If you already own a home, there may come a time when you’re ready to upgrade (or downsize) and move to another. Homeowners in this position must decide whether it’s better to sell their current home or rent it. On one hand, owning real estate is one of the best ways to diversify your portfolio and build long-term wealth. However, selling your home and making a lot of money upfront also has advantages. So how do you know which option is right for you?
Evaluate the Potential Rental Value of Your Home
The main benefit of renting your home is that you continue to build equity while a renter covers your mortgage, but this isn’t the case in every real estate market. You have to run the numbers to determine how much you can charge a renter and if that is worth it compared to your mortgage on the property.
In the highly competitive and popular Denver real estate market, the average mortgage payment is $1,667 (but that jumped to $1,988 for houses purchased in 2021). The average rent for a 2-bedroom apartment in Denver is $2,286, and a 3-bedroom is $2,782. That means that you could easily rent your house and make at least $700 more per month than your mortgage payment.
That being said, I am a real estate broker in Western Colorado, where home prices and rents are significantly lower than in Denver. Based on the average list price for homes in Cedaredge, CO, the average mortgage payment is around $1,347. On the other hand, the average rent for a 2-bedroom apartment in Cedaredge is only $933, and a 3-bedroom is $1,195. Here, you’re unlikely to recoup your mortgage payment by renting, so it’s a better idea to sell.
There’s a stark contrast between your ability to make money from renting in Denver vs. Western Colorado (or any smaller regions). When you evaluate the benefits of renting your home versus selling, you must research housing trends and similar properties to determine what will make you the most money.
Could You Make More Money With A Short-Term Rental?
Does your town have access to a unique landmark or tourist attraction? Does your town cater to seasonal tourists? Cedaredge can answer “yes” to both of these questions. It’s the gateway to the Grand Mesa, the largest flattop mountain in the world. This and the closeby Colorado National Monument attract recreational tourists year-round. Cedaredge and the Grand Mesa are also hot spots for hunting season.
While a town like Cedaredge might not compete with Denver’s high rents, you can still evaluate its short-term rental potential. If you have a Colorado cabin close to the national forests and monuments, you may find short-term renting more fruitful. Right now on Airbnb, cabins on the Grand Mesa are renting for anywhere from $77 to $250 per night.
When You Should Rent Your Home
Regardless of where your property is – Grand Mesa, Cedaredge, Denver, or anywhere else – here are a few signs that you should consider renting.
Demand For Rentals is High
Are people in your area renting or buying? How are rental trends forecast? Do your research and ask your friends about what they would consider renting. Apartment List publishes rental market reports for major cities, but if your town isn’t on the list, a quick Zillow search should show you whether rental properties are a hit or miss in your area.
Your Mortgage is Low
Just because the average mortgage for a given area is high doesn’t mean yours fits the same criteria. If you purchased your home decades ago and your mortgage is extremely low or almost fully paid off, you can rent your property for a low rate and are more likely to find a tenant.
On the other hand, if your property value has appreciated, you may find that you can sell it for more money than renting is worth. For example, at $1,000 per month, it would take 41 years for a rental property to generate what you could make if you sold it for $492,000 today…
You’ve Always Wanted To Own A Rental Property
Renting your property comes with a host of new responsibilities. As a landlord, you are responsible for running background checks on potential tenants, organizing maintenance, and keeping the property in good shape. This is even more demanding for a short-term rental. If you can make money and this kind of work appeals to you, renting is a great choice. However, if you barely have time to upkeep your property as it is, then you might reconsider adopting that responsibility for two.
Of course, you can always hire a rental manager, but that costs money that eats into your profits!
The Bottom Line
Many homeowners will face the daunting dilemma to rent or sell. It comes down to numbers and how valuable equity in real estate is to you. Do your market research and decide how long you would have to rent your property to make the same amount of money you could sell it for today. The result should tell you everything you need to know.