When you’ve owned a property for more than seven years (either living in it or not), you’re often sitting on a good chunk of equity. When you find yourself in that position, a common question that flits past one’s mind – should you hold onto the property and rent it out for income or sell it?
To Rent or Sell? Factors to Consider
First and foremost, if you are living in the home and don’t have the cash available for a down payment on your next home, the answer is obvious – you have to sell in order to get another home.
But, if you do have the cash for the next down payment – or the home was an investment property in the first place – then you have a few more factors to consider.
The choice to rent or sell should come with serious consideration and thoughtful calculation. A common mistake we see investors make is failing to think through where they’re going to invest the capital they earn from the sale. They’re just happy to have turned a profit. Full stop. They have no clear reinvestment strategy.
This is unfortunate because it’s often better to continue holding onto the property. In doing so, not only can owners capitalize on a healthy rate of return, but they can also take advantage of the tax benefits, leveraged compounding, and a host of other benefits (such as keeping a low interest rate).
Before you make something of a gut decision on whether to sell or rent your home, here’s the very basic line of thinking you should run through your head.
Can you go out and invest that money somewhere else and earn a higher return on invested capital than if you kept the property and rented it out?
At the end of the day, you want to put your money where it will offer you the best returns. Maybe it’s real estate, maybe it’s somewhere else, but you must determine what you’re going to do with that money before deciding to sell.
Here’s a very simplified example:
Let’s say you buy a property that costs $100k. You put 20% down so that means you have $20k invested. You live there a few years before deciding you want to rent it out. You charge ‘x’ in rent, you have ‘y’ in expenses, and at the end of the year, let’s say you collect $2,000 in profit per year. You put down $20k and you get to collect as profit $2,000 per year. That amounts to a 10% return on invested capital in this scenario.
On the flip side, say you throw that scenario out the window and decide to sell the house. You get your $20k down payment back (ignoring any appreciation for a minute). The question is, can you take that $20K, invest it somewhere else, and get a 10% return every year? Maybe you can, maybe you can’t, but that’s the financial calculation you should be running as you assess whether you should sell your house or rent it.
With financial decisions, there are hundreds of complicating factors, but the crux of the argument remains the same – put your money where the profits are.
To hear more from us as we discuss this very question, watch our webinar replay: Should You Rent or Sell Your House. And if you have questions about owning a rental property in Central Ohio, give our team at RL Property Management a call anytime at 614-725-3059.