Should I Rent or Sell My Home?

As families grow, kids go off to college, or lifestyles simply adjust, it is common to move houses multiple times in our adult lives. “Passive income” is a hot topic, and having a rental property is becoming more and more popular. When buying a new home, people often wonder if they should keep their existing home and rent it out versus selling and taking the proceeds.

While we could analyze dozens of different scenarios, the answer to that question really comes down to interest rates & net cash flow. Assuming a strong rental market in the area, the lower the interest rate, the more attractive it becomes to keep a home and rent it out. The higher the interest rate, the harder it is to bring in enough income to generate positive cash flow on a property.

Consider the following case:

Dave & Marie’s existing home is worth $300,000. They owe $200,000 at a 2.5% interest rate, so their monthly payment is $948. Based on the current market, Dave & Marie can expect to get $2,000 per month in rent. Carrying costs including taxes, insurance, maintenance, etc. are $400/month. Dave & Marie’s net income from holding the property would be $652/month.

Now, if we simply change the interest rate to 7.31% (current average as of 9/29/23), things look a lot different. Now, the monthly payment becomes $1,647. With the same carrying costs and rent, Dave & Marie are barely breaking even. If they are without a renter for even a month, or a major maintenance item comes up, they would be in the red for the year.

Conclusion:

 The decision to keep versus sell your home shouldn’t be made solely on the desire to have a rental property. We must take into consideration the specific facts and evaluate whether or not the cash flow makes sense. At a low interest rate, it is more likely that enough cash flow can be generated to justify retaining a current residence as a rental property. However, if the rent generated is not enough to cover debt servicing and carrying costs, putting that equity towards a new home purchase with a higher interest rate or investing the proceeds is the more lucrative option.

DISCLAIMER: The scenarios and characters referenced in these case studies are for educational purposes only.  Rates of return referenced are conservatively based on aggregate historical market returns over time. Past performance does not dictate or ensure future success and should not be viewed as a recommendation or financial planning advice.