Deciding whether to rent or sell your home to buy a new home is a big decision. Not everyone will have the same answer, either. You must consider many factors including whether you will qualify for financing for a new home purchase if you keep your current home. You also need to look at how renting will affect your future.
Selling and renting both have their benefits. Your tolerance level as well as ability to qualify for additional financing will play major roles in your decision.
Factors to Think About
This is a big decision you are about to make. Before you decide, consider the following factors:
- What is your financial situation like? Can you afford to cover both mortgages? You have to think this way just in case your tenant stops paying or moves out suddenly.
- Can you handle the responsibilities of being a landlord? You will have to handle the maintenance and repairs on the home. This means either doing them yourself or paying someone to do them. This goes back to your financial situation and what you can afford as well as what you have time to do.
- What are your plans? Are you moving away forever or is this a temporary situation? If you are moving away forever and it is out of state, being a landlord could be difficult. If your move is temporary, though, it may be cheaper to have a home to come back to when the time comes.
The Average Rent in the Area
After considering the above questions, start looking into the average rent for your area. You might find that you cannot charge enough rent to cover your mortgage payment. This would leave you behind each month. In this case, renting may no longer be a choice.
If, however, the market rent is high enough that you could cover the mortgage payment and minor repairs, you may consider it. As your tenants pay you rent, you pay your mortgage down. This helps to further your investment in your property. Even if you have to sell it in a few years, chances are the property will appreciate. When you do sell, you will do so for a higher profit thanks to the years you spent renting it out.
The Money you Have for a New House Purchase
Considering your future plans is an important part of this decision making process. How much money do you have for a down payment? What type of home do you want to purchase? Upgrading from your current home may require more funds than you have on hand. If so, you have to decide between purchasing a different house or selling your current home.
If you do have the money for a down payment keeping your current home can help further your investments for the future. It is something to consider as long as you can comfortably afford everything that goes along with owning two homes.
Think of Future Repairs
You lived in your home so you know the condition of the important things like the HVAC system, roof, electrical, and plumbing. Can you think of any repairs that may be necessary very soon? Do you have the money to handle those repairs?
Thinking about the future, you will need an emergency fund to handle anything that comes up with the home. Renters need repairs done almost immediately. You cannot tell them they have to wait 3 months to fix the plumbing because you do not have the funds. Calculating a decent size emergency fund in your budget will help determine if renting your home is right for you.
As a benefit, renters often overlook certain issues that buyers would not. For example, the kitchen cabinets may not be the most aesthetically pleasing. A buyer may move onto another home because of it. They do not want to invest the money in the cabinets right now and would rather purchase a home that has the look they want. A renter, however, may overlook something like kitchen cabinets because they are not investing in the home themselves.
Can you Find Tenants?
This sounds easier than it is for most people. Unless you have experience in renting out to complete strangers, you do not know everything that goes into the process. It is a screening process that requires multiple steps in order to ensure quality tenants. Background checks, calling references, and coming up with a lease that everyone agrees on takes a lot of time.
If you do not have the resources to handle these tasks, can you afford to hire a property manager? On the plus side, property managers often secure higher rents than you ever thought possible. They know the type of tenants to look for and how much rent to charge. They are not emotionally attached to the home, so they have a few advantages when dealing with the details of the rent and lease.
Can you Qualify for Financing?
Perhaps the most important consideration is if you can qualify for financing for a new home purchase. The lender will need to qualify you with two mortgage payments. Some lenders may allow you to use future projected rent if you have an executed lease agreement already. If they do allow this income, they will use 75% of the amount stated on the lease. This allows for the expenses that go along with taking care of a home.
If your debt-to-income ratio is too high, you may not qualify for financing. This could help you make your decision quickly. Before you decide whether to sell or rent your home, secure a pre-approval from a lender. This way you know what you qualify for and can make your decision accordingly.
A new house purchase while owning your current home requires many decisions. Carefully evaluate all aspects of the situation. Think of the present as well as the future. Renting your home out is a big responsibility. If you do not hire a property manager, everything is on your shoulders. If you think you can handle it and you can qualify for new financing, renting can help you with one of the largest investments of your life.