Should I Sell or Rent My House When I Relocate for Retirement?
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Andrew Lisa
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Jairo Rodriguez
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Most homeowners planning to relocate for retirement sell their houses, downsize, and then put the profit toward their investments and lifestyle dreams. However, some seek to convert the property they already own into a new income source by turning it into a rental.
There are arguments to be made for both, and neither scenario will suit everyone. Here’s what you need to consider.
First Things First — Can You Afford To Move Without the Lump Sum?
As with so many other things regarding retirement, money will make many of the big decisions for you. Will you have enough money to pull off the move if you don’t sell, and even if you can, will doing so leave you strapped and stressed?
“If you need the cash from the sale of your home to fund your retirement or to buy a new home in your new location, then selling may be the best option,” said Cam Dowski, an interior designer, Realtor and founder of WeBuyHousesChicago. “On the other hand, if you have the financial means to maintain and rent out your home, then renting may provide you with a steady stream of income during retirement.”
Is the Income Stream Worth the Headaches?
Rental properties generate income, but they also generate stress and a never-ending to-do list summarized in the dreaded “three Ts”: taxes, tenants and toilets.
“As someone who has spent most of his adult life as a landlord, I can tell you that the average person dramatically underestimates the headaches and overestimates the profits of being a small-time landlord,” said Brian Davis, real estate investor and founder of SparkRental.
“Most retirees, especially those living long-distance, don’t want to hassle with chasing down delinquent tenants for rent, filing eviction and arranging for someone to show up in court on their behalf or cleaning out all the junk abandoned when they finally leave. For that matter, most retirees don’t want to hassle with the more mundane tasks of filling vacant units, screening renters, signing leases with all the necessary addenda and disclosures, documenting move-in and move-out walkthroughs, storing security deposits per state and local laws, repair complaint phone calls from tenants, and so forth.”
The Property Management Compromise
If you like the idea of steady rental income but recognize that being a landlord can be hard, frustrating and all-consuming work, there’s a way to make the income stream much more passive — for a fee.
“Renting out your home and having a property manager take care of everything is a great option,” said Kelly Sollinger, owner of the real estate investment firm Georgia Fair Offer.
According to All Property Management, management companies typically charge 8%-12%, so you’ll have to factor that expense into your budget. But, as Sollinger points out, the compromise “gives the retiree some mailbox money every month.”
If You Rent It, Keep Your Income Expectations in Line With Reality
The rule of 1% says that you have to charge 1% of the home’s value in monthly rent to generate positive cash flow. If your house is worth $500,000, that’s a cool $5,000 per month, right? Don’t bet on it.
According to Kiplinger, that formula doesn’t account for appreciation and mostly works for properties purchased specifically as investments.
If you’re near retirement and you’ve owned the home for a long time, your house has probably increased in value over the years. That would make most lived-in homes worth $500,000 terrible investment properties even if they’d be great homes to buy as primary residences.
The 50% Rule
If you wouldn’t buy your home as an investment property, don’t assume you’ll get 1% by renting it out. Even if you do, plan to kiss half of that monthly check goodbye.
“When it comes to cash flow on rental properties, there’s a rule of thumb in the industry called the 50% Rule,” said Davis. “You can expect around 50% of the rent to go to non-mortgage expenses. These include vacancy rates, repairs, maintenance, property taxes, property insurance, property management, accounting, and so on. So retirees should ask themselves a question: What kind of cash flow am I looking at if I cut the rent in half and then subtract the mortgage payment?”
How Far, Exactly, Are You Relocating?
Life as a landlord can be challenging, but life as an absentee landlord is often beyond the bounds of possibility for the average person — particularly one who’s getting on in age.
“If you are relocating at some distance from your property, I feel strongly that it is a much better idea to sell your house instead of renting it,” said Bridget Blonde, a Realtor with Nest Realty. “I have experience in these situations and several have not turned out well for elderly landlords. If your health changes and you can no longer make the trip to check on your property or deal with your tenants, you will need a trusted and effective property manager to do this for you. If you do not have a good property manager, over time you will lose touch with what is going on with and at your property and this can lead to numerous problems.”
A Sale Is Guaranteed Cash — Steady Rental Income Is Not
Once you sell your home, you’ll have a lump sum in the bank to spread out among any number of investments. But if you tie up all or most of your nest egg in a rental, your financial security becomes much more precarious — especially if you’re not an experienced veteran.
“It’s risky to fiddle in the investment property business as it requires expertise to make significant profits, mainly due to leveraging,” said Alyson Peck of Bridge The Gap Home Buyers. “Engaging in this field without proper knowledge can result in financial loss. Therefore, I advise against renting your home.”
On top of all that, owning a rental comes with a bevy of tax considerations that don’t apply to home sales, including the loss of the highly favorable 121 exclusion, which lets you write off up to $250,000 from the sale of your primary residence.
“Your home was never designed to be an investment,” said Davis. “Sell it, and then consider reinvesting the proceeds in passive real estate investments such as real estate crowdfunding or real estate syndications. In many cases, you get all the benefits of real estate ownership but none of the headaches.”
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