Should I Rent Out My Old Home or Sell It?
Source: Canva, 2024
Deciding whether to rent out or sell your old home can be a challenging choice, with both options offering unique advantages. The right decision will depend on your financial goals, the local property market, and your long-term plans. Here’s an in-depth look at the factors you should consider to make an informed decision.
1. Assess Your Financial Situation
Immediate Cash Needs: Selling your home can provide a significant amount of cash upfront, which might be necessary if you’re looking to fund a new home purchase, pay off debts, or invest elsewhere.
Rental Income Potential: If your property is in a rental-friendly area, renting out your old home could create a steady income stream, which could be especially valuable if you’re looking for long-term cash flow rather than a lump sum.
Tax Implications: Understanding capital gains tax (CGT) and other tax implications is essential. If you’ve lived in the property, it may qualify for a capital gains tax exemption. However, once it becomes an investment property, you might be liable for CGT when you eventually sell it. Consulting with a tax advisor can help you understand the financial implications of both options.
2. Examine the Local Real Estate Market
Property Value Trends: Research recent home sale prices in your neighborhood to see if your property’s value has significantly appreciated or if it’s expected to grow. A rising market might favor holding onto the property, while a flat or declining market might make selling a wiser option.
Rental Market Conditions: Look into local demand for rental properties and typical rental yields in your area. Sites like Homely, Realestate.com.au, and Domain can provide insight into local rental rates, vacancy rates, and market trends. High rental demand could mean a better return on investment as a rental property.
3. Evaluate Long-Term Property Appreciation Potential
Property values in certain areas are more likely to increase over time due to factors like infrastructure developments, proximity to popular amenities, or neighborhood revitalization. If your old home is in a growth area, holding onto it could allow you to benefit from long-term appreciation.
On the other hand, if the area has few growth prospects or if property values have peaked, it might be more strategic to sell.
4. Calculate Potential Rental Yield and Cash Flow
Calculate the rental yield by dividing the annual rental income by the property’s value, and then multiply by 100 to get a percentage. A higher yield can indicate that the property would be a strong rental investment.
Consider your cash flow after accounting for mortgage payments, maintenance costs, property management fees, taxes, and insurance. Ideally, rental income should cover these expenses and still provide some profit. If the property’s rental yield and cash flow potential are strong, renting could be a profitable option.
5. Consider the Costs of Being a Landlord
Maintenance and Repairs: Managing an investment property involves regular maintenance and unexpected repairs. Older homes especially may require frequent upkeep, which can eat into your rental income.
Property Management: If you’re not prepared to manage the property yourself, you may need to hire a property manager, typically charging around 5-10% of the rental income. This service is helpful if you live far from the property or lack the time to handle tenant issues.
Vacancy Risks: There’s always the possibility of vacancies between tenants, during which you will still need to cover mortgage payments and other expenses. Understanding the vacancy rate in your area will help you assess this risk.
6. Evaluate Tax Benefits for Rental Properties
Owning a rental property can provide tax deductions for expenses such as mortgage interest, repairs, property management fees, and depreciation. These deductions can significantly reduce your taxable income, which can make renting an attractive option for high-income earners.
However, tax rules vary by location, so consulting a tax professional can help clarify the potential deductions and benefits in your specific case.
7. Analyze Lifestyle and Long-Term Goals
Future Relocation Plans: If there’s a chance you might return to your old home in the future, renting it out temporarily could keep this option open.
Diversifying Your Investment Portfolio: For some, owning multiple properties can serve as a diversification strategy within an investment portfolio. If you’re looking to build wealth through real estate, keeping your property and renting it out could be a valuable addition to your assets.
Simplicity and Peace of Mind: Being a landlord can be time-consuming and stressful. If you’d prefer to avoid the responsibilities that come with rental property ownership, selling might be the better choice for you.
8. Consider the Costs of Selling
Real Estate Agent Fees: Real estate agents typically charge a commission on the sale price of the property, which can range from 2-3% or more. Factor this cost into your calculations to understand how much you’ll actually take home after selling.
Capital Gains Tax: If the property has significantly appreciated, you may incur a large capital gains tax bill when selling. This tax applies to the increase in the property’s value since you purchased it, minus certain deductions. However, if the property was your primary residence, you might be eligible for a capital gains tax exemption. A tax advisor can provide clarity here.
Marketing and Staging Costs: To sell at the best possible price, you may need to invest in marketing and home staging. Preparing the property for sale may also involve cosmetic upgrades to attract potential buyers.
9. Hybrid Strategy: Rent First, Sell Later
If you’re uncertain about committing to either option, consider renting the property for a few years before selling it. This allows you to benefit from rental income and possibly capitalize on property appreciation before selling. It also gives you more flexibility if you change your mind about selling or renting in the future.
Pros and Cons of Renting Out Your Old Home
Pros
Generates steady rental income
Opportunity to benefit from property appreciation
Potential tax deductions on expenses
Flexibility to move back if needed
Cons
Ongoing maintenance and property management
Tenant-related risks, including potential vacancies
Increased responsibilities and time commitment
Possible capital gains tax implications on future sale
Pros and Cons of Selling Your Old Home
Pros
Immediate cash influx
Freedom from landlord responsibilities
Avoids risks associated with vacancies and maintenance
Simplifies your finances and reduces debt
Cons
Potentially lose out on long-term appreciation
No ongoing rental income
May incur capital gains tax on the sale
Selling costs, including agent fees and marketing
Final Thoughts: Should You Rent or Sell?
There is no one-size-fits-all answer, but carefully evaluating your financial goals, property market conditions, and lifestyle preferences can help guide you to the best choice. If the rental income and tax benefits align with your long-term financial plans, renting out your old home could be a smart move. On the other hand, if you prefer simplicity and are looking to free up cash, selling might be the better option.
Ultimately, this decision depends on a combination of market factors, your financial position, and your willingness to manage an investment property. With the right approach, both renting and selling can be profitable—it's all about determining which aligns best with your personal goals.
