Usually your first house is a “starter” home that you purchased because it fit into your budget at the time. A few years later you then sell your house, move up to a bigger home, and may even repeat this process several more times. But what if you didn’t sell your home and rented it out instead? Let’s look at the pros and cons of doing so:
Pros:
Easier Way to Have an Investment Property: If you were to purchase an investment property then you generally need a much larger down payment of say 20% – 30% compared to a mortgage for a home, which you may not have available. Additionally, the interest rate and payment terms are generally less favorable than a residential mortgage. Since you already purchased your existing home as your residence, you already have financing in place, which is avoids this issue.
Transaction Costs: Look at any settlement statement and you will see that the transaction costs greatly reduce the proceeds after selling your home. By renting out your home you will have avoided these costs.
Appreciation and Rental Income: If prices in your neighborhood are rising and there continues to be strong demand for housing then most likely your house will appreciate and so will the rent that you can charge. A rental property can also provide diversification to the stock market.
Cons:
No Down Payment for New Home: Homeowners usually use the equity from selling their home to purchase another home, but if you do not sell your home then you will have to either save up for a down payment or access your equity through a loan.
Negative Cash Flow: If your cash flow will be negative for the foreseeable future, then it doesn’t make sense to rent out your home. You have to also be able to have the cash to cover expenses when your house is vacant.
Leverage and Debt: Debt is a double-edged sword (that can be another article). You want to make sure that you aren’t so leveraged that it puts a large strain on your finances, especially if/when bad things happen.
You Are Now a Landlord: Who wants to be a landlord and clean toilets? This is a very common argument, but the answer should always be never because who likes problems? You should make sure that you have reliable handymen, plumbers, etc., and screen your tenants as much as possible. However, you should like the fact that you have created a financial asset for your well-being.
Most homeowners never even consider renting out their home, but it can be a viable financial strategy depending upon your situation. Just make sure to run the numbers first.