First, congrats! Real estate is a powerful investment that can generate additional monthly income. Also, benefiting from long-term appreciation. The fact you are asking yourself ‘should I rent or sell my house’ indicates you want to build wealth.
Since real estate is an investment, calculate all your potential income and expenses. This will determine if this is a smart investment. Not every property is a smart investment and can lose money.
To start calculating potential returns, let’s review important items that impact your profits.
Will you self-manage or hire a property manager?
Every rental property needs property management. Whether self-performed or hired. By self-performing, you can save thousands of dollars per year. In exchange, it requires some time commitment. Therefore, it is important to determine early in the process your preferred management style.
The primary tasks for property management are maintenance coordination, leasing and rent collection.
Hiring a manager ranges from 16 to 18% of the annual rental income. That includes monthly management and leasing. Landlords often complain about their manager’s maintenance expenses. Property managers utilize their own handyman and have a minimum trip charge. Yes, there are stories of a $99 light bulb change.
Self-management is practically free but time consuming. Managers are expensive but require less time.
How much maintenance is required?
Take a real good assessment of your home. Is it old and falling apart? Or, is it new and everything works great?
Like when you were the home owner, maintenance will continue at its current pace or worsen. Afterall, even the best tenants never treat the property as kindly as you.
Make a list of items that can potentially break within the next few years. Waters heaters. HVAC. Old carpet.
Make a list of items that continue to be an issue. Electrical issues. HVAC problems. Irrigation system.
Look up the last 2 years of expenses for the home. Including all your Lowes trips! If self-performing, consider the time. Regardless of management method, both will require money but property management can be 3-5x more.
How much can your home rent for?
Not sure what rent amount you can get, consider a testing listing. This will allow you to list the property and gauge the amount of interest you will receive.
If you are testing now but considering moving in 3 months or later, you will need to re-activate your listing. Tenants typically search 1 or 2 months in advance.
After enough inquiries, determine whether the rent amounts are good.
Have you lived in this home for 2 years?
Chances are you took advantage of Fannie Mae and got a mortgage with less than 20% down. If so, Fannie Mae has regulations that could limit you from buying another home.
A popular rule is living in the property for at least 2 years. Not being underwater.
The great news is the opportunity to buy a new home every 2 years for 5% down! The sad news is buying a new home less than 2 years can be at least 20% down.
Will it cashflow?
By now you have determined if you will self-manage or hire management. Know what to expect for maintenance. Have an understanding of a realistic rent amount. And know if you can move out while avoiding taxes.
By subtracting all the expenses (management fees, maintenance and mortgage) from the rental income, this will determine if the property can safely make a profit.
Investors typically want 15% return-on-investment. After figuring our your potential profits, what return percentage do you get? If this is a cashflow dollar amount or percentage that excites you, then you should rent your house.