There are a few mental calculations that need to be made before making this decision. How much do you owe on the current one? What is the value of the property? What is the interest rate a buyer will get? How far away are you moving? But, before we get into those, you have to ask yourself the most important question: “Do I want to be a landlord?”
The Landlord Question
Some people have already answered this question for themselves, but some haven’t really considered it. It seems really nice to just get rental money which helps you pay the mortgage and you get to feel like an investor. But, it all gets tough when the toilet is clogged, a tenant stops paying the rent, or does significant damage to the property. It can quickly get more expensive to rent than to leave it sit if you aren’t careful.
My advice to you is to take the time to learn about how to be a landlord. If you are hesitant, research property managers. The idea for you isn’t to make money, just to pay the bills until it’s favorable to sell (which may be many years or sooner depending on your situation) and build equity.
How Much Do You Owe?
This one’s easy. Take a look at your mortgage statement. Additionally, look at your bank account and determine how much you are paying for property tax and insurance. Multiply insurance by 1.25x because it is more expensive to have a renter. Look at what you put in to repair the place and double it. Tenants are not as careful with the property as you are. Think about changing some things to make it more tenant-proof, like removing sink garbage disposals – they are always breaking.
What is the Value of the Property?
A real estate agent can help you here, but you are really just looking for an estimate. Online sources like Zillow and Redfin are variable in their accuracy, though. You can ask the agent for a broker’s price opinion, which will come at a cost, but can help you. You could also do the research yourself. Get a bunch of those throwaway real estate magazines and find houses in a similar location and similar size to yours. Look at the asking price, knock off 10%, and take the average, and you’ll be pretty close to your house value. This is pretty inaccurate, but is free and doesn’t take a lot of time.
How Much Can It Rent For?
You need to estimate what the property will bring in. The best way to do this is to find out from some local property managers. They probably won’t want to waste time talking to you unless you plan to hire them, though. Real estate agents who specialize in rentals could tell you, but they have the same problem – if you aren’t using their service, they probably won’t give you much thought.
Another way is to pretend you are a renter. Go online or get the rental magazine at the same place you got the real estate magazine. Start looking for rentals similar to your house. Write down what they are asking for rent and take the average. Take this number and knock off 8% for vacancy (that’s one month a year). That’s your rental income.
How Far Away are You Moving?
This is an easy one. If you are moving more than 1 hour away, you really won’t be able to manage the rental yourself. Sure, there are those that do, and some do it well, but it’s far more likely that you won’t. It’ll become a disaster before you know it – and you won’t know it, because you’ll be so far away. The only way I’d ever consider renting from afar is to have a property manager.
Make Your Decision
With this information, you can decide whether to sell or rent. The bottom line is – if you don’t think you can manage it reliably yourself, then sell. Otherwise, do the math.
Take the yearly rental income you calculated and subtract the repair expense you calculated earlier. Subtract 10% of that to save for reserves for when a major repair is needed. Then subtract insurance and property tax. Finally, take out your mortgage. If you are left with a positive number, then the project is feasible to rent. If not, then you better sell.
Sadly, most of the time, you’ll need to sell. Renting out just one single family house is often a losing proposition. Though, if you have a lot of equity before moving, it might work for you. And, if you really want to get into renting, this might be a good way to learn – as long as you have personal reserves to float the property if it goes south. Just be sure you give it a lot of thought before jumping in.
