In today’s real estate market, property owners face a critical decision when they decide to move to a new property: should they sell their old home or consider renting it out? The United States’ rental market is currently experiencing unprecedented growth, making this choice even more challenging for property owners, and while the idea behind generating passive income through a rental property sounds like a sweet deal, it’s vital to understand there is much more to this rosy picture than meets the eye. In this article, we’ll explore the mover’s dilemma, and if you’re looking to monetize your property whether selling or leasing to access equity, we’ll take a deeper look at the five most important considerations for any property owner.
Market Trends in the U.S. Rental Sector
Before delving into the decision-making process, let’s take a closer look at the current state of the U.S. rental market. Did you know that more than 35% of households in the U.S. rent homes, and over the past few years, the demand for rental properties has only continued to surge? According to the U.S. Census Bureau, this is driven by various factors such as demographic shifts, lifestyle preferences, and the influence of remote work. As a result, rental rates have soared in many regions, offering property owners a compelling incentive to explore the rental option.
Zillow’s most recent rental report released in July 2023 showed that the typical asking rent in the United States has reached $2,054, representing a 4.1% increase when compared to the same time last year. It’s worth noting that overall rent growth has been decelerating since its peak year-over-year growth of 16.2% in February 2022. Now while this trend indicates a more stabilized and moderate rental market, we also know that we’re in a period of pervasively high-interest rates.
Because of this, here in Orange County, our team is seeing an increased pool of luxury rental candidates. These are people that would otherwise be buyers, but due to interest rates are able to sit on the sidelines with excess cash until those rates come down. Interesting to note, is that our luxury clients who are well-qualified, good FICO score individuals are also the ones currently able to monetize their properties. While monetizing your property at this time sounds ideal, we realize not all will fall under the luxury rental candidate pool, so here’s what we want you all to consider in this current market.
Your Financial Goals
When contemplating whether to sell or rent your home, financial implications play a pivotal role. Selling a property can yield a lump sum of money, which can be invested elsewhere or used to fund the purchase of your new dream home. On the other hand, renting can provide a steady stream of income, offering financial stability and the potential for long-term gains if the property appreciates in value. In short, there are pros and cons to both scenarios.
Our advice is to evaluate what YOUR personal financial goals are! While it may seem obvious, taking time to evaluate your long-term financial and lifestyle goals is the core consideration anytime you make an investment decision. Yes, the thought of leasing out your residential property may sound enticing, but have you considered leveraging a 1031 exchange to trade up to something that has better diversification and greater ROI? What if your goal is to simply trade up your primary residence? Is there a way to access all your equity without selling?
These are just a few of the questions we’d advise you to think about – it shouldn’t be about what’s working best for your investor neighbor or friend, but rather, what is going to help you get closer to your personal financial goals in the end.
Taxation and Investment Strategies
It’s essential to consider the tax implications of both selling and renting. When selling your old home, you may be subject to capital gains tax depending on your location and the length of time you’ve owned the property. However, rental income is also taxable, and there are potential deductions available for expenses related to property management and maintenance.
Consulting a tax professional can help you navigate these complexities and devise a tax-efficient investment strategy. Our team has access to incredible connections that can provide you with the proper advice when considering your tax implications. Want to get connected? We’d love to steer you in the right direction.
Rental Demand, Vacancies, and Reserve Funds
Before making your decision, it’s essential to thoroughly research your local real estate market and rental demand in your area. Lack of knowledge of rental demand, ignoring the possibility of vacancies, and not preparing for reserve funds are where property owners unknowingly put themselves in a sticky situation.
As your local experts, we know that high demand for rentals in certain regions may indicate that renting your property could be a lucrative option, especially if you can secure reliable, long-term tenants. On the other hand, we can also advise you when selling may be more beneficial when our market is experiencing low inventory and high buyer demand, as this can potentially lead to competitive offers and a quicker sale.
For our current Orange County property owners, know that our inventory is swelling! We’ll work together to determine what option may be best for you in this current market. Too often we’ve come across owners that easily fall into the trap of believing their home can rent for $X amount, and don’t properly weigh the possibilities of the home being vacant until the perfect tenant is found. This is where reserve funds become SO important.
Are you ready to cover the cost during that potential vacancy period? Do you have an accurate grasp of the rental market in your neighborhood? Are you equipped with the proper data points to support your desired monthly rent?
You don’t have to hunt for the answers yourself. This is where we come in!
“Passive Income” vs. Property Management
You remember hearing it in your Economics 101 class repeatedly, but we’re here to remind you again… “there’s no such thing as a free lunch”. This whole notion of house hacking and passive income is STILL work. The question is, are you doing the work or are you paying someone to do it?
Renting out your home means taking on the responsibilities of a landlord, which involves property management tasks such as maintenance, repairs, and tenant screening. While some property owners are well-equipped to handle these duties, others may prefer the hands-off approach that comes with selling. If you opt to rent, you can also hire a property management company to handle these tasks on your behalf, ensuring a smooth rental experience, but again this is an expense you’ll have to incur.
It all comes down to simple math. Your time is money. Hiring a property management company is money. Will it still make sense for you in the end?
What’s Next
The mover’s dilemma is a significant challenge faced by many property owners in the current U.S. rental markets. Whether to sell or rent your old home is a decision that requires careful consideration of market trends, financial goals, taxation, rental demand, and property management responsibilities.
Ultimately, there is no one-size-fits-all answer, and what works best for one property owner may not be suitable for another. As your real estate advisor, our team is equipped to help you make an informed choice that aligns with your unique circumstances and aspirations. So if you’re currently struggling to find the right answer – reach out to us today. We’d be happy to discuss the pros and cons and provide you with the most up-to-date information on the rental market here in Orange County.