For anyone out there that had purchased their first home and are now at the point of moving out, a question you might ask yourself (depending on the housing & rental market you’re in) is:
Should I rent out my house? Or should I just go ahead and sell it?
For many, real estate is simply one part of a complete long term financial strategy. This means passive income for a property that you would be leasing out. Now, there’s no shortage of “scammy” programs & videos out there promoting the idea that you can have this incredibly easy 6-figure passive income for life if you do these “3 weird financial hacks”. But, in this case, passive income stemming from real estate investments and renting out property is common and it can be a great option.
However – it’s not THAT easy and it’s NOT for everyone!
Here’s the deal – it does involve work, mostly upfront in marketing the property, and hopefully not much throughout the term of the lease. It also involves high upfront costs, and lastly, it involves risk (like many other investments). Let’s unpack those three points to see if you should either rent out your house or simply sell it and move on.
1. How much work are you willing to do?
Renting out your property can net you a decent extra income, but what’s your appetite for doing work? The decision you have to make is 1) Are you going to do the work to market your property and attract potential renters? Or are you going to work with a realtor to do so? 2) Are you going to be managing the property (collecting rent, taking care of maintenance issues, etc) yourself, or are you going to contract out to a property management company to do this?
If the answer to those two questions is that you’d everything yourself, then great! You have an appetite to do that work. If not, you’ll be paying quite a bit to outsource that work. It’s typical for realtors to charge 1-month’s rent to help you find a renter, and property management companies charge anywhere between 8-12% of rent/month. This can quickly eat into any profit you might be making on the property.
2. Can you handle the upfront costs?
Depending on the condition of the house, you may need to invest money into certain renovations or touch ups to make the property more attractive to renters. Another cost though is the cost associated with your property not renting out for a certain period of time. Whether it’s due to the unit not being available because of renovations taking place, or you simply don’t have immediate success finding a good viable tenant, you have to account for the period of time that you don’t have a tenant and you’re still bearing 100% of the cost burden without collecting an income.
So you have to factor the possibility that this could be the case. You need to have a buffer to absorb this cost if it happens.
3. What is your appetite for risk?
Just because it’s “passive income” doesn’t mean there’s not alot of risk associated with it. On the house itself, there’s a chance that the property may not appreciate much (under performing the rate of inflation of 3%), or in some (somewhat unlikely) adverse scenario, it could even depreciate. There’s also a chance you have a tenant that may be difficult to deal with or doesn’t pay in a timely manner. In more extreme circumstances, you may be in a position where you need to evict the tenant, which involves legal action. At some level, all of these risks ultimately mean that it impacts the bottom line and makes this “passive income” idea less compelling.
If you’re good with all that – here’s the good news (and why you might want to rent out your house):
1. PASSIVE INCOME!
If you’re aware of all the risks & challenges, you can do a better job of mitigating them, reduce your expenses, and increase your profit. And assuming there aren’t hundreds of maintenance issues you need to take care of throughout the year and the tenant is paying on time, then it really is passive income with minimal work. If you ever get to the point of owning the property entirely, then the income will be that much nicer.
2. Own an appreciating asset
I mention there’s a risk that the property doesn’t appreciate much or even depreciates. If you live in or near a growing city or suburb with population and job growth, chances are, your property will be appreciating. So while you collect rental income, you also have an asset that is appreciating so that should you ever want to sell it, you’ll have a pretty healthy return on your investment.
3. Diversified investment portfolio
As I mentioned at the beginning, real estate investments are fairly common as part of a broader investment strategy. Most people have investments in the stock market, which hopefully they have a diversified portfolio there to reduce risk, but adding a rental property will give you another investment that is largely independent of how the stock market is performing. People will always need a place to live, and performance of the stock market has little impact on that. The determining factor of success for the property would be the location, desirability of the general area, and job opportunities.
Hope this clarifies some of the points you should be considering if you’re thinking of renting out your house vs selling it. There’s risk, but plenty of reward as well!