“Should I sell my house or rent it out?”
Your answer to this question could change your life. Why not take the next ten minutes to answer this question once and for all: Should I sell my house or rent it out?
In this article, we’ll take a look at whether land lording is the right path for you. We’ll also discuss some excellent avenues to the kind of passive income prospective ‘landlords’ or property owners always want, but can never seem to attain. We promise to teach you how you can get the income streams you want WITHOUT the headaches and hassles of actually being a landlord.
Set Your Selling Goals
Your first step? Figure out WHY you want to sell or rent in the first place. This is a big choice that will absolutely impact your income stream over the coming years, and it’s critical to understand the reason you’re making this commitment in the first place.
Set Your Selling Goals: I Want to Sell My House, Forget the Rental
If you are leaning toward the sale of your home, consider why you want to sell. Is it because you don’t plan to live there anymore, or have already moved? Do you want to get your home equity out of your home and into your pocket? Or maybe you are “just over it”.
Whatever the reason, make sure you consider your motivations: what do you want to achieve by selling? Once you have those ideas in mind, or an amount you want to attain, you can compare this option to that of renting out your home on a tenant-by-tenant basis
Set Your Selling Goals: I Want to Rent Out My House, Forget the Sale
Are you interested in the idea of long-term passive income? Did an HGTV show spark your interest in home flipping to secure great homes for new buyers? Maybe real estate been an interest of yours in the past, or a new situation has come up with the property where you live.
If you don’t mind moving onto another home and entrusting your first home to a tenant, it is possible that you could avoid paying the extra 10% of your home’s value that comes with traditional property sales if you rent out your home. (The cost of selling a property is higher than most people think). Consider your financial goals and whether you can sustain two properties at once while managing the average duties of a landlord. If you think you can handle it, remember to compare these advantages to that of selling your home.
The [SECRET] Third Option: Seller Financing
Still reading? We’re rewarding the committed with a secret third option for those who want the best of both worlds! We mean the average home seller who wants to put passive cash in their pocket and sell their home, all in one fell swoop.
So what’s this secret third option? Creative seller financing.
More often than not, if you are considering renting your property, you might be thinking about using real estate to create passive cash flow. It probably also means you don’t need all your equity immediately – otherwise you’d be selling the property. This puts you in a great position to consider seller financing or a lease purchase which can give you secured passive income while none of the headaches of being a landlord. It might be a totally new idea to you, but it’s actually very simple. Find out how to do that HERE.
Still curious about selling your home vs. renting it out? Answer these 7 questions to better answer the following question: ‘Should I sell my home or rent it out?’
Renting Out Your Home: 7 Questions to Ask Yourself
1. Are you the landlord type?
The first and most important question to ask yourself is “can I be a good landlord?”. While you’ll often hear stories about nightmare tenants, the truth is a vast majority are good people and good renters. If you don’t feel that you can be a good landlord by providing a clean, functional rental property that is well taken care of, then being a landlord is not a good fit for you.
You need to be prepared to handle tough situations and keep your cool if things happen to go the wrong way. Would having to evict someone create significant stress in your life that would offset the cash flows you were getting?
Do you plan to acquire more rentals over time? Will you treat it like a business with proper books and records, file taxes? You’ll need to keep the proper paperwork organized and ensure all the bills are paid on time.
If not, you may need to use a property manager which can typically cost 8-10% of rents for a residential property. That amount can usually eat up a lot of the cash flow and $100-200 per month may just not be worth the hassle.
2. How will this rental property fit into your lifestyle?
Assuming you are comfortable with the local laws and your personality is the type that would make a good landlord, it’s time to decide if it fits into your lifestyle
Will you be living locally where you can check on the property? Or will you be an “absentee” landlord?
- Showings: Do you plan to show the property to prospective tenants yourself? If not, who will? What will they be paid?
- Screening: What is the screening process for prospective tenants? One bad tenant can wipe out several years of positive cash flow, so tenant selection is critically important.
- Communication: Are you willing and able to have tenants get in touch with you when there are problems at the property? What method of contact will you use? What will your tenants be instructed to do in case of emergency?
3. What are the local laws and property restrictions on renting your property?
Some local jurisdictions have laws that tend to favor tenants while others tend to favor landlords. In tenant-friendly areas, it can take substantially longer to evict a non-paying tenant. Your city and state will typically have plenty of information on the laws that apply in your area. Start with this search and refine it for your area
Most mid-size cities will have organizations dedicated to assisting tenants in disputes with landlords. Many landlords avoid these organizations like the plague, but the fact is they’d be happy to send you information on the rules that would apply, especially if it means one less bad landlord to deal with. You can also get in touch with your local Bar Association to find a lawyer well-versed in your local laws.
Do you have a Homeowners Association (HOA) that can restrict the number of rental units? With Airbnb and VRBO conversions being popular, many condo buildings have limited the number of units that can be used as rental housing. Check with yours to find out if yours is at the maximum already.
4. What are the expenses?
It’s now time to make a list of your expenses. Taxes; insurance; homeowners association costs; landscaping; routine maintenance and repairs; and utilities including water, sewer, and garbage all need to be accounted for. Your insurance policy will need to be updated to properly cover you as a landlord, and you may want to purchase an additional umbrella policy to protect your other assets from lawsuits.
If you have a mortgage, include that payment information in your calculations (don’t double-count taxes and insurance if your mortgage payment includes them). Pay attention to your loan terms: do you have a fully-amortizing mortgage that pays down to $0 over time, or do you have one with a balloon payment due?
Is the interest rate fixed or adjustable? Plan for higher non-owner occupied interest rates if you need to refinance the loan while the property is a rental. Most homeowners are on 30-year fully amortizing mortgages which keeps this expense pretty simple for most.
Keep in mind that taxes and insurance go up over time – sometimes faster than rents. You will need to make sure that rents will likely also increase so that there’s enough cash flow to cover increases in these expenses. Many new landlords will lease to great tenants and feel too guilty to increase the rents enough to cover the increases in expenses. Set expectations correctly up front!
4.1 What reserves?
The last thing you want to do is spend what you *think* is net cash flow but only to be surprised by a major replacement of HVAC or roof that makes you put $5,000 on a high-interest credit card. Roof replacements can easily cost over $10,000. You need to allocate money every month to have cash ready for these inevitable expenses.
Do you have the discipline for that? Many people have trouble seeing funds sitting in a savings account and impulsively spend it.
The first step to calculating the reserves you need is to assess the “useful life” of the major components of the house. HVAC, roof and appliances tend to be the culprits.
4.2 What are the rents?
Time to do some secret shopping and research the rents in your area. Try to find listings that are slightly better than yours and slightly worse to create a range of rents. The more data points you can find, the more confident you can be in your range of possibilities.
Make sure to adjust the rental amount if certain expenses are paid by the tenant in one property and not another. Some properties may include cable and internet or utilities while others tend not to. It’s a good idea to have the tenant pay any variable expenses that depend on their use.
Keep in mind that not every rental listing is real. There are scams galore on the internet, so beware of any “too good to be true” listings.
Like a good secret shopper, you want to take the extra step besides looking online. Call on some rental ads and ask about the property, lease terms and security deposit information. If you’re impressed by a particular manager, add them to a list to consider if you decide to use a property manager.
5. What is the cash flow?
Take the monthly rent you estimated earlier and subtract all of the expenses and reserves. What is left over? Is that enough to make your new landlording job worthwhile?
6. Should you make any updates or major repairs?
Based on your analysis, you’ll learn how your property fits in with the rest of the rental stock in the area. You may notice that your property is a little dated compared to properties with higher rents.
It can also be tempting to make your rental the best quality in the market if you lived in the home yourself. There’s a certain pride that comes with homeownership that people tend to carry over to rental conversions. If you already have a mental list of renovations, be aware that it’s dangerous for your wallet!
Most first-time landlords tend to underestimate the cost to improve the property and overestimate the rents people are willing to pay for it. Your home will be a rental home, not a lavish hotel (well, maybe if you Airbnb it).
A good rule of thumb is that the cost of your upgrade project should be paid back by your rental income in about 3 years. If the project you are updating will cost $15,000, you’ll want over $400 per month in higher rents. You can adjust this rule to fit your own risk tolerance and how long you plan to keep it as a rental. Paying for upgrades is an investment and you should be getting a return on it.
7. What’s the Worst Case Scenario?
Your imagination has probably already been down this path, but we’re going there anyway: what is your worst case scenario?
You get a “professional tenant” who moves in and refuses to leave while giving you $0 in rents. What will you do? Fall behind on mortgage payments? How would the stress affect your life? Would your work performance suffer? Even if the likelihood of this is very small, you need to be prepared. The last thing you need is your “passive income property” to turn into a foreclosure and a unsalvageable credit history.
A Covid world has similarly extended timelines for evictions on non-paying tenants. Some lenders are giving relief in that case, but it’s unlikely to be a long-term option.
Vacation Rentals vs Regular Rentals
Renting your property as a vacation rental on websites Airbnb and VRBO can be a very lucrative way to rent your property. It’s more hands-on compared to a normal rental but can be well worth the effort, particularly if it’s in an ideal vacation area.
Rents and Fees
You can check the properties in your area that are already on these websites and see what their typical daily rates are. How many unrented days do you see on the calendar? Managers
In most areas there will be seasons where vacation demand is lower. Will the premium rates in the peak seasons offset the off-peak? It’s important to calculate your annual cash flows with this in mind. You’ll need extra cash to pay the bills if your property isn’t booked as often.
More party-oriented renters = more wear & tear
Renting to vacationers can mean more people looking for a party. You’re usually well protected by insurance and security deposits for bigger damages, but it doesn’t account for the higher level of general wear and tear you’ll get. Vacationers will be around the home more often than a normal tenant who spends their week at work, so things will wear out a little faster.
You can use it, too
Unlike a typical rental, you can always block out dates for your own use. This is typically a “plus” for people who move out of an area and want a “cheap” place to stay when they come back to visit. Beware that if you do use it too many days in the year, the income tax rules will complicate your tax return.
Vacation rental summary
If you think owning a vacation rental would be more fun and are more of the risk-taking type, this might be the way to go for you.
So, what’s your final answer? “Should I sell my house or rent it out?”
As you’ve seen, the decision to turn a property into a rental is not as easy as it seems at first. There are a lot of considerations not only about the property itself but some introspection of yourself.
Is it a ‘Yes’?
If you’ve gotten through all these questions and still feel that turning your home into a rental property is right for you, congratulations! Real estate is a great industry to be in. It’s more work than the HGTV shows will lead you to believe, so be ready to put in some effort. But if you do it right and take care of your tenants, you’ll be on your way to long term wealth building in real estate.
“No” is no big deal
If your gut says “nah, this isn’t for me”, that’s okay! Landlording is not the right type of job for most people, and that’s not a character flaw or anything negative about you personally. Some people are cut out to be artists and musicians, while others are meant to be accountants and tax professionals. There’s a wide spectrum of “right fits” for people.
The Best of Both Worlds?
If you are still interested in making passive income out of your home, Full Price Offers is buying property all over the country. We take over all management and responsibility for the property and pay sellers equity in the form of monthly passive income. You get many of the benefits of a rental property without the work – by using seller financing to ‘be the bank’ instead of ‘be the maintenance person’. We pay all the selling costs so you would avoid paying 10% of the home price that sellers will typically pay!
Just want an offer on your home? Don’t want to think, ‘should I sell my house or rent it out?’ Get an offer in just 24H with our EquityShield guarantee HERE.