Should You Rent Out Your House or Sell It?
We take a close look at both options to help you determine which one makes the most sense for you.
By Emily Southey | 12 minute read
Are you thinking of renting out your house or selling it, but aren’t sure which is right for you? The experts at Wahi have put together a list of pros and cons for each. We also break down some signs to look for when determining whether selling or renting is right for you. Check it out below.
The Pros of Selling Over Renting
- Living mortgage-free: If you have owned your home for a while, you may have built up a considerable amount of equity. In this circumstance, you might be able to sell your home for enough money that you can buy a new one in a smaller, more affordable location and live mortgage-free.
- You can afford a new (bigger and better) home: Another perk of selling over renting is that doing so may allow you to buy a bigger, better home somewhere else.
- You can avoid being a landlord: Managing a rental property is work. When you decide to rent your home to a tenant, you become a landlord, which comes with a lot of responsibilities. If you don’t have the time or energy to devote to this, selling your home may be the best option.
- It is easier to sell a home without a tenant: The reality is that even though rental properties generate income, they may also be harder to sell — especially if they have current tenants living in them. Selling a home that is vacant is generally faster, easier, and more convenient for both the buyer and the seller.
The Cons of Selling Over Renting
- Depending on where you move, your new home may be less valuable: For example, if you plan on selling your Toronto home and moving somewhere outside of the city, you will be exiting the Toronto real estate market. Although your new home will likely be cheaper, if you ever want to re-enter the Toronto market, it will be more difficult. Experts say that Torontonians who sold their homes in 2020 would, on average, need to spend $400,000 more to buy their old homes back in 2022.
- You do not like your new home: Another con of selling over renting is the risk of not liking your new home. If you opt to rent rather than sell right away, you can test out living in a new home or neighbourhood and make sure you like it before selling. Homeowners might regret selling if they end up not liking their new property.
The Pros of Renting Over Selling
- Your property will generate rental income: Renting out your home instead of selling it allows you to earn extra income and hold onto a valuable piece of real estate that may continue appreciating in value. Plus, the rent you collect will increase the amount of equity you have in the property.
- You have the option of moving back: If you aren’t certain that selling your home and moving is right for you, renting it out can be a great middle ground. It allows you to test out a new home or neighbourhood without fully committing. If you end up not liking your new property, you can move back in after the lease with your tenant ends.
“Not all homes will be successful rental properties. Out of all the factors to consider, you will need to pay close attention to the location, size, and condition of your home.”
The Cons of Renting Over Selling
- Maintenance and repairs: Just because you no longer live in your home doesn’t mean that the maintenance and repairs stop. You will become a landlord if you choose to rent out your home, which means you are responsible for tasks like collecting rent and handling emergency repairs. If you don’t have the time or energy for this, then selling might be the best bet.
- Capital gains tax: Another con of renting over selling is that if you rent out your home before selling, the home sale may be subject to capital gains tax. Principal residences are exempt from capital gains tax in Canada, but if you stop living in your home, it no longer becomes your principal residence. Therefore, if you sell your property at a gain, it will be taxed.
- Income taxes: A second con that relates to taxes is that the rent you collect from your tenant(s) will be taxed as income. Therefore, homeowners must be prepared to pay taxes on the income they earn.
- Difficult selling the property: Finally, selling a property with a tenant is much more difficult than selling a vacant property. This may mean that your house sits on the market for a longer period of time. It might also dictate when you can sell the property. For example, you may choose to wait until the current tenant’s lease is up to avoid the hassle of transferring their lease to the new owner. While this will make your property more attractive to buyers, it might be inconvenient for you if it doesn’t line up with when you want to sell it. Even showing the home becomes more complicated when you have a tenant as the law requires you to give the tenant 24 hours’ notice, and you can’t insist they leave the property during the showing.
Questions to Ask When Deciding Whether to Rent or Sell
Now that you’ve read through the pros and cons of renting over selling, you may have a better idea of what’s right for you. Beyond weighing the pros and cons above, we also recommend asking yourself the following questions to determine whether to rent or sell your home.
1. What is my financial situation?
Start by taking a good hard look at your financial situation. If you are leaning toward renting out your home, be sure to assess whether you can afford to purchase a second home (bearing in mind that down payments for second homes can be as high as 20% in Ontario). Generally speaking, buying a second home isn’t recommended unless you have built up enough equity in your first property to pay the down payment on your new one. Beyond the down payment, you must ensure that you have enough money to cover the closing costs of a new home and the new mortgage payments. You will also want to find out how much money you could collect from a tenant if you rent out your home to determine whether it would be enough to cover maintenance, property tax, and mortgage payments for your rental property. If it doesn’t seem like it would more than cover those costs, renting instead of selling may not make financial sense. Ultimately, we recommend crunching the numbers with a financial planner, accountant, or realtor to decide if your financial situation is suitable for a second home.
2. Do you want to be a landlord?
A second question to ask yourself is whether you are comfortable being a landlord. Keep in mind that when you rent your home to a tenant, you become a landlord, and being a landlord is a job. Unless you have the means and are willing to pay a property management company to manage the rental on your behalf, you will need to take on this role yourself. This means maintaining the property, conducting all necessary repairs (including emergency repairs), collecting rent, vetting and finding a tenant, and more.
3. Is your property suitable for renting?
Not all homes will be successful rental properties. Out of all the factors to consider, you will need to pay close attention to the location, size, and condition of your home. These three factors play the biggest role in determining the success of your rental property. A prime location, ample square footage, and a home in new or solid condition are likely to translate to a successful rental property. Do some research to determine how much rent you can charge based on the location, size, and condition of your home. Be willing to see the flaws and put in the work (for example, making necessary repairs) before renting if you decide to go this route.
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Five Signs You Should Sell
One final way to decide whether renting your home or selling it is right for you is to look for the signs. We’ve put together a list of signs that it might be time to sell your home below.
It’s a seller’s market
If you’re currently in the midst of a seller’s market, where demand for homes is high, then selling your home might make the most financial sense. Rather than waiting and risking a cool market, selling while the market is hot is likely to earn you more money. It might also allow you to get away with doing minimal repairs on the property prior to selling. Overall, selling your home in a seller’s market usually means more money in the seller’s pocket.
Average rent prices are low
Another sign that it’s time to sell is if rent prices are low. Be sure to research the average rent prices for homes of your size in your neighbourhood. If vacancy rates are high and rents are low, you may not have much success renting out your property. Even if average rent prices are acceptable, you will need to calculate whether they are enough to cover your mortgage payments, taxes, maintenance costs, insurance, and more. If you will still come up short, we recommend selling over renting.
You do not have the time to manage a rental property
If you simply do not have the time, energy, and money to dedicate to managing a rental property, this may be a clear sign that selling is right for you. Ultimately, being a landlord will not jive with everyone’s lifestyles. Whether you’re retired and just want to relax or you work a full-time job and don’t want to spend your free time maintaining a property and responding to tenant complaints, you should only rent out your property if you are prepared to be a landlord (or alternatively, if you are prepared to spend money to hire a property management company).
You don’t have much liquid cash on hand
Liquid cash — at least some of it — is generally required to manage a rental property. To be on the safe side, property owners should always have enough cash to cover property maintenance, taxes, mortgage payments, and more in the event of a vacancy. Experts recommend having a minimum of $10,000 in discretionary income at your disposal when managing a rental property. If you don’t have enough money on hand to deal with unexpected losses or vacancies between tenants, as well as emergency repairs, selling might be the right decision.
Sayers explains that you need to have enough liquid cash to maintain the property and pay property taxes and mortgage payments in the event of a vacancy. If you don’t, renting might not be right for you.
You want to use the equity you’ve built in different ways
If you need cash to fund a down payment on your next home, and you have built up a lot of equity in your current home, selling it might allow you to achieve your goals faster than renting. Speak to a mortgage broker or realtor about your current equity to determine the most effective way of spending it.
Three Signs You Should Rent
If the following three signs ring true, it could mean that renting out your home is the way to go.
1. Rental demand is high
Rental demand changes with the market, and it can spike for many reasons. For example, if you’re located near a popular university or in the core of the city, your property may be particularly attractive to renters. Whatever the reason, if vacancy rates are low, average rents are high, and rental demand is strong, it could be a strong indication that renting is the right decision.
2. Your house has a lot to offer
Does your home have something unique to offer renters? If so, renting can be a viable option. Examples of unique amenities include renovated interiors, proximity to city centres, walkability, new appliances, lots of outdoor space, and parking. If you know that your home is in a good location and has a lot to offer renters, you may decide to rent rather than sell.
3. It’s a buyer’s market
One last sign to rent your home rather than selling it is if it’s a buyer’s market. If the local market is weak, selling your home might not be the best decision. Doing so could lead to you accepting a purchase price below market value. If you can afford to hold onto the property, consider renting it out and listing it once the market is stronger. The good news is that you will continue building equity in the property during this time while simultaneously generating rental income from a tenant.
Frequently Asked Questions
If I am downsizing from a house to an apartment, should I rent out my house or sell it?
The answer to this question ultimately depends on many factors, including your financial situation, current real estate market conditions, and the location and size of your home. There are pros and cons to both. If you are prepared to take on the landlord role and the market is strong, renting out your home might make financial sense. Alternatively, if you don’t have much equity in your home or you are downsizing but moving to a major urban area where housing prices are higher, selling your home might be your best bet.
Should I rent out my house to a relative or friend instead of selling it?
Renting out a home to a relative or friend instead of selling it can be worthwhile. Since you know them personally, there may be less risk associated with having them as a tenant. That said, if you decide to rent your home to a relative or friend, we recommend treating them like any other tenant. Draw up a standard lease agreement and make sure they abide by it and sign it. This way, if anything goes south (if they stop paying rent), you will have legal recourse.
Can I continue to live in my house and rent out a floor of my house instead of selling it?
Yes, you can certainly decide to rent out part of your home rather than renting out all of it. This can be a great way to maintain your principal residence status and avoid capital gains tax. Doing so will also allow you to generate rental income, which can help cover mortgage payments, maintenance, property taxes, and more. Renting out part of your home only can be a great option if you are not sure whether you’re ready to move.