenges. The good news is that you can get a property manager to deal with tenants on your behalf. In that way, you get the benefits of being a property owner with much less time and effort needed on your part.

 

So, is it better to sell a house or rent it out?

When you need to decide if it is better to sell your house or rent it out, there are several factors to consider. You need to look at your financial situation, understand the current market, and, if possible, leave emotion out of the decision.

Everyone has unique circumstances and different aspirations. Before you make any decisions, talk to an expert and explore all your options. If you want to speak with someone who can help decide what the next steps should be, we’re HERE to help.

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