Pros and cons of selling a rental property

It sounds like a dream come true: sell your house to the person who is currently renting it. By doing so, you can avoid the costs of turning over the property as well as fees associated with selling your home. But is it all positive?

Pros

No Marketing or Real Estate Agent Costs

By selling to your tenant you may not have to hire a realtor at around six percent (this varies by market, but typically three percent goes to the buyer’s agent and three percent to seller’s agent).  You also don’t have to prepare your home for showings or open houses. Showing your home can come with many additional expenses, such as cleaning up minor cosmetic fixes, or having to spend money staying out of your house for the day.

No Empty Cost House Costs

Since your tenant is buying the house it never goes empty, and they will be paying rent right up until the purchase closing date. Depending on your market, your house could easily be on the market for 30 days while you are looking for a buyer, and then another 45 to 60 days until it closes. This could easily mean three months or more of rent that is lost when you sell to an outside buyer versus your tenant.

Cons

Expect Concessions

Most home buyers – even first time home buyers – know that selling a house costs a lot of money, and that your For Sale By Owner saves you money. Therefore, when they are negotiating the price, they may expect to benefit from the savings, too! They may ask for closing cost assistance or maybe even a lower price. When you sell your home yourself, you still have to do the work for accepting these concessions. This may mean coordinating with the title company or closing attorney, hiring contractors to perform repairs, or completing all required paperwork. If you have made your discount too steep, your savings may be offset by lost profit.

Losing Money By Pricing Too Low

When you sell to your tenants you are not opening the house up to the market. In a buyer’s market this typically isn’t a problem. However, many markets now are seller’s markets, where there is low inventory and high demand. A house with multiple offers will raise selling prices higher than anticipated. That means that those who don’t open to the public will miss out on this increased potential. Being unaware of the market conditions may end up costing you thousands of dollars.

Time Is Money

Lastly, when you sell as your own agent, you will be on your own, without professional knowledge and experience. While you can certainly put a team together, this will not be the same as someone who does many transactions a year. In addition, you will be serving as the landlord and the seller, and will be coordinating directly with the buyer. There will be no third-party intermediary, and no buffer between the two sides, just as emotions are running high.

Conclusion:

The key is evaluating your market, your tenant and yourself. Some people don’t mind putting in the extra effort to close the deal. For others, a real estate agent could be hired to do the paperwork. While this isn’t available everywhere, in some areas agents will facilitate the deal for two to three percent. They will organize inspectors, appraisers, and the like for both parties. This gives the best of both worlds by including professional representation while reducing the costs.

Tools to Make Landlording EZ

After you’ve purchased your first rental property, the next steps are finding a qualified Tenant and creating a great Lease Agreement. Visit

Typically, homeowners anticipating a move will seek to sell their current home, often needing the cash from the sale to help purchase their next home. Sometimes, circumstances have homeowners wondering what the pros and cons of renting your home are and whether it’s feasible to turn the old home into an investment funded by renters.

Market overview for renting and selling

Rising rents and fewer vacancies trending in rental market

The rental housing market rebounded in 2021 with higher rents and lower vacancy rates as lack of for-sale properties prevented higher-income renters from becoming homeowners, according to America’s Rental Housing 2022 report by the Harvard Joint Center for Housing Studies.

The median rent in December 2021 for a one-bedroom apartment was up over 11 percent from the previous year, reports Zumper’s National Rent Index. The rental platform predicts rents will continue to rise in 2022 due to strong demand outpacing supply. In April, the median one-bedroom rental reached an all-time national high of $1,410, up 3.2% for this year so far and 13.2% year over year. Two-bedroom rental prices set a new record, rising 14.6% from last year to $1,746.

The rental market looks promising for would-be landlords, but let’s look at the climate for selling your home.

Home sales slow down as mortgage rates and prices increase

While 84% of agents surveyed by HomeLight expect the seller’s market to continue into 2022, prices are not expected to rise as quickly or as dramatically as in the previous year. One-third of agents anticipate price increases above normal in their market, while 39% expect typical growth rates of 2%-3%. Only 4% believe that prices will skyrocket by double digits.

Demand for existing homes has slowed nationwide with sales falling in March for a second month in a row to a seasonally adjusted annual rate of 5.77 million, according to the National Association of Realtors® (NAR). Sales declined 2.7% from February and 4.5% from the previous year, although the median price rose to $375,300 — 15% higher than March 2021. Total housing inventory also dropped 9.5% from 2021. Declines in the number of sales across US housing market regions reflect evolving market conditions.

Pros of renting out a house

While constrained inventory, rising interest rates, and skyrocketing prices have forced many people to put off their aspirations of owning a home, a recent Zumper survey of renters indicates that 81.6% of respondents plan to move in the next 12 months. This opens the door for potential tenants to rent your property.

If you live in one of the country’s hottest rental markets, becoming a landlord could be a profitable venture. New York City ranked highest on Zumper’s top 10 list for one-bedroom median rentals in April 2022 with rent of $3,420 followed by San Francisco, Miami, Boston, San Diego, San Jose, Los Angeles, Washington, DC, Oakland, and Fort Lauderdale.

Homeowners in the suburbs may also see an influx of prospective tenants as higher-income households leave cities in search of more spacious single-family rentals. Renters outnumber homeowners in 103 suburban areas including those surrounding Miami, Washington, D.C., and Los Angeles with 57 more expected to have a renter majority in the next five years, according to apartment listing service RentCafe.

Note: Before evaluating the pros and cons of renting your home, check with your mortgage and home insurance companies to find out if tenants are allowed. Contact your municipality and homeowner’s association (HOA) to see if regulations permit renting. 

Earn income and build equity

Renting out your house could be a money making proposition if your property brings in more rent than your monthly mortgage payments, taxes, insurance, and other fees. Your home can generate a valuable revenue stream while allowing you to hang onto your asset longer so it can continue to appreciate and build equity.

Become a real estate investor

If you’ve ever contemplated becoming a real estate investor, then get started with your current home that you’re familiar with rather than buy an investment property at today’s high prices or a fixer-upper that needs work. Set aside the extra cash flow and additional equity for retirement or your next real estate transaction.

Keep your options open

Renting out your home gives you a fallback plan should you relocate for a job transfer or personal reasons. Your property will still be yours so you won’t have to pay a higher price to return to your old neighborhood if things don’t work out in a new city.

Take advantage of rental property tax deductions

The IRS will want its share if your home generates rental income, but don’t overlook the tax breaks you’ll get as a landlord. Keep records documenting expenses just in case of an audit.

Consult a tax accountant to take full advantage of tax benefits and to see which apply to your situation. Deductions that can reduce your tax burden include mortgage interest on loans used to improve a rental property, fees paid for professional services, personal property for your rental such as appliances and furniture, or repair costs such as repainting or fixing plumbing issues.

Don’t overlook the cons of being a landlord

Being a landlord isn’t for everyone, so you should examine the pitfalls of tenants living in your home.

Foregoing cash for your new home purchase

Most people, when moving, need to sell their home to help them purchase their next one. You may need another source of cash for a down payment on your next home. Tying up capital might not make sense if you need to cash out the equity in your current home.

Handling tenant hassles

Dealing with tenants and their complaints may not fit into your busy schedule or comfort zone. If you don’t live nearby or prefer letting someone else handle the day-to-day issues, hire a property management company to take care of repairs and routine maintenance, screen applicants, collect rent, and even assist with evictions. Expect to pay 8% to 12% of the monthly rental value, but the cost may be worth the savings in time and aggravation. Search for property managers on websites for the Institute of Real Estate Management and the National Association of Residential Property Managers.

Even if you’re extremely thorough in your background check, you could run into difficult tenants. In the worst case scenario, you might have to go through a lengthy and expensive eviction process costing an average of $3,500 for legal fees and court costs, in addition to lost rent and charges for cleaning or repairs.

Be prepared for unexpected expenses

Although vacancy rates are currently low, rentals do sit empty from time to time. You’ll need cash on hand to pay monthly costs (including possibly your mortgage on the house) while waiting for a new tenant to move in.

You’ll also need funds to fix malfunctioning appliances, leaky pipes, and other unexpected problems to maintain your home even though you don’t live there.

An uncertain future could cost you money

Although home prices might be going up today, the future is unknown and your property value could decline if your neighborhood or the real estate market changes. So you might have to rent your home for longer than you planned or sell for less than you could right now.

If you need the equity in your home for large unforeseen expenses, such as a huge hospital bill or major repair for your new home, it could take months to sell or you might have to settle for a lower price if you require a fast sale.

Plus, selling a home with tenants further complicates matters. Tenant rights can cause legal and financial difficulties if violated. For example, in most states you need to give tenants at least 24 to 48 hours notice before showing the property or letting in appraisers, inspectors, or repairmen. The tenant may have the right to remain in the home until the lease expires, so this could be a dealbreaker for prospective buyers who want to move in right away.

Crunch the numbers to compare profits or losses

Now that you’ve evaluated the pros and cons of renting out a house, it’s time to do some number-crunching to determine what’s best for your bank account.

Start with HomeLight’s Home Value Estimator

Begin with HomeLight’s Home Value Estimator to calculate your home’s worth. Enter your address and answer a few simple questions. We’ll pair your information with reliable housing market data to provide an initial estimate of your home’s current value.

Get an Estimate on Your Home's Value

It only takes two minutes to answer a few questions. You’ll receive a detailed analysis of your home straight to your inbox immediately. Simply tell us a little bit about your property (the address, type of property, it’s condition and the year it was built) and how soon you’re looking to sell.

Get Estimate

Conduct a comparative market analysis

The next step is to conduct a comparative market analysis or CMA to see how your home measures up to other properties in your area. This analysis compares your house’s square footage, lot size, age, condition, number of bedrooms and bathrooms, location, renovations, upgrades, and other details to nearby recently sold properties. While you can search Internet sites like RealtyTrac to create your own CMA, reach out to a local real estate agent for a comprehensive analysis that provides the most accurate valuation.

Calculate net proceeds

Subtract your selling costs from your home’s worth based on the home value estimator and CMA. These include 5%-6% in agent commissions, prep and staging costs, and attorney fees. Don’t forget to deduct the amount you still owe on your mortgage.

Utilize HomeLight’s net proceeds calculator to estimate the cost of selling your home and your net proceeds.

If you can sell your house at a profit in a time frame that works for you and the drawbacks of becoming a landlord outweigh the benefits, then you might want to get your home ready to put on the market.

But if the numbers aren’t what you hoped for, perhaps it’s time to calculate the income potential and costs of renting out your house.

Set your rental price

Although growing demand is driving up rental prices throughout most of the country, you’ll need to assess your area’s rental market. Check out comparable rentals to make sure your rent is in line with the competition or you won’t attract many potential tenants. View nearby rentals on websites like RentCafe and review Zumper’s National Rent Report to determine an appropriate rental price.

Cover your costs

Make sure the rent covers your expenses including mortgage payment, property taxes, and insurance. Don’t overlook other possible costs for marketing, lawn care, property management, or fees if your neighborhood has an HOA. Reserve money for routine maintenance like servicing the HVAC system and unanticipated costly repairs such as a new roof. One rule of thumb suggests budgeting 1% of your home’s value for annual maintenance.

When crunching the numbers, remember to account for the tax deductions you can claim as a landlord.

Account for possible vacancies

National rental vacancy rates are at historically low levels, just 5.8% for Q1 2022 or 1% lower than last year, according to the US Census Bureau. But vacancies vary throughout the country so research vacancy rates in your area. Then factor in expenses you’ll have to pay if your home has no tenants for any length of time.

Can you make a profit?

To determine if renting out your house will be a profitable venture, take your annual rental income and subtract your expenses, as well as costs for repairs and possible vacancies. Don’t forget to factor in allowable tax deductions. Your house will continue appreciating so renting out your house might be a viable option if you break even or earn a profit.

Analyze the numbers along with the pros and cons

After compiling the numbers for both selling your home and renting it out, determine your profit from selling versus the time it will take to make that amount by renting. The National Association of Residential Property Managers’ Rent vs. Sell Calculator is a useful tool. Enter information about your mortgage, taxes, and potential rental rate to help make your decision.

Now that you’ve analyzed the numbers and considered the pros and cons of renting your home, you’ll be able to make the right choice for your situation.

If you can sell your home at a price that’s too good to pass up, HomeLight can put you in touch with a top agent in your area who can sell your property faster and for more money.

But if the time isn’t right to get the price you’re looking for or you’d like to earn rental income while your home appreciates, then holding on to your house as an investment property might be your preferred strategy. Check out sites like ZumperPro as you begin your new adventure as a landlord.