Selling Vs. Renting: The Pros and Cons of Each

At some point in time, many homeowners find themselves asking the question, “Should I put my home on the market and sell it, or should I keep it and rent it out?” As with most finance and tax-related questions, no simple answer exists. However, with issues related to each scenario pointed out by experts in the industry, perhaps the decision can become easier to make. Read on to acquaint yourself with the pros and cons of selling vs. renting, as shared by Gina Miller of RE/MAX UNITED and Mary Jo Ryan of Coldwell Banker Howard Perry & Walston.  

“Just off the cuff, I have to say I’d think long and hard about renting out my home before acting on that option,” says Gina Miller, Broker, ABR® (Accredited Buyer Representative), and e-Pro (Internet Professional). “Unless you’re willing to pay a property management company to perform credit and background checks on potential renters, make sure that all legalities are in order on the lease, take care of collecting rent (and late fees, as needed), and handle routine maintenance on the home, you may not be ready for the headaches that come along with being a landlord. You also need to keep in mind that between renters you will need to paint and make repairs, and you may need to install new carpet. Additionally, you may need to subsidize the rent to make the mortgage payment if the renter doesn’t pay, if the rent doesn’t cover the mortgage payment, or if the house isn’t rented. This is not to say that renting out a home is never a good idea, it’s just an overview of expenses that need to be considered up front.”

Mary Jo Ryan, also Broker, ABR®, and e-Pro of the Bill and Mary Jo Ryan North Raleigh Real Estate Team agrees with Miller. “You really need to have some deep pockets to consider renting out your home… Rental property is not a ‘get rich quick’ scheme. Rental agencies take roughly 20% of monthly rent as the fee for their services, and in my opinion it’s well worth it to pay a company to handle the numerous details of the application and the lease, and to make sure monthly rent gets paid.” 

“Another factor in the decision on whether to sell your home or rent it depends on location and price point,” Ryan continues. “A small home in close proximity to a university or an urban center has a larger pool of potential rental customers than a home of, say, 5,000 or more square feet in the suburbs. Occasionally homes of this type can be rented to corporate executives here on assignment from other countries, but those circumstances are few and far between. Keep in mind that even with the larger pool of renters for smaller homes, many people living in a rental home are not going to take care of it in the same manner they would a home of their own – meaning that you’ll most likely have ongoing repair and replacement issues.”

Both Miller and Ryan advise that you talk to several professionals before you make a final decision on renting or selling. First, if you’ll be moving from your current home to buy another home, talk to your mortgage lender about how renting vs. selling your current home will affect your qualifications for a new loan. Most lenders will not assume that a rental home will be rented continuously, which will most likely affect your next mortgage. Talk to your accountant regarding tax considerations. Discuss future needs and goals, including retirement and estate planning, and how rental property might affect these plans. If you’re not going to work with a property management company or rental agency, talk with an attorney to make sure your rental application is inclusive of all the information you need to deem a potential renter worthy of renting your home. Also have your attorney review your lease agreement to make sure it is sound. Ask your attorney for a review of laws regarding tenant rights to ensure that you and your home are properly safeguarded in your lease. If you plan to rent and decide to work with a property management company, interview several companies before making a decision on which one you’ll work with. Carefully review each respective contract, to make sure that the contract is comprehensive, that you understand what is covered, and that you understand costs and fees.

“All of this research should be done up front,” says Miller. “Once you decide which way you’re going to go, oftentimes the process moves very quickly when you have an interested party. If you decide you want to rent your home and then quickly get a renter, you don’t want to realize several months down the road that you should have done things differently and that you didn’t fully think things out.”

With all of this said, is there ever a good time to rent out your home? Maybe so, say both Miller and Ryan.

“Sometimes a family member or friend needs rental housing, and you know your home will be well taken care of,” says Ryan. “Or it could be that parents of college kids will buy a house for their son(s)/daughter(s) to live in, and use the purchase as a tax write-off. Occasionally there are reasons that make rental property viable… Just make sure you understand what you’re getting yourself into.”

“Another scenario that can be practical is a lease option, if you’re careful,” says Miller. A lease option is a contract a renter signs with an option to purchase a home for a specific price within a certain time frame. Typically, a portion of the rent is applied to a future down payment.

“As with rental contracts, I’d review a lease option contract with an attorney,” Miller continues. “Sellers can benefit from lease options, in that monthly rent is usually higher than market rent, and renters are more likely to treat the property like an owner. But sometimes renters decide they don’t want to buy the property. You want to be sure you’re covered financially.”
 
Miller lists a number of resources on her website www.ginamiller.com in regards to rental property considerations, from Internal Revenue Service publications such as #527 on Residential Rental Property to questions and answers on Lease Options, Property Management, and Seller Financing.

“You should be well informed before making a rental vs. selling type of decision,” says Gina. “I want to provide not just the advantages of rental property, but the pitfalls as well. And as I’ve already mentioned, I think it’s so important to learn as much as you can from industry, tax, and legal professionals before finalizing a decision.”

“Many people think that renting is an option they should consider in a slow market,” says Ryan. “In some markets across the country, this may be a sensible approach. The Triangle market, however, although admittedly a little slower than in years gone by, is still quite good. I wouldn’t recommend to any of my customers right now to consider renting instead of selling due to market conditions.”

Miller holds the same opinion. “We are so fortunate to be in one of the best real estate markets in the country. Of course other markets can have an effect on ours, but it’s exciting to live in an area that offers great jobs, excellent schools, and a wonderful quality of life. People who live here want to stay here, and people from other areas want to relocate here.”

“If I’m working with a customer to sell a home in a price range that has a large supply of homes on the market, the first thing I look at is pricing,” Miller continues.

“If research on homes in that price range indicates a lengthy standing inventory, I will suggest to my customer that we need to adjust the sales price to reflect market conditions. If the home is priced fairly, it should sell in a reasonable amount of time. I also work closely with my customers to make sure their homes are staged well. For example, if I feel like they need to install new carpet to sell their home, I let them know this is what I think. I help them to rearrange and sometimes remove furniture to have it ‘show’ as well as it possibly can. A home that’s priced fairly and properly staged should sell within a reasonable amount of time.”

In a nutshell, both Miller and Ryan advise that you do your homework – and do it well – before making a decision to convert your home to rental property. Talk to professionals who can help you make decisions specific to your situation, realistically assess projected expenses, and think about your long term goals. Follow these steps, and chances are great that you’ll make the decision right for you.

For a simple calculation on the economic viability of renting vs. selling your home, visit www.forbes.com, click on tools, then renting vs. selling.

Rebecca Newsome, MIRM, is a freelance writer