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A day may arrive when you find yourself having to choose between renting and selling your current property.



Renting Vs. Selling a Home: Which is Right for Your Property?

March 18, 2019
By Comerica Bank

A day may arrive when you find yourself having to choose between renting and selling your current property; for example, you might need to temporarily or permanently relocate for employment purposes. In this situation, renting out your property is not necessarily preferable to selling it, and vice versa. Rather, the optimal choice for your current property will depend on various factors that we explore in this post. 

Your future housing plans

Homeowners who leave town altogether typically opt to sell their home rather than rent it out. This is especially true for homeowners whose only reason to return to the city or town they leave behind is to check on the property.

Homeowners leaving the property for a few years with the intent of returning, on the other hand, may be more inclined to rent that property out to cover the mortgage cost until they return. This option appeals particularly to homeowners who feel attached to the property or the location. The only hitch is that homeowners in this category will need to act as a landlord in the interim or hire a property manager. The former can be a time-consuming process, while the latter can be expensive. 

Considerations for selling 

Homeowners interested in selling their home usually start by calculating the amount they need to pay on their current loan compared to the current value of the house. Profits made on the purchase price will ideally be enough to cover the loan balance while leaving some money left over to fund the move and, if applicable, finance a down payment for a new property.

If you're in a difficult market, or have a new loan subject to prepayment penalties, you aren't necessarily stuck in that house. It may be worth exploring a land contract, which is a common path to "rent-to-own" a home. This is where a homebuyer who is unable to secure financing through traditional means provides the seller (you) with a down payment on the house and then pays monthly rent. The seller may apply that rental income toward paying off an existing loan on the house. Either way, that rent gradually increases the buyer's equity in the home.

Sellers may want to look into rent-to-own because it widens the scope of potential buyers and gives homeowners who feel stuck in a tough market a means to sell their property. Should the buyer back out, the seller keeps the down payment and any rental income, meaning it's a relatively low-risk affair for sellers.

Considerations for renting

Homeowners may choose to rent out their current property for several reasons, including: 

  1. With the intent of eventually returning to the house.
  2. To continue paying off the mortgage with the long-term goal of rental income and eventually profiting from capital gains.

Renters who intend to return to their property can continue paying off their mortgage and possibly profit from rental income in the time spent away from their property. The extent of those profits depends on the price-to-rent ratio. A low price-to-rent ratio means it's cheaper to buy than to rent in that area, so there's a good chance the rental income will yield a profit. A high price-to-rent ratio means that it is more expensive to own than to rent, which will yield narrower cash flows. These metrics can be useful for rental property owners, but it's also important to consider the market (e.g., is there actually any demand to rent in that area?).

The same price-to-rent rules apply to homeowners who decide to treat their current house like a permanent rental property. The main difference is that an investment property will be subject to capital gains taxes on the sale. 

The bottom line

The decision to rent or sell your current property depends predominantly on your priorities, such as whether you're attempting to find, or retain, the home of your dreams, or profit from an investment property. Contact Comerica Bank to begin discussing your options.

 

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.