Updated: Mar 14, 2019
This really depends on your goals. While there are some market considerations at play, this decision rests mostly on your personal plans. Holding onto your home as a rental property can transform it into a great investment, but it’s not without its own risks.
First, do the math.
When looking at your home as a rental property, it all comes down to cash flow. Estimate the rental income then subtract your projected costs: mortgage, condo fees, insurance, property tax, water, and any utilities you plan to provide. If this cash flow number is negative, then renting does not appear to be in your short-term interest, and a sale may be better.
If this number is positive, weigh the projected rental profits against the cash you would receive in a sale. Take the cash flow amount you calculated and make it an annual amount. Then, divide it by the cash you’d expect to receive in a sale. That percentage is your cash-on-cash return on investment (ROI). With that number, you can compare the rental property to other possible investments. For example, a 2% ROI is barely better than parking your funds in a savings account. A 15% ROI, on the other hand, may well be worth the risk and hassle of being a landlord.
Second, consider your own goals and plans.
Think carefully about whether you would like to be a landlord. For some, it is a great opportunity to undertake an active investment. For others, it’s an unwelcome obligation. Be honest with yourself about your risk tolerance and willingness to serve tenants. Also, consider how much cash on hand you would need to purchase your next home.
Last, look at the tax and other considerations.
If you’re on the fence after the other two steps, take a closer look at the tax and legal considerations. Some tax break encourage rental property investment. Others, such as the effective three-year limit on capital gains exclusions, incentivize the sale.
Of course, we enjoy doing the math and weighing options. If you’d like some help working through this decision, please contact us.