Renting vs. Selling - What Makes More Sense?

Posted on October 9, 2007 by Eric
Filed Under Mortgage

Looks like something I should read…. Our move is coming ever closer and we’re in a unique position where there is the possibility we could keep our current house and rent it out. The typical price a tenant will have to pay to rent a home in our area tends to be higher than our current mortgage costs. Even after taxes and home owner’s insurance (and maybe even a home warranty), we might still be pulling in a slight profit.

Home prices have gone up in our area pretty significantly. We’ve got some equity in this house that we could use to invest for our future, or to pay down the mortgage on the new house. The idea of eventually making a reasonable profit renting the house out to folks, and maybe even paying off the house while it earns that profit is also appealing. But there’s more to the picture than that.

We’re not sure we want to be landlords. The whole idea of having to make sure other people have the rent in on time, or to deal with problems that happen in the house (who wants a 4AM call about the air conditioner going out) aren’t really appealing to us. To bring in a management company to handle that would probably put us in a situation where we aren’t making enough off of rent to cover all the related expenses. We could also run into that situation if things start breaking down in the house, whether from neglect or just age. If problems arise, it may put us in a position to have to tap our emergency fund, and it might directly erode any profit we might have made. And if we have trouble finding renters, it would be very difficult for us to make both the mortgage payments, and we may be forced to tap our emergency fund (or go back into debt).

On the other hand, if we sell the house (and get a reasonable profit), we can pay down most of our secondary house loan, reducing the amount of time we carry that mortgage, or we could put that money into investments for our retirement. I don’t see a lot of downside to that, but over the long run, if we were renting the house (and presumably our equity would continue to increase), we may be in a better financial position in the future.

Right now, I’m leaning toward selling the house and investing the equity. So is Melissa. But I want to “do the math” and make sure that doesn’t sway us (one or another). We only have a few months left to make our decision. Once I get some more solid information from the realtor on what the house is worth (and what the current rents are in my area now), I’m going to sit down and figure out what our options look like. If I find something particularly interesting, I’ll probably write a post about it.

If you have some experience in these areas, and have some advice, we’d love to hear it.

Photo credit Umjanedoan

Comments

8 Responses to “Renting vs. Selling - What Makes More Sense?”

Tejvan Pettinger on October 10th, 2007 1:05 am

Good luck with getting good lodgers. Hopefully, over the years your mortgage payments will become a smaller % of your income. So it should get a little easier.
plonkee on October 10th, 2007 5:55 am

I don’t have any experience myself, but plenty of people at work have done this and they’re very happy. I’d probably only do it if I could cover the cost of a management company, whether I chose to use one or not so that you always have that option.

Don’t forget about vacancy rates and tenant damage that costs more than their deposit.
Eric on October 10th, 2007 4:14 pm

@Tejvan - That’s just one of my many concerns about being a landlord. If I run into a situation where I have no renter for months, that’s going to be incredibly painful.

@Plonkee - I have some friends who do this as well, and they’ve warned me about tenant damage (in the same conversation where they tell me I should absolutely rent the house out). I think there will definitely be added stress as a landlord, and I’m not sure there is enough return to make that worthwhile.
mbhunter on October 11th, 2007 8:01 pm

There are ways to structure your lease so that you don’t get the calls at 4 AM. Make the tenant responsible for minor repairs, or go with a property management company.
Eric on October 11th, 2007 8:14 pm

mbhunter - Thanks for the comment! I think you’re right, and I had asked some friends about the possible calls to fix things. They said the same thing - have the lease make the tenant responsible for most of those repairs. I think if I decide to rent it, I’m going to go with the management company anyhow. Just one less thing to have to worry about.
Gary Diamond on April 19th, 2008 5:05 am

We rent out our units and what we do it pay the same amount as we would normally thus paying twice the amount we should thus paying the bond much quicker. Our part of the world has interest rates of 12% so bond money becomes expensive.

We always recommend a rental agent whom takes responsibility for the property.
Make Friends, Earn Money on May 31st, 2008 11:17 am

Yep, property management companies are a good way forward in the short term. My advice would be to use them for 3-6 months and learn how they go about managing the property for you. Keep asking them questions about how they manage the various aspects and then you’ll have the knowledge and confidence to go it alone as landlords, armed with some great information.
Jan(new comment) on August 17th, 2008 9:24 pm

I agree to mbhunter. There is always an option to get rid of this pretty annoying calls for just for maintenance concerns.