Sell Home and Rent?
Hi everyone! Based on my own personal experience and reading others’ financial analyses of renting versus buying, I believe there are circumstances in which it makes more sense to rent than buy, and my husband and I don’t believe our current house will be our long-term home, so I’m trying to figure out if it makes sense financially to go ahead and sell now and start renting if that’s going to save us money over the long term. Does anyone have suggestions on how to do the math for this? I’m currently reading “Quit Like A Millionaire” and their suggested formula is multiply your mortgage payment by 150%, which comes out to $1,952 in our case, and if that amount is higher than rent, you should rent, but if its lower than rent, you should maintain/buy. Based on rental rates in our area, we’d probably be able to rent for just below $2,000 for a 3-bedroom unit, so based on that formula alone, we’d essentially breakeven so it doesn’t matter. But if we sold now, we could likely net $90,000 and invest that, so does that change the equation?
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Hi! Another happy renter here but I have to caveat that with a question: what are your long term goals? There is the math side of things, but if you have that low of a mortgage and you are planning on staying in your area longterm, that seems to be an important factor. I'd also think about the age of your current home- how soon will it need a new roof, hvac, windows, etc? I'm sure Paula will cover all of that in her excellent response below, but I don't think this should just be a math question. Fill us in on what you're thinking if you'd like- I'd be interested to know more!
We haven’t landed on exact long term goals yet, but we’ve been talking about the idea of renting so that we can stay in different areas for shorter amounts of time, but ideally keep a “home base” around our current area because family is here and we have 2 under 2 right now, so we want them to spend time with their cousins. We are currently looking at doing a 4-6 week stint somewhere out west this Fall, as we can both work remote, to “live” in a new place temporarily and explore, but we want to be able to return home before we’d consider heading out again. And this will be the first time we try something like this, so who knows if we will even enjoy it. As I’m typing this out, I’m realizing that if we do decide to go the route of renting, want to travel to different areas, but also want to maintain a home base, it would make the most sense to keep our house and rent it out as a short-term rental to (hopefully) cover the costs. It feels like a big commitment to think of doing that right now, to get our house short-term rental ready, so doing a trial run this Fall to see how we feel about the traveling lifestyle should be very beneficial before we jump into anything.
That sounds awesome! What a fun, flexible lifestyle. And I agree- keeping the house and renting it out seems to make the most sense. I used to have a few STRs and they can make decent money- especially when it is all gravy (you'd be paying the mortgage anyway). Good luck!
Your best bet financially is most likely to stay in your house. Bottom line, you have to run the specific numbers for your specific situation and house. When making a buying decision, if you are going to be in a home less than 3 years, renting is usually better. If you are going to be in the home 4-7 years or more (you have to run the actual numbers for your particular market (not some generic 150% formula!) buying is generally better financially. Since you have already bought and invested time, the math is more likely in favor of staying in the house. Inflation is your friend over time as rent increases a lot more than the cost of owning a comparable home (to include repair and maintenance costs), plus the home owner benefits from inflationary increases in home value for the entire value of the home, not just for growth on the down payment. A key part of making the numbers work is to treat your home like a rental house and rent to yourself. No unnecessary upgrades. If your landlord wouldn't put in new countertops for you as a renter of a house, then you shouldn't put them in for yourself either (or don't count that as part of the financial equation!). I have written several articles giving details on how to calculate the rent vs buy breakeven point. Here is the main one that contains links to the other articles.
Your Personal Home IS An Investment – Living The FIgh Life
Rent vs Buy is an area where the anti-buy content creators have missed the mark with the "renting is always better" binary trope because they don't run the numbers over the long period or compare apples to oranges like JL Collins did in his anti-buy article from a few years ago. Similar to stock investing, real estate is a long-term investment and buying and renting to yourself is just as powerful (or more) financially as renting to other people. All the best in your housing decision and your financial journey!
Just an aside, but I think we should start caveating the "rent will always go up" argument. Several states and municipalities have enacted broad rent control laws, including the state of California which contains like 10% of the US population.
I wouldn't jump to that conclusion yet. From what I read, the new CA law excludes housing older than 15 years, excludes single-family homes not owned by a corporation or REIT, AND for all the rest it allows annual rent increases of 5%+CPI or 10% whichever is lower (so a CPI of 3.5% would enable an 8.5% rent price hike). That is still a significant annual increase in rent over home owner costs which are: 0 for the P&I (the majority of housing costs), inflationary for insurance and maintenance, and the local-will to approve property tax increases. I don't think rent control is a necessary caveat to any of these discussions for the few locations that truly cap rents.
Thank you! I ran the numbers on our specific scenario and we are better off maintaining our house. From a cash flow perspective, we’d be slightly better off renting, but even with us assuming we invest the cash flow difference at a 7% growth rate, the portion of the mortgage payment building equity plus 3% assumed growth of the house results in a better outcome. The main mental block I keep hitting is the fact that those dollars stay invested and “locked up” in the home, while if we rented and invested the difference in the market, those future dollars could be used for other goals, and our FI number would be lower because our expenses are less. So having a large amount of our net worth and monthly expenses in our house causes our FI number to be higher, so if we’d ever want to take advantage of the equity in it and sell to help reach FI quicker, we’d then be in the same exact situation we are now of feeling like we should keep it because it makes more sense than renting. Of course, it all changes once there’s no mortgage payment.
I look at my home equity as reducing my FI number during the last 20 years of my retirement like a pension or Social Security hitting when I an older. Using Big ERN calculator I add my house equity as an inflation adjusted pension starting when I am 70. Since I will invest the money in an inflation adjusted vehicle, it will keep up with inflation as I pull a monthly amount. By doing this my FI number is less or my SWR is higher since the financial calvary is coming later. Hope that makes sense. I’m working on a blog post about this since so many FI content creators recommend ignoring personal home equity when calculating a FI number. Cheers!
That formula seems to only look at cash flow–right now, not the big picture. With a mortgage, part of your payment builds equity in an asset that usually appreciates. Rent is 100% gone forever.
Mortgage payments stay fixed—rent keeps rising. When I bought my first house, my mortgage was only slightly higher than rent, but within three years rent had passed it. Eventually the mortgage gets paid off. Rent never does.
That said, there are instances where rent is better especially for transition.
Yes, definitely something we’ve been thinking about. Especially with how low of an interest rate we locked in compared to the increasing rent rates in our area. However, housing maintenance expenses are not fixed and can definitely change things if there are a lot of big expenses that pop up during the time of owning the house. Thankfully we have an annual budget for that, but it wouldn’t be enough to cover some of the extra large one off expenses - new roof, new driveway, etc.
True it does take more planning and includes risk, but a new roof also adds equity. As a landlord I charge enough rent to cover all those items so at the end of the day I still make money on it. When renting, you still pay for all the maintenance, just at an even rate. I think as others have said, it really depends on what you are more comfortable with.
I think it really comes down to how important is your home/living space to you? Do you actually want a house ? A house is larger and is often going to involve more expense and effort. That's ok if your home is a focus of your life.
My home isn't that important to me. I'm mostly happy in a rent controlled apartment. I have less space, but I need less space. I know that's not for everyone.
I guess what I'm saying is buy/rent isn't just a financial decision.
Something you could consider is to NOT sell your home and still move out and rent. We moved out of our first home that we owned that was about 800 sq ft after we had our second child. We had wanted to sell it, but the way the market was we would've taken a loss, which we simply couldn't afford to do. Thanks to the encouragement of friends who were landlords, we kept it as a rental property with the intent to sell when the sellers market improved. But then we discovered that landlording wasn't hard for us and now that home nets us over $1K/month that goes into our pockets, plus a few hundred dollars more a month that our tenants put into our equity. I'm so grateful we didn't sell it! A couple benefits of turning a home that's been your primary residence into a rental property is that you still benefit from that advantageous mortgage interest rate you got when you bought it to live in (compared to if you'd bought it to be a rental property) and you already know the house inside and out, which makes it a lot easier to be a landlord. And if you're planning on renting, you don't need to sell the house now for your next down payment. And you can always cash out on it later. Just adding another option to consider.
Yes, we have been considering this as an option! We’ve always been interested in owning a rental property but have felt investing in the market better aligns with our goals of flexibility and not having to deal with renters. Plus, as you pointed out, we’d have to pay 4%+ more interest than our mortgage rate, which has never been very compelling. If nothing else, we could at least try to list it at/above our current monthly expenses and see if we get any interest. I’m a little intimidated with starting a rental given horror stories about what renters can do and how much maintenance it can end up being, plus we have a pool so I can only imagine the extra liability we’d have, but it’s certainly something for us to consider! Thanks for your input and sharing your experience!
Happy renter here!
I think some of the calculations assume you're considering buying a home vs renting, and it may be a bit different in your case since you already own the home and are considering selling.
For us, one consideration is avoiding the "phantom costs", as Ramit Sethi calls them, associated with home ownership. As a renter, we never have to replace any appliances, it's not our problem if there's weather damage to the house, etc. Our rent is a price ceiling, a mortgage would be a price floor. I'd assume that the Quit Like a Millionaire have accounted for this in their formula, since the 150% is way higher than the naive advice I've heard to buy if the mortgage is <= your rent.
I haven't gone back and re-listened, but ChooseFI episode 551 has this topic in the title, so you may find something useful there. Paula Pant has also been on and discussed her price-to-rent ratio:
Rent vs Buy: How to Make the Smartest Choice