Should You Become a Landlord Instead of Selling Your Home?

Moving to a new location often forces homeowners to decide between selling their property or renting it out. In a challenging real estate market, becoming an “accidental landlord” can provide financial relief and long-term benefits, but it comes with responsibilities and risks. This article examines the key advantages, potential drawbacks, practical tips for success, and when selling might still be the better choice.

Build Equity

One of the primary advantages of renting out your home is that tenant rent payments continue to pay down your mortgage principal. This steadily increases your equity in the property over time. For instance, every monthly rent check covers the mortgage, reducing the loan balance and boosting your net worth without additional out-of-pocket costs from you.

According to U.S. Census Bureau data on homeownership, properties held longer often appreciate, and forced principal paydown via rent accelerates equity growth. The Federal Housing Finance Agency (FHFA) reports average annual home price increases of around 5% in recent years, compounding the benefits when tenants handle payments. This strategy turns your home into a passive wealth-building asset, potentially allowing you to sell later with significantly more profit.

Save Time and Money Upfront

Preparing a home for sale typically involves extensive staging, repairs, and marketing, which can cost thousands. In contrast, readying a property for rental often requires minimal fixes focused on functionality rather than curb appeal. One homeowner reported spending less on painting, flooring refinishing, repairs, and cleaning for tenants than they would have on sale preparations—despite handling much of it solo during a family move.

This approach saves not just money but also time, especially if you’re relocating far away. The National Association of Realtors (NAR) notes average seller prep costs exceed $2,000, while rental turnovers average under $1,500 for basic updates. By skipping realtor photoshoots and open houses, you avoid upfront cash drain.

Avoid Risk of a Long Marketing Period

In sluggish markets, homes can linger unsold for months or even a year, leaving owners with dual mortgage payments, utilities, taxes, and maintenance—without income. Renting eliminates this vacancy risk, providing immediate cash flow to offset costs.

Recent FHFA data shows median days on market reaching 60+ in some regions post-2023 slowdowns, amplifying financial strain. Renting ensures steady income, stabilizing your budget during transitions.

Avoid Paying Commission

Real estate agent commissions typically range from 5-6% of sale price, often $15,000-$30,000 on a median U.S. home. By renting, you defer this expense indefinitely. Future tenants might even buy directly, enabling a commission-free sale via owner-financing or lease-option.

The Consumer Financial Protection Bureau (CFPB) highlights how commissions erode seller proceeds; renting preserves that capital for reinvestment elsewhere.

The Costs of Becoming a Landlord

Despite savings, landlords face upfront and ongoing expenses. Prep costs like painting and repairs can exceed first month’s rent. Tenants may demand fixes you ignored as an owner, and local laws often mandate compliance, such as habitability standards.

Expect periodic maintenance: when appliances break, roofs leak, or lawns need care, you’re responsible. The U.S. Department of Housing and Urban Development (HUD) requires landlords to maintain safe conditions, potentially adding $500-$2,000 annually in surprises.

Data sourced from NAR and HUD reports.

Screen Potential Tenants Thoroughly, but Talk With Them as Well

Rental markets attract applicants with credit blemishes like short sales or bankruptcies. Don’t auto-reject; review circumstances and require co-signers or higher deposits. Prioritize strong landlord/employer references, which predict reliability better than perfect credit.

• Check credit score (aim for 620+)
• Verify income (3x rent minimum)
• Contact prior landlords
• Run criminal/eviction background
• Interview personally for red flags

The CFPB advises comprehensive screening to minimize evictions, which cost $3,500+ on average per NAR.

Talk With Your Neighbors About the Impending Change at Your Home

Inform neighbors early about renting to ease concerns over noise, traffic, or property values. Introduce tenants on move-in day and foster goodwill—happy neighbors monitor your property and attract quality renters/buyers.

Studies from the Urban Institute show neighborhood stability enhances rental appeal and values.

Other Considerations for Aspiring Landlords

Buy or maintain higher-end properties to command premium rents, deterring problematic tenants financially. Some families rent strategically near schools/work while profiting from distant ownership, saving on commutes and generating net income (e.g., rent out for twice current lease).

However, converting to rental triggers IRS depreciation, reducing cost basis and increasing future capital gains recapture—potentially 25% tax on depreciated amounts plus standard gains. This erodes tax-free primary residence exclusion ($250k single/$500k married).

Tax Implications of Renting vs. Selling

Selling your primary residence qualifies for up to $500k tax-free gain if owned/occupied 2 of last 5 years (IRS Section 121). Renting forfeits this post-conversion, adding depreciation recapture and higher basis adjustments.

IRS Publication 527 details rental income reporting, deductions for expenses, but warns of “Section 1250” recapture at 25%.

Downsides and When to Sell Instead

Landlording involves headaches: tenant disputes, repairs, vacancies, and legal compliance. If uninterested in management, need sale proceeds for a new down payment, or prefer simplicity, sell.

• No equity needed for next purchase
• Avoid landlord hassles
• Cash out in hot market
• Relocate without ties

Run numbers: ensure rent covers mortgage +20% buffer. Emotional decisions lead to regrets.

Frequently Asked Questions (FAQs)

Q: How much should I charge for rent?

A: Aim for 1-1.5% of property value monthly (e.g., $300k home = $3,000-$4,500). Use sites like Zillow or local comps, ensuring coverage of all costs.

Q: Do I need a property manager?

A: Ideal for distant owners; 8-12% of rent. Self-manage if local and experienced.

Q: What if tenants damage the property?

A: Require security deposit (1-2 months’ rent), conduct move-in/out inspections, and buy landlord insurance.

Q: Can I sell later tax-free?

A: Partial exclusion possible if reclaim as primary, but depreciation recapture applies. Consult IRS rules.

Q: Is landlording profitable long-term?

A: Yes, with positive cash flow and appreciation, but factor risks like vacancies (5-10% annually).

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medha deb

 

Medha Deb is an editor with a master's degree in Applied Linguistics from the University of Hyderabad. She believes that her qualification has helped her develop a deep understanding of language and its application in various contexts.

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