Should I Sell or Rent My Property?

Relocating to a new place invites a new type of stress in your life. As you are coordinating a move, you need to think about the house. Do you sell the property before relocating to a new destination? Or is it better to keep the house as a rental?

For some homeowners, the answer is obvious. If you need the equity for a down payment on your next home, you sell. But if you can afford to hold the property, the decision becomes much harder. And the stakes are real.

Here's what you need to think through before you decide.

Owning Real Estate Is a Long Game

Real estate values tend to appreciate over time. You won't see dramatic equity gains in the first year or two, but zoom out 10 to 20 years and the picture changes. Historically, real estate has outpaced inflation while leaving additional profit on the side.

By selling today, you can lock in your current gain. If you hold, you allow the asset to grow over time as the tenant is helping you pay down the mortgage.

That's a hard thing to walk away from.

Where Are You in Your Amortization Schedule?

This is the question most homeowners don't ask, and they should.

In the early years of a mortgage, most of your monthly payment goes toward interest. But if you've been paying for 5 to 10 years, that shifts. You're now making a meaningful dent in the principal every single month.

Here's the thing: your mortgage payment won't go up, but rental rates will increase with time. The longer you hold, the more the numbers tilt in your favor. You're building equity both through appreciation and the payment of the principal amount.

If you sell now, it could mean giving up years of compounding benefit right when it starts to accelerate.

The Tax Picture Is More Complicated Than Most People Realize

There are two major tax considerations when you're deciding whether to sell or rent.

The first is the capital gains exclusion. The IRS allows you to exclude up to $250,000 in gains from the sale of your primary residence ($500,000 if married filing jointly) — but only if you lived in the home for at least 2 of the last 5 years. If you rent the property and more than 3 years pass without moving back in, you lose that window. You can reclaim it by moving back into the house, but the clock is running.

The second is depreciation recapture. While renting, you can deduct depreciation on the property, which reduces your taxable income each year. But when you eventually sell, the IRS recaptures those deductions and taxes them at a flat rate of up to 25%, regardless of your income bracket. To avoid that, you can do a 1031 exchange and invest in another investment property. Discuss the situation with a tax attorney.

Is It Worth It Financially?

Renting your home can generate a good income depending on market conditions and your mortgage loan terms. For many homeowners, an additional $10,000 to $30,000 in annual net worth makes it worthwhile to rent out a property.

With a mortgage, that income won't all land in your pocket as cash flow. However, it covers the mortgage, reduces your out-of-pocket carrying costs, and continues building equity. Over time, the rental rates will go up but your mortgage payment stays fixed. That will allow you to earn a better chunk of money in the long term.

It’s important to understand the cost of owning a rental property. There will be times when the home remains vacant. You will need to find new tenants. You need an excellent property manager on your side for a stress-free experience. You can estimate spending 10%-15% of your monthly rent on property management, tenant screening, and vacancy rates provided the market conditions are favorable.

Overall, some landlords estimate 30 to 40 percent of gross rent goes back into expenses. The cost of maintenance will depend on the age and condition of the property. Factor that in honestly before you project returns.

Landlord-Tenant Laws are Different in Every State

Before you do anything else, review the landlord-tenant laws in your state. Many first-time landlords are unfamiliar with the legal settings and don’t know what they are getting into. The irony is that the laws in Texas are entirely different from those in New Jersey or California. Texas is one of the most landlord-friendly states in the country. In Texas, you can issue a 3-day notice to vacate for nonpayment of rent, and a full eviction typically wraps up in 2 to 4 weeks. Courts are efficient and it’s possible to move through cases quickly.

It’s an entirely different experience when we talk about New Jersey. There is an anti-eviction act that stops you from not renewing a lease. You cannot remove a tenant without a justified cause and that could have its own legal language.

A contested eviction can take 2 to 6 months or longer. Property taxes in New Jersey average 2.47%, which is among the highest in the country and will directly impact your income as a landlord.

It’s possible to be a successful landlord in both states but you must be prepared mentally and have a team of contractors and property managers by your side. Consult an attorney to understand the landlord-tenant laws in your state.

Are You Planning to Return?

This question changes everything.

Is there a possibility that you would want to move back into your home after 3 to 5 years? If yes, then renting is often the smarter move. You will not have to bear the expenses of selling a property and then buying another one. You can preserve the equity (asset), generate income in the interim, and return to a property that has continued to appreciate.

It’s important to remember the capital gains tax deduction. If you think you will sell once you come back, make sure that three years have not passed in the 5-year lookback period.

Selling or Renting a House is a Personal Decision

Selling a home comes with real costs too. Realtor commissions, closing costs, staging, and holding expenses can reduce your net proceeds when you choose to list on the MLS. Renting a property also comes with friction. Not everyone can manage a tenant while being away. You will need to make a fair assessment whether you would like to handle this job and if it makes financial sense for you to keep the property.

Talk to an attorney, understand the landlord-tenant laws and understand your cash flow to make the best decision for your situation.