For the average homeowner, selling your old house is key to recouping your investment and raising money to buy a new one. Holding two mortgages is widely seen as a serious financial liability, to be avoided at all costs.
But what if, rather than selling your old home, you rent it out to tenants? In principle, this could allow you to cover mortgage costs and (ideally) make a tidy profit. But is it a smart financial play? Do the rewards for renting vs selling your home outweigh the risks?
This might surprise you, given how uncommon it is, but the answer is clear: Yes. In many cases, renting delivers clear financial, psychological, and logistical advantages over selling. Here are the top five key benefits of renting out your old home.
1. Renting lets you play the market
Financial gurus often recommend homeownership as a key to financial stability. That’s because the real estate market tends to go up over time, making your home a good investment. But this is just a generalization. When it comes to your individual home, there are all kinds of variables and fluctuations that can make it difficult or impossible to sell at a good price.
Federal interest rates can change, making it hard for prospective buyers to get a loan and buy your house. A new industrial development could make your location less attractive. Road and traffic changes could tank property values in your neighborhood. If you’re dead-set on selling your home, these shifts are serious financial risks. Ultimately, many homeowners find themselves between a rock and a hard place – unable to recoup a fair price for their house, but desperate to get out of the old mortgage.
In situations like this, renting can be an ideal solution. After all, finding tenants who are willing and able to move into your house is a completely different ballgame than finding that perfect buyer. The rental income can cover your mortgage costs while you make upgrades to boost the property’s value, wait for local property values to rise, or even if you just need to stall for a few years until the right buyer comes along.
Bottom line: Renting your house allows you to ride out downturns in the market and sell whenever you can maximize profit.
2. Renting is a baby step toward property investment
If you’ve spent any time in savings and wealth-building forums like Bigger Pockets, you’ve surely come across the phrase passive income. Passive income is simply money you make for doing nothing – the paycheck shows up, even when you’re entirely “passive.” Obviously, that’s tough to beat as a financial strategy. Why go to work if you can make money doing nothing?
That’s what makes property investment such a big draw for the average landlord. The more real estate you own, the more rental income you have rolling in every month. But as a lifestyle and investment strategy, it can be hard to break into. You might not have the time, energy, or risk tolerance to go out and buy a second home to rent out while holding down a fulltime job and paying the mortgage on your primary residence.
That’s why moving homes is actually a perfect opportunity to experiment. You don’t need the initiative to go out house-hunting and searching for a great investment. Just size up your local rental market, and (assuming the numbers work), try leasing the home. If it doesn’t work, you’re no worse off than when you started. You can always sell your home later. But if it does work, then you’ve just gotten a foothold in property investment and passive income – a thrilling first step for the typical real estate investor.
3. Renting solves ‘commitment issues’
The finality of homeownership is a little bit terrifying. When it comes to major commitments, taking on a 30-year mortgage is right up there with marriage and kids as a ‘major life event.’ And selling your home isn’t much better. Everything you invest in a house (money, time, emotional energy, etc.) vanishes the moment you sign that paperwork.
That’s why renting out your house is a perfect backup plan. Rather than giving up your primary residence completely, you can simply let your tenants cover the mortgage while you feel out the new living situation. If it doesn’t work out, you haven’t made an irreversible commitment. You can always come back home when the lease is up.
Moving in with a partner or relocating for a new job becomes a lot less scary when you have an ‘undo’ button.
4. Renting can snag you tax benefits
Property taxes are complex, but there are plenty of scenarios in which renting out your home will ease your tax burden. For example:
When you sell your house, you might be subject to a ‘Capital Gains’ tax – a whopping 20% of the income you make. Now, there are certain exclusions in place designed to protect homeowners. For instance, if you’ve lived in the home for at least two of the past five years, it’s considered your primary residence, which exempts you from the tax. This can shelter up to $250,000 if you’re single, and up to $500,000 if you’re married. But if you don’t qualify for these exclusions, renting out the home can protect you from this steep tax hit.
Landlords also have an advantage if the house needs to be sold at a loss. For the average homeowner, that scenario is just tough luck. But if you’re renting the house out, the IRS considers it a lost investment in your rental business. Selling the house therefore counts as a business loss, which you can use to offset other capital gains in your annual income.
Finally, the IRS allows very generous tax deductions for property investors. As a landlord or property owner, you can deduct almost everything required for the upkeep and maintenance of your real estate, and the operation of your rental business. That means everything from routine repairs and service calls to interest on your mortgage, advertising costs, travel to and from the property, and even depreciation on the building. Of course, you also have to pay income tax on your rental income, but these deductions and tax write-offs can make it very easy to come out ahead.
In full disclosure, we’re not your accountants and this isn’t tax advice – talk to a professional before you make any decisions!
5. Rental property management is outsourceable
Remember our point above about passive income? Hang on, you might be thinking. How is real estate investment a source of passive income if you have to manage the property yourself?
It’s a great question. Many landlords work night and day to manage their properties. There’s routine maintenance like leaf and litter removal, roof cleaning, and pool maintenance. There’s emergency repair work like leaky pipe fixes and drywall patches. There are property visits and walkthroughs associated with move-ins and move-outs. There’s advertising and marketing the property, staying on top of taxes and legal codes, handling documentation and paperwork… The list goes on.
But here’s the good news: With a top-tier property management service like Great Jones, you can outsource every single one of these responsibilities. As your property manager, we’ll handle everything from rent collection and tenant screening and placement to advertising and property maintenance. That means you can stay in the loop on your property and above the fray of day-to-day responsibilities – all of this comes with a clear and fair pricing plan.
So, if you’re deciding whether to sell or rent, just remember: with the right partner, renting out your house can be a hassle-free source of truly passive income. Read more about the services we offer.