SELLING VS. RENTING YOUR HOUSE OUT | PROS & CONS
Whatever your reason is for selling, one question that comes up often is if you should sell your house or lease it out to a renter. Both can be great, but there are a few things to consider before you make a decision.
Before we get into the pros and cons of selling vs. renting, let’s establish two things…
1). Can you qualify for your new house without selling your current one? This question needs to be answered before you think any further. If you don’t know the answer to this question, give our mortgage lender a call or fill out the pre-approval application here.
2). The second thing to consider is if you are landlord material. Can you handle petty maintenance calls or are you okay with hiring a management firm? Do you have a pool to maintain as well? What risks are you willing to take with a renter if you have a pool? If you are okay with the risks involved and you consider yourself landlord material then let’s move on!
THE PROS OF BEING A LANDLORD
Tax Write Offs
Being a landlord has its perks, and when it comes time for tax season you will see one of those perks! You can write off the loan interest, any depreciation, maintenance and improvement costs, and insurance.
At the time of this writing, if you have a pass through entity, such as an LLC or S Corp, you can deduct 20% of net rental income if all sources of income, after deductions, are less than $175,500 if you are single and $315,000 if you are married. Pretty cool!
Those numbers could always change in the future, so if you are reading this at a later time, you may research those numbers. Or you can contact us and we can let you know if they have changed or not.
I would imagine you’ve built up some equity since you’ve owned the house, because you were paying on the mortgage monthly and the values have increased over time. Well if you rent it out, those payments to the lender keep rolling in. Thus increasing your equity and decreasing your loan. Someone else is paying off your mortgage!
Something else to consider is that you are building wealth through the creation of equity and could use it to your advantage one day. If you wanted to cash out your equity and refinance or take out a HELOC (home equity line of credit), you have that option.
Cash Flow – Paying Other Bills
If building equity without paying a dime isn’t cool enough, then how about someone else paying your car note or other bills? If your property is cash flowing every month, meaning you have a good portion of the rent left after expenses are paid out, you can use those excess funds to pay some unrelated bills.
Below is an example of a cash flow…
- Rent payment coming in from renter: $2,000
- Pay mortgage payment: -$1,400
- Pay other expenses/put in savings for maintenance: -$200
- Excess funds for your pocket: $400
How great would it be if someone else is paying down your mortgage AND your $400/month car note? That could free up some of your income to use for travel, vacations, or other fun things that you normally couldn’t do before!
THE CONS OF BEING A LANDLORD
Lack Of Liquidity
Real estate is not a liquid asset. Should you need to cash out or sell the property for emergency purposes, it could take a few months before you see the money in your account. Real estate is obviously a physical asset, so it will take some time to sell if you ever needed to. Just something to keep in mind.
Rising Property Taxes
Property taxes can make or break a landlord. Here in Texas we don’t have state income tax, but we more than make up for it in the form of property taxes.
Some areas within Houston are different so it’s important to keep an eye on your tax rate and property values. With increased value, comes increased taxes. Stay ready!
Increasing Insurance Premiums
We live very close to the coast line, which is why our insurance is somewhat high down here. If your house in a coastal county, like Brazoria County or Galveston County, you will be required to carry windstorm insurance on the property.
Nonetheless, there’s nothing stopping your insurance carriers from raising the premiums after your policy expires. So be on the lookout and plan accordingly for that potential price increase.
This is a landlords worst nightmare. Someone who won’t pay their rent and refuses to vacate the property. Of course you can proceed with filing for eviction, but that takes some time. You can only hope that the tenant doesn’t destroy the house if you both get on bad terms.
If you find yourself in this position you should contact a real estate attorney immediately.
Decline In Values
One thing to keep an eye on is the property values in the neighborhood or if the area starts to become less desirable for whatever reason. If values are starting to decline, first figure out why. If it’s something that worries you, then maybe you should consider selling.
Upkeep & Maintenance Costs
If you hire a management company or do it yourself, you have upkeep and maintenance costs regardless. Think HVAC, plumbing, electrical, and roof issues. If you have a pool you still need to have it serviced, don’t ever place that responsibility on the tenant. Because even if they agree to it, how do you know that it’s being properly taken care of?
If the pros outweigh the cons, or the reward for you is greater than the risk, then leasing your house to a renter may be better than selling. If you consider yourself landlord material and can handle it, go for it! It can be a great investment and is one of our personal favorite ways to create wealth for our family.
Before you make your decision, let’s review the pros and cons of selling your house, rather than leasing it out. Hopefully at the end of this article you will know which direction you want to go!
THE PROS OF SELLING YOUR HOUSE
One of the biggest pros about selling your house is getting a nice little pay day from the equity in your home. If you sell for $300,000 and owe $200,000, you get cut a check for $100,000 (minus your selling costs of course).
Having additional cash can open up many opportunities for you. If you had an additional $100,000 in your account, what would you do with it? I’m sure every single person could quickly come up with a list of what they would do with that money.
If you want to know how much you can sell your hous for, head on over to our home valuation page. If you want to know how much it really costs to sell a house click here to read about your closing costs as a seller.
Using The Money For A Down Payment
Most people who sell their house to purchase another one, typically use a good chunk of the proceeds for a down payment on their next home. You could save it and only put down the minimum amount required by your lender, but that’s for you to decide!
Paying Off Existing Debt
Selling your house opens up a lot of other possibilities besides just purchasing a new one. You could pay off some debt that’s been lingering around for a while. Maybe you owe $30,000 on a car and you’re tired of making payments on it. Or maybe you have some existing medical bills or credit card debt you want gone. Either way, the possibilities of what you can do are endless.
Selling To Upsize
Sometimes clients want to upsize their house substantially and one of the ways they can qualify for the house they want is by making a larger down payment. Of course your lender would let you know how much you can qualify for. When you sell your house, you can use those proceeds as your down payment to buy a bigger one, if that’s your goal!
THE CONS OF SELLING YOUR HOUSE
It’s A Process
A major con when deciding to sell is that it doesn’t happen right away. It’s a process. Even if we found a buyer the first day on the market, it will take a minimum of 30 days to close typically. To make things more difficult, we may need to find you another house to purchase.
If you leased out the property, you could skip all the madness and just find a new home to purchase.
Dealing With Showings
When we sell your house the traditional way, you have to deal with showings. If you work from home, this could interrupt your work schedule. It can also be a hassle to keep the house show ready at all times, especially if you have kids or pets.
It can be challenging, but if you are considering selling, check out the video we made about showings and how to handle them.
Working With Picky Buyers & Negotiations
Buyers can be extremely picky sometimes. It’s just the nature of the business. When you sell, you will have to deal with the possibility of working with a picky buyer during their inspection period.
Everything is negotiable so keep that in mind. You don’t have to do everything a buyer asks or be a pushover, I just want you to be prepared if it happens.
Check out the video we did in our “What To Expect” series: What To Expect: When Receiving An Offer.
Non-Traditional Selling – Discounts
One last con, or pro depending on which way you look at it. If you don’t want to go through the traditional means of selling, but still want to sell your house, our team may be able to make you an offer to purchase it directly from you. Obviously, this would have to be at a discount, so you need to make sure that’s the route you want to go before making that decision.
We invest in real estate and if our clients want a quick cash sale and are willing to sell to us, then we try our best at creating a win-win for both parties!
Alright! I hope you found this video or article helpful and hopefully by now you have a better sense of direction on what you want to do. Does it make sense to lease your house to a renter? Or does it make better sense to sell the house and capitalize on the market? The choice is yours!
Call our team if you have any questions about what you should do o if you need some personal guidance! If you found this article helpful, share it with your friends and family on social media. You never know who else it may help out!