At some point, every homeowner has asked themselves this question. Much of the decision comes down to the specifics of your personal situation, but here are a few things to consider.
Have I lived in my home for two years or more? - If you sell your primary residence less than two years after purchase and don’t have an IRS approved reason, such as a verifiable job transfer, you may have to pay capital gains tax on the profit. If you sell your primary residence after the two year mark, married homeowners have a $500,000 exemption and single homeowners have a $250,000 exemption. Without this exemption, any profit you make off the sale of your house could be subject to up to 20% in capital gains taxes. While there are some tax implications for rental income, they tend to be much more favorable than the dreaded capital gains tax. If you haven’t lived in your home as your primary residence for two of the last five years, but you need to move somewhere else and expect to make a profit if you sell, it may very well be better to convert the property into a rental. One other consideration - for most conventional mortgages, you are required to live in your home for one year before renting it out if you qualified for the mortgage based on the home being your primary residence.
Do you really want to become a landlord? Can you pay someone else to do it? - Being a landlord has a way of taking up more time than you originally thought it would. Even with the best tenants there are usually a few issues that pop up during a lease term. And we’ve all heard horror stories about those not so great tenants, so keep in mind there is a possibility things could go wrong. Louisiana has very tenant friendly eviction laws, so that less than ideal renter may be harder to evict than you would think. Even landlords with a small property portfolio may find it worth while to turn over the majority of the tasks associated with owning rental property to a property manager. Provided you can afford to do so, this can save a significant amount of time and stress.
Do you have enough equity to sell? - One of the most common reasons homeowners consider the rental option is because they don’t have enough equity in their home to make a sale worthwhile. In this scenario, it may benefit homeowners to rent out their home for a few years in hopes that the home will increase in value as their equity increases.
Do you have enough cash tucked away for a landlord emergency fund? - HVAC systems mysteriously stop working the first week of June. Carpets get ruined. Roofs leak. Appliances stop working. As a landlord, this will be your responsibility. Also, what happens if the property goes unoccupied for a few months or a tenant simply stops paying rent, and the home still has a mortgage obligation? Make sure you have enough cash on hand to deal with any of these costly scenarios should they happen.
These are just a few of the top questions to ponder as you consider the decision to sell your home or rent it out. The most important thing to do before making the leap in either direction is to sit down with your CPA or investment professional to go over all the implications considering your complete financial picture.