Whatever the reasons for wanting to rent out a home vs. selling it, not everyone can afford it. Keeping a second house only works when the proceeds of its sale aren’t needed as a downpayment for the next house. And yes, tenants will pay rent, but there are significant expenses too. Add this to the costs of owning a primary residence, and it just isn’t possible for a lot of people.
But renting a home can be a lucrative endeavor. When a landlord manages to keep the property occupied, and finds good tenants who take care of the home and pay their rent on time, they can make money. Prospective landlords need to see what comparable properties in the area are renting for and calculate their expected costs. This can determine whether they should sell it or rent it.
These costs associated with rental properties should be considered when deciding between selling a home vs. renting it out:
Mortgage. Perhaps a homeowner inherits his or her parents’ house that was paid off long ago, but more often, the second home will still have a mortgage. Renting out the home makes the owner responsible for the principal and interest on two home loans. Consider also that missing or late payments could have a significant impact on the homeowner’s credit rating.
Insurance. Like any home, the property needs to be insured. For a rental property, a landlord policy is also a must. It protects the owner in regards to the property itself (for example fire or other damage) as well as liability coverage for medical expenses or legal fees if a tenant is hurt.
Repairs and Maintenance. A rental property owner is responsible for routine upkeep on the home as well as fixing things that break. It’s customary to clean carpets and paint every time there is a change in tenants. And renters may complain about things that an owner may live with, like a loose doorknob or window that won’t open. There could also be costly repairs if an owner decides to sell the property instead. The cost of those one-time fixes before putting a house on the market should be weighed with the ongoing needs of a tenant when choosing between selling and renting.
Management Fees. Owning a rental property is a business, and there are expenses associated with managing that business. Advertising the property, credit screening and doing background checks on prospective tenants, legal fees for drawing up leases, and accounting services, can all add up. Property management companies can take care of these tasks at an additional cost, usually about 10% of rental income.
Taxes. Property taxes for both a primary and rental residence should be considered. In addition, landlords are taxed on the income from rental properties just like on any other income. They can, however, write off their expenses and depreciation. When selling a home, the seller is allowed up to $250,000 in capital gains for their primary residence ($500,000 for a married couple filing jointly.) For a secondary home, they are on the hook for capital gains unless they lived in the house for at least two of the previous five years. This becomes important if a homeowner chooses to rent a home for a while and sell it later. If the timing is wrong, it could cost a lot in taxes.