Whether you inherited a family member’s home, kept your starter home after upgrading, or spent the last few years investing in rental real estate, you may find yourself having a “keep-or-sell?” debate. The right path can depend on a variety of factors unique to your property and your market. Read on to learn what you’ll want to consider when deciding whether to keep or sell your rental home.
Those who are in hot markets may find that purchase rates are rising even more quickly than rental rates, sending even well-qualified homeowners into the rental market after being priced out of a new home. This can be a win-win for landlords, as selling a rental home in this market is likely to yield a high price, while hanging onto it as a rental can also be a financial boon.
However, those in depressed real estate markets may find that selling a rental home is a tough prospect. In many cases, keeping this home rented and occupied rather than taking a loss on a sale is the more prudent financial move.
If your rental property is cash-flow positive, keeping it can often make sense from a financial perspective — at least if you’re accounting correctly for irregular costs like evictions, vacancies and minor maintenance items. When your rental receipts are enough to cover these costs, along with the mortgage, you’re essentially just allowing your tenants to pay for your home on your behalf.
On the other hand, a rental property that is coming up on some expensive repairs (like a new roof, foundation repairs or multiple tree trimmings) may not be worth hanging onto through these repairs unless you’re truly committed for the long term.
In some cases, even a cash-flow positive home isn’t enough to cover unforeseen expenses that may crop up. If you’re living paycheck-to-paycheck without this additional rental income and aren’t sure how you’d pay for a major expense, letting this property go may be the better option.
If you’ve long dreamed of an early retirement fueled by rental royalties, letting go of an existing cash-flow positive rental may not further this goal. However, selling your home and sinking the profits into an index fund may also provide you with an adequate rate of return for your retirement goals; you may want to do some calculations to see whether one option substantially outweighs the other.
Often, tax factors can drive the keep-or-sell decision for you. Whether you’re running out of time to take a certain depreciation deduction, need to perform a 1031 exchange, or are finding it more lucrative to write off your real estate-related expenses than let your home go, selling your home could mean losing thousands of dollars per year in tax deductions.
This isn’t true across the board, and in some situations, selling may actually be most advantageous from a tax perspective, but for tax-conscious homeowners, hanging onto a rental deduction may make the most sense.