Should You Sell Your House or Rent It Out?

Should You Sell Your House or Rent It Out?

7 min read
Brandon Turner

Brandon Turner is an active real estate investor, entrepreneur, writer, and podcaster. He is a nationally recognized leader in the real estate education space and has taught millions of people how to find, finance, and manage real estate investments.

Experience
Brandon began buying rental properties and flipping houses at the age of 21. He started with a single family home, where he rented out the bedrooms, but quickly moved on to a duplex, where he lived in half and rented out the other half.

From there, Brandon began buying both single family and multifamily rental properties, as well as fix and flipping single family homes in Washington state. Later, he expanded to larger apartments and mobile home parks across the country.

Today, Brandon is the managing member at Open Door Capital, where he raises money to purchase and turn around large mobile home parks and apartment complexes. He owns nearly 300 units across four states.

In addition to real estate investing experience, Brandon is also a best-selling author, having published four full-length non-fiction books, two e-books, and two personal development daily success journals. He has sold more than 400,000 books worldwide. His top-selling title, The Book on Rental Property Investing, is consistently ranked in the top 50 of all business books in the world on Amazon.com, having also garnered nearly 700 five-star reviews on the Amazon platform.

In addition to books, Brandon also publishes regular audio and video content that reaches millions each year. His videos on YouTube have been watched cumulatively more than 10,000,000 times, and the podcast he hosts weekly, the BiggerPockets Podcast, is the top-ranked real estate podcast in the world, with more than 75,000,000 downloads over 350 unique episodes. The show also has over 10,000 five-star reviews in iTunes and is consistently in the top 10 of all business podcasts on iTunes.

A life-long adventurer, Brandon (along with Heather and daughter Rosie and son Wilder) spends his time surfing, snorkeling, hiking, and swimming in the ocean near his home in Maui, Hawaii.

Press
Brandon’s writing has been featured on Forbes.com, Entrepreneur.com, FoxNews.com, Money Magazine, and numerous other publications across the web and in print media.

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YouTube
Instagram @beardybrandon
Open Door Capital

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Sometimes, you can only live on your property for so long until something comes up and you have to relocate. Maybe that’s by choice, or work is forcing you to do so. Maybe you like the idea of earning some passive income. Either way, you have to face the question eventually: Should I sell my house or rent it out?

Although it sometimes is difficult, owning two homes can actually work and be profitable if you rent out the previous home. By keeping the house, you can begin building serious wealth through cash flow and equity. It’s not the right move for everyone, so how do you know if it’s right for you?

As with most real estate questions, these are not universal “right or wrong” questions. But once you understand the options, you can make the best choice for your situation. Not every home makes a good rental, and not everyone is cut out to be a landlord. Here are some reasons to rent out your second home.

Rent: Positive cash flow

The first thing to look at when deciding whether to rent or sell your house is the math. Math probably wasn’t your favorite subject in school, but luckily you don’t need to know too much of it to understand real estate investment math.

When your property is rented out, and you deduct all of the associated expenses like mortgage, taxes, insurance, utilities, management, vacancy, repairs, HOAs, etc., will the property produce a monthly profit or a loss? If you’re gaining a profit, keep it. When you consider the money you’d earn from renting it out, you will gain even more from the property in the long run.

Rent: Make a return on your investment

Next, consider how much you would profit if you sold the property today, assuming you’d lose around 10% to agent fees, closing costs, and other sales expenses. If you would make little or nothing, it may be advantageous to hold on to the property and wait for the market to improve over time. This is especially true if the property will provide a cash flow and appreciation, especially if you rent it out in the meantime.


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Rent: Waiting out a bad market

Of course, we don’t have crystal balls, but trying to gauge where the market’s going is not impossible. Take a look at the growth of your city—is it moving away from you or toward you? Are businesses moving into your area? Are homes being fixed up or left to rot? You can’t know with 100% certainty, but by analyzing the current trends in your market, you can make a more informed decision on what to do moving forward.

All of this information will help you determine what the future will look like and how your neighborhood’s value will increase or decline. Besides, it makes sense that buyers or renters want to come to an area where new, exciting things are happening. If you aren’t sure or want a more seasoned opinion, talking to a real estate agent could be a great option.

Rent: Option to return to the property

Listen, no one will judge you for loving your home. With such a huge investment, we’d hope you’d at least like it. So if you’re hoping to come back to it one day, renting may be the best of both worlds for you. That way, you still own the home, and you’re able to plan for a future with it while in the meantime renting it out for passive income.

Rent: Having someone pay your mortgage

It may sound funny, but it’s true. If someone else is paying you rent to live in your home and you’re not living with them, it makes more than sense to charge them enough to cover your mortgage. For many people, paying one less bill helps eliminate stress while allowing them to keep the property.

We’ve discussed reasons to rent out your second home. So now it’s time to go over why selling may be the best option.


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Sell: Better ROI through a sale

If you would make a profit by selling, consider your return on investment (ROI). For example, if you could make $100,000 in profit by selling your house and achieve only $1,000 per year in cash flow, that’s a 1% ROI. It’s better to take that $100,000 profit and invest it in something else that could produce a higher return.

Sell: Fewer taxes to pay

Keep in mind that tax benefits for homeowners typically only count toward the primary residence. Unfortunately, you can only have one of those at a time, and since we’re talking about a second property here, those benefits wouldn’t help you out.

Also, consider how much you pay for both homes. For many people, it would be rough to be able to maintain them both. And depending on where you live, you could be paying a lot in property taxes alone. Think about the taxes you’d have to pay on not only your primary but your secondary residence. Do the math even if you don’t want it, and make the best choice for yourself.

Consider the fictional case of Bob and Marge, who bought their home in 1990 for $150,000. Today, they can sell the property for $500,000, clearing $300,000 after the sales expenses. If they keep the home as a rental for, let’s say, five years and then sell, they’ll potentially owe $60,000 in taxes. But if they sell now, they can potentially keep that $300,000 in profit without paying any capital gains tax.

Sell: Don’t have to deal with tenants

Honestly, many people are not cut out for the landlord’s life. While some tenants are a dream to manage, others require significant time and patience to deal with. Granted, being a landlord is a skill that you can learn, and just because you are one doesn’t mean you have to involve yourself with tenants directly. But if you choose to keep that kind of distance, you’d have to hire someone else to bridge that gap, which is another expense. Property managers would be able to do that for you, but it’s best to avoid extra expenses if you’re looking to save money.

Also, consider the kind of person you are. Are you swayed by sob stories? Would you postpone filing eviction because your tenant called you with one? You may say no and that you’re able to hold your ground, but be honest with yourself when you answer this one. Tenants will push your boundaries so they can have more time to pay their rent. Landlords have to defend those boundaries and operate with the smooth efficiency of a business. When someone is late on their payments, there are two consequences: a late fee and filing to begin the (long) process of eviction. If you can’t do that, that’s completely fine. But you’re probably not cut out to be a landlord.

On top of that, you have to realize that renting isn’t a guaranteed form of income. If you and the tenant have some issues or they choose not to renew their lease, you could be out of that income for months.

Sell: Avoid extra expenses

Beyond your mortgage payment of principal, interest, taxes, and insurance, you’ll incur plenty of other expenses if you rent:

  • Vacancies
  • Property management fees
  • Capital expenditure and repairs
  • Maintenance
  • Administrative, bookkeeping, and miscellaneous
  • Other fees depending on the property and where you live

The 50% rule states that your expenses will run around 50% of the rent—not including any financing like principal and interest that you pay. If the rent is $1,000, and your mortgage payment (principal and interest) is $400/month, you can expect roughly $500 in additional expenses, leaving you with a cash flow of $100/month.

The golden rule of cash flow with rentals is that it’s based on a long-term average of your expenses, not on what happens in a typical month. In a typical month, you’ll just pay your mortgage payment. Then suddenly, you’ll be slapped with a $3,000 roof repair bill.

Get comfortable with the numbers in your neighborhood. How much can you expect to rent the property for? What’s the average vacancy rate? If your property has carpets, what will it cost to replace them between each tenancy? These are some of the most important questions that need to be answered with certainty and honesty. Also, you need to have an answer you’re comfortable with before you decide to rent out your second home.

Sell: Fleeing a buyer’s market

Sometimes the housing market goes up—other times, not. If many people are selling their homes in the same area that yours is in, it might be a sign that you should also consider selling. However, lots of sales at one time could mean the value of your property drops quickly and leaves you with less economic standing. If you see that possibility on the horizon, selling may be a good option for you.

Sell: The property makes a poor rental

Be honest with yourself and your property. Does it serve you best as a rental? Or invested elsewhere? The last thing you want is to keep your old home as a rental property, have it cash flow poorly, and then you throw your hands up and say, “Rentals are not for me.” These kinds of investments are both an art and a science, and just because a property made a good home for you, it may not make a good rental.

Run the numbers. If you like what you see, move forward. If not, sell the property and invest the proceeds elsewhere. And if you decide that being a landlord is not for you, you have other options for investing in rental real estate. You can buy it and hire a property manager. You can become a silent partner and have your partner handle all management. Or you can step back even further and invest in private notes or real estate investment trusts.

Sell: Fund better rental investments

Just because your old home may not be a prime candidate for a rental investment doesn’t mean you shouldn’t become a landlord. Imagine you sell your home and walk away with $50,000. You use $25,000 as a down payment on a fourplex, which cash flows $500/month. Then, do the same thing with the other $25,000. If you can rent out all of the spaces quickly, you could easily earn thousands a month in rental income.

Of course, this may not be the case for you because the home you already own would actually be a great property to use as a rental. It’s also possible that you don’t feel confident in your ability to buy rentals that will cash flow in your market. Regardless, these are all questions you will need to ask yourself before deciding on keeping or selling your second home as a rental.