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Pros and Cons of Renting Out Your Old Home

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Pros and Cons of renting out your old home

Now that the housing market has picked up, does it still make sense to rent out your old home? In 2010, when it was very difficult to sell a home, renting out your home was a great alternative. Fast forward to 2015 and the housing market is rocking like it was 2006. My brother has been looking for a home in the San Jose area and he keeps getting outbid. The Portland housing market is also very hot right now. The inventory is low and it’s a sellers’ market. Mrs. RB40 just told me her coworker got outbid again.

The hot real estate market makes it easy to sell, but our rental market is also rising very fast. The Portland metropolitan area’s rent rose 20.45% over the last 5 years. That’s the sixth fastest rise in the US. We also have an apartment building boom in Portland. I see three big apartments in various stages of construction on our way to preschool. There are signs of construction everywhere in Portland.

Actually, this market is reminiscent of 2007 when we decided to move and then rented out our old home. There were several reasons why we moved. We wanted to live in the city and be closer to Mrs. RB40’s work. Our condo has a great view and it was perfect for a couple with no kids. The old house was too big for us. I think the primary reason we kept the house was because we weren’t sure if moving into the city was going to work out. We put a lot of time and effort into the old house and we didn’t want to let it go. If we didn’t like living in the city, we could move back into the home we liked. I also wanted to try being a landlord because I heard that it was a great way to make some extra money on the side. This was a couple of years before I started obsessing about Financial Independence so it wasn’t the main reason.

Knowing what we know now, would we rent out the house if we could do it again? Or would we just sell it? I’m sure many homeowners struggle with this dilemma. Let’s go over the pros and cons to see both sides of the story.

Pros of renting out your old home

Become a landlord – Real estate is one of the few proven ways to build wealth. I’m sure you have heard many stories of how various properties appreciated over the years. We purchased our old home for $209,000 in 2000 and sold it in 2014 for $346,000. (Keep in mind, our initial investment was 20% or about $40,000.) The tenants were paying down the mortgage for us from 2007 to 2014, that’s half of the time we owned it. If we kept the place, eventually it would have been paid off and we’d have a nice monthly positive cash flow. We sold it because we wanted a rental that’s in a better location and closer to where we live. I wanted to try being a landlord because I want to build our wealth and renting our old home was the easiest way to get started. You can see if you like being a landlord. If it’s not the right fit for you, then you can always sell the place and invest in the stock market.

You know the property – We lived in our old home for 7 years so we knew all the problematic areas. I knew we’d need an exterior paint job in a few years. The fence had some rotten spots. The carpet piled up in certain areas. In contrast, you never know what problem you’re going to get with a property you haven’t lived in. Our rental duplex had an antiquated electrical wiring system and we had to spend about $1,000 to bring it up to code. Well, we got the inspection report, but I still think it takes time to become familiar with a property.

Better chance to cash flow – Our old home generated positive cash flow as soon as we started to rent it out. It’s pretty difficult to generate positive cash flow in Portland because the purchase price is so high. We purchased the home in 2000 at a decent price so the mortgage and property tax was reasonable. We wouldn’t have been able to cash flow if we purchased the place in 2007 explicitly as a rental. This might change in the future at the rate rent is rising, though.

Build equity – The good thing about owning a home is you get to build equity. We pay $1,200 per month on our mortgage and a portion of that goes toward the principle every month. After 20 years, we’d have a big stake in our home. Having a rental home is even better because your tenants are helping you build equity. The more property you have, the more equity you’re building every month. That’s oversimplifying it a bit, but it’s the general idea.

Rent goes up every year – The Portland area is projected to see a population growth of up to 725,000 people in the next 20 years. However, the city only has the capacity for 15,000 new single family homes. I guess this is why rent is going up so much each year. However, your mortgage remains the same assuming you got a fixed rate loan. So your rental income increases while your mortgage cost remains the same. Actually, we refinanced to a lower rate so the mortgage could even decrease in some scenarios. Property tax, repair, utilities, and insurance usually increase, though.

The longer you hold property, the better it is for the cash flow. We lived in our old home for 7 years so the rent slowly increased over that time. Our purchase price was also locked in at a reasonable price and the mortgage wasn’t that high.

Appreciation – In the long term, real estate price will most likely appreciate. It depends on your local market, of course. I only lived in California and Oregon so my experience is limited. The housing price took a big tumble during the last recession and it just only recovered in some area. However, I still think real estate is a great investment for the long term. I’m sure in 30 years, the housing price in Portland will be sky high.

Renting out your old home house

Tax deduction – A rental property is a great investment because the tax code was written by landlords. Rental properties provide many tax benefits and here are a few of them.

  • Interest – We could deduct the interest payments on the mortgage.
  • Depreciation – The cost of the building is depreciated yearly and deducted against the rental income.
  • Repairs – The cost repairing the drainage can be deducted.
  • Travel – The cost of travel associated with the rental can be deducted.
  • Legal and professional fee – Accountants, HOA, property managers, and gardeners can all be deducted.

Primary residence has better mortgage terms – It’s much easier to obtain a mortgage for a primary residence than a rental property. In my experience, the requirement is much less strict than when you’re getting a mortgage for an investment property. You can also put less money down on a primary residence. The last time I got a rental property, the bank wanted 25% down and required quite a bit of extra documents. Mortgage insurance won’t cover investment property so you need at least 20%. The interest rate is also a little bit better with primary residence mortgage.

Con of renting out your old home

Renting out your old home is a great way to build wealth, but nothing in life is free. There are quite a few big disadvantages to it as well. I didn’t know any of this before I converted our home to a rental in 2007.

Being a landlord – If rental property is such a great way to build wealth, why doesn’t every investor own rental properties? Being a landlord takes time and energy. You know your old home best so the repair and maintenance is less problematic than a newly acquired rental, but there are many other problems a landlord has to deal with.

  • Vacancy – How long can you carry two mortgages?
  • Bad tenants – I have dealt with late rent, damaged property, unauthorized alteration of the home, and more. I hope I never have to do an eviction. That sounds like a nightmare.
  • Insurance – As a landlord you need to get additional insurance.
  • Emergency repair calls – I got one call in the evening about some electricity going out. Luckily, it was just the GFI and was easily fixed. The water heater is bound to go at some point and I’m not looking forward to that at all. There will still be repairs even if you know the home well.

Some people never want to be a landlord and I can understand why. It can be a lot of work. Of course, you can hire a property manager if you don’t want to deal with it, but that can be problematic as well. A property manager takes about 10% of the rent and usually a month rent when they sign a new tenant. It is also difficult to find a good property manager. They manage many homes and they won’t have time to pay a lot of attention to your property. I tried 4 property managers and wasn’t 100% satisfied with any of them.

Less money for down payment – When we moved in 2007, we didn’t take any money out from the old house via refinancing. We had some cash saving and sold stocks to cover the down payment on our new condo. Most regular households couldn’t afford to do that. They usually need to sell the old house so they can use the money as a down payment for the next home.

Primary residence capital gain tax exclusion – If you have a gain from the sale of your primary residence, you may qualify to exclude up to $250,000 of that gain ($500,000 if you file a joint return.) This is one of the best tax breaks available to regular people. When you convert your old home to a rental, you will lose this tax break.

In order to qualify for this tax break, the homeowners must use the home as a primary residence for at least 2 of the past 5 years. You could move into your old home for two years and sell it to get some of the tax break back. You won’t get the whole tax break because depreciation recapture will still be taxed. In 2008, Congress further limited the exclusion of capital gain on properties that was converted from a rental to a primary residence. You will get a just a fraction of the tax exclusion if you turn your home into a rental. The size of the fraction depends on how many years the home was rented vs. used as a main home.

We did a 1031 exchange when we sold our old rental home in 2014. This deferred the capital gain tax until we sell the acquired duplex. To get back a portion of the capital gain exclusion, we’d need to keep the duplex as a rental for 2 years and then make it our primary residence for at least 5 years.

This whole thing can get complicated very quickly and will require its own big article. Suffice to say, you need to talk to a good tax accountant when you sell a rental (and a big bottle of Advil.)

Real estate price could go down – I’m sure we all know this after the last housing bubble burst. Zillow shows that our home price peaked in 2007 and only recovered recently. Theoretically, we could have sold the old home in 2007 and get the same price as what we got in 2014.

If I had a crystal ball, I would have sold the home outright and buy a new rental property at the bottom of the market. In reality, I don’t like have a big chuck of cash in my saving account so I would have invested it in the stock market which also took a big tumble in that time frame. Anyway, real estate price can and will drop. I still believe it’s a guarantee win over the long term, though.

Harder to get a mortgage – Unless your income is strong, it could be more difficult to get a mortgage for a new home while carrying a mortgage for the old home. You don’t have proven rental income from the old home yet so some banks don’t take the rental income into consideration when they look at your mortgage application. Actually, the rules change all the time so I’m not sure if it’s different now. Our income was very good in 2007 so it wasn’t a problem for us.

Would you rent out your old home?

Would I rent out our old home if I could do it over again? Absolutely! I wanted to gain some experience as a landlord and this is the easiest way to do it. If I hadn’t rented out our old home, I don’t know if I would have the gut to jump into a new rental property. The experience was invaluable. I strongly believe that rental property is a great way to build your wealth over time and I’d hate to miss out on that. I don’t have a crystal ball so I still don’t know how to time the market.

There are quite a few disadvantages to renting out your old home, but I still urge you to consider it if financial independence is your goal. You can always sell it within 3 years of converting it to a rental and get the capital gain tax exclusion. Two of the last five years as a primary residence mean it can be any two years.

Would you rent out your old home when you move? If you’ve already done it, do you think it was the right choice?

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.

Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.

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{ 33 comments… add one }
  • Gwen January 29, 2016, 6:33 am

    I’m making the deliberate choice to become a landlord. I’m currently in the market for a duplex but haven’t had any luck so far. It turns out the market pretty much dies over the winter. Who knew people hated moving in blizzards? I’ll keep this unit for as long as I can, but I have to live in it for a year since I’m getting a VA loan.

  • Chella June 13, 2015, 8:41 am

    Thank you for sharing this. We are on the last stages of renovating our home and i think we should consider renting it out for extra income.

  • Vivian June 10, 2015, 8:01 am

    Good article Joe! Just to share my experiences, I fell into becoming a landlord. I tried to sell my house in Denver metro back in 2008 but could not sell after 1 yr on market. I had no choice but to rent it out without knowing much about horror stories of tenants. The rent was just enough to cover my mortgage. Fortunately my experience as landlord has been good with tenants living there on average of 3 yrs. I’ve never had any vacancy. The current tenant will move out by the end of June and I already have another lease ready by July 1 for 2 yrs term with increased rent. The new tenant already expressed interest in living at my house for much longer than 2 yrs. I am also in the process of refinancing the mortgage into 15 yrs and with the new payment, i still have cash flow with the new rent. Since the rental market is so hot in Denver, I’m planning to buy another rental property and looking forward to paying off the current rental in 15 yrs. The only downside is to find good trade people. I’m still having problems with this. But overall i like that tenants pay for my equity, my house appreciates and rent increases over time.

  • Rich June 9, 2015, 12:03 pm

    Hey,
    My family is pretty heavily invested in subsidized federal housing (as a landlord). So we actually do less screening then we’d like. As you said renting vs selling is always a challenge, if your old home is fairly new and doesn’t have any large repairs coming up in the next 5 years I would definitely agree to hang onto it when economically possible. We try to keep houses that are younger then 20 years old and then sell them off once big ticket items are coming around the corner (kitchen/roof repairs).
    Cheers
    -Rich

  • Chris Muller June 7, 2015, 6:52 am

    Thank you for this! We too are thinking of renting out our small home when we move instead of selling. The market for home sales is not good where we live, but the rent market is huge. I definitely agree with the lack of down payment as a con, as many people use the money from their home sale for the down payment on their next home. Great article though, I’ve actually saved it in my favorites for when we go to actually make this decision. Thank you again!

  • Pennypincher June 6, 2015, 10:07 am

    Bravo, Joe! Easily one of your most interesting posts to date. Could have read more responses all day long. Good, fun, informative reading. Thanx!

  • Sam June 5, 2015, 4:29 pm

    Fantastic article Joe! Great return from 200K to 340K. What would it be now?

    I never want to sell b/c I never want to pay the 5% commission (absurd), and I want to own for cash flow reasons. I know in 20-30 years I’ll kick myself for selling, so the plan is to bear the pain of being a landlord until I can no longer take it anymore!

  • Stockbeard June 5, 2015, 1:12 pm

    Thought about keeping our condo in Japan and rent it out when we moved to the US. But the implications of renting a place from abroad were far too complex for us, from a legal/tax/fees perspective. Also, a condo is not an asset in Japan, it’s a liability and its value decreases over time.
    So we sold it. Roughly for the price we bought it, which meant a loss once you factor in the fees from real estate agents.

  • Jason June 5, 2015, 11:40 am

    So, I’m a big proponent of real estate, but the best results are obtained when people purposefully choose properties as investments rather than just “fall into it”.

    I have a friend who moved and rented their old place out and it’s been very troublesome for two reasons. First, this was going to be their “forever” home, so there was a lot of emotion clouding things; they couldn’t understand why their renter didn’t care as much about their home as they did.

    Secondly, and most importantly, even though they bought a long while ago, it wasn’t purchased with renting in mind so the numbers were still off and they had only very small cashflow. Basically, they would have been much further ahead if they would have sold and rebought objectively better properties. But, their argument was that they may move back into it, so in my mind, they shouldn’t have expected the best returns.

    At this point, they’re pretty down about real estate investing in general and probably will never try it again. But, they started off on the wrong foot by mixing investments and personal property. In my book, that combination almost always underperforms and you should go in expecting that.

    My advice is for people wanting to do this is to closely examine the rents and costs associated with renting your place out and compare them with hand-picked investment properties. Then you’ll actually know the real trade-off you’re making if you decide to keep your old place. Just don’t do it out of sentimentality.

  • Justin @ Root of Good June 5, 2015, 10:40 am

    We kept our old condo we bought during college and rented it out for a couple years till the housing market improved. The place appreciated about 50% from our purchase price, so we made out pretty well.

    Sounds kind of like your old house in that we had to drive 40 minutes to check on the place and fix things. After a while it became a hassle and we got rid of it.

    • retirebyforty June 5, 2015, 11:23 pm

      Yeah, I didn’t like driving out to check on the home. The new rental duplex is much closer and it’s near Trader Joe’s and preschool so I’m around there all the time anyway.

  • Big-D June 5, 2015, 10:17 am

    I think it is relative to what your renters are like. If they are handy, can fix stuff (especially if they break it) and are well off financially, then great. If you get into the horror stories people have, then it is not a great experience. It all depends on your situation, the condition of the rental, and the work the renters are going to do on it. My renter is a construction guy by trade. The house was a little run down but he likes working on it. When stuff breaks, I can provide the cost of the materials and he fixes it. He loves it and I don’t get a 2am call for something being broken.

    • retirebyforty June 5, 2015, 11:22 pm

      The tenants at our old house was a little handy, but not really. He could fix a few things so that’s good. They were late with the rent a few times, though. That’s a problem. Having a construction guy as a renter would be awesome.

  • SimplyFinanciallyFree June 5, 2015, 9:18 am

    We have an owner occupied duplex for almost 4 years and so far everything has worked well. We are very selective of who we rent to though as we do share walls. We have new tenants moving in this summer and were able to increase the rent so that it covers 87% of the mortgage and taxes. Living in an area with a 99% occupancy rate has its advantages. Some day we will move out of our unit and rent it out as well. Having living in the property for years will certainly be helpful when the time comes as we do know its quirks.

    One thing we did find out recently though when discussing buying another property was that we could not include the income from the rental on a mortgage application as we end up showing a loss tax-wise for the property. You can only include rental income as income when applying for a mortgage if it actually shows as positive income on your tax return. The tax deductions are good for taxes but not good when applying for a new mortgage.

    • retirebyforty June 5, 2015, 11:21 pm

      Tenant screening is the key to having a good experience.
      Thanks for the info on the income. I forgot about that.

  • Mrs. Frugalwoods June 5, 2015, 8:59 am

    We’re planning to rent out our current home in a few years after we retire and move to a homestead. We actually bought this house largely for the rental potential–it’s a single family in the city, so it’s a desirable rental location and, we’re not beholden to any condo association rules. And, we’d already be able to rent it out for about double our mortgage. It’s great to hear that you’d do it again if you had the choice!

  • RA50 June 5, 2015, 7:52 am

    Joe,

    We are not ready to be landlord, my mother is one, she has to apartments and I can see how painful it is and how much energy you put in it.

    She is making money out of it, but the stress she endure is not for us. One day I will inherit ate this property, but I can tell you that I will sell it very very quickly.

    Cheers,

    RA50

    • retirebyforty June 5, 2015, 9:07 am

      Sorry to hear that. That’s why we sold our old 4-plex. It was just too much headache. The right property and tenants make all the difference.

  • Mrs. Budgets June 5, 2015, 7:31 am

    I would definitely rent out my old home if we moved. I just don’t think we’re planning on ever moving. Mr. Budgets has a friend who buys real estate, (I don’t know if this is legal or morally right) that when he buys a new place he always claims his intent is to being living there (that it will be his primary residence) even though he knows full well he isn’t. He does this to get a better interest rate and doesn’t have to put as much down. He claims he technically will be living there as far as the loan company is concerned, though just for a day or maybe just a couple of hours.

    • retirebyforty June 5, 2015, 9:06 am

      That is a little bit ambiguous. He should live there for at least a few months. 🙂

  • smn-dc June 5, 2015, 7:26 am

    Here in DC, the market is hot for sellers, often with cash buyers winning against everyone else. For renters, it’s sometimes hard to find a good place w/decent rent as even find a rental it can be competitive. DC being a transit city, it’s very easy to find professionals to rent your place. We agree w/your points w/how being a landlord has pros in so many ways and for us this outweighs the few cons. Besides the townhouse we live in, my husband and I have 2 row houses in DC (in good neighborhoods) that we rent out. Seeing the extra passive cash flow every month (even though it’s only $400 extra for each property after all the expenses) and knowing in less than 15 yrs (we recently refinanced) both places will be paid off is something to look fwd. to. The biggest challenge for us is that we’re not handy at all. Over the past few yrs, we’ve learned how critical it is to have on speed dial: 1. a good plumber who’s trustworthy and honest, 2. another handyman (or a few more as some get busy) whom you can call to do everything else. For those who have had bad experiences dealing w/tenants, as the R.E. saying goes–it’s all about location! You buy in a good, safe, upcoming location, you’ll likely be more able to attract the type of tenants that’s profession, respect the place they call home, etc. Sure even professionals may screw you over but that’s why it’s important to screen tenants in the process. Call their past landlord! And to keep our current tenants, our rent is well under priced & we’re always very prompt if they have any issues, we get it fixed it asap. A good relationship w/the tenants shows you care about their well-being and the home.

    • retirebyforty June 5, 2015, 9:04 am

      Thanks for sharing your experience. I need to find a good handy man…
      Past landlords can be bias sometime. I know some landlords are so eager for their tenants to move, they give a better than deserved review.

  • Jordan June 5, 2015, 6:53 am

    Great ideas here! Deciding to rent out your old home is a pretty big decision, so thanks for sharing your insight on what can happen.

  • Pennypincher June 5, 2015, 4:06 am

    Comments on renting from the other side of the fence. Unknowingly, we bought a home next to a rental house. Worst neighbors ever. Cigarette smoke, pot smoke, junk, trash, car parts (!) left all over the yard. Car alarms going off at all hours. Renters don’t care, it’s not their property. Adult children moving in and out, dogs pushing down our fence, beer cans thrown in our yard. Tenants taking in extra tenants to cover the rent. Loud parties. We had to sit down and have a talk w/the police over the behavior next door. And these were all adults! Renting in a high rent, excellent neighborhood.
    I’m sure there are some decent tenants out there somewhere. But I’ve never witnessed them.

    • retirebyforty June 5, 2015, 9:02 am

      Yikes! That’s not good. You need to screen the tenants really well, but it’s luck of the draw. Our current tenants are great so it’s headache free right now. You’re right most tenants don’t care much about the property.

    • jim June 8, 2015, 1:29 pm

      I think this is a unfairly broad and negative portrayal of renters. About 1/3 of people are renters and they aren’t all inconsiderate losers. Virtually everyone I know has rented housing at some point in time and they’re all decent people.

  • John C @ Action Economics June 5, 2015, 3:46 am

    Mrs. C. and I rented out our first home after failing to sell it for over a year back in 2011- 2012. In retrospect I wish that we had put renting it out as our original plan. Since we had it listed for sale during the first year we were renting it out as well, we were not able to refinance, and we didn’t think to refinance before listing it. Once we decided to keep it we did a refinance to a much lower rate and a lower term that lowered our monthly payments by around $100 a month. From time to time being a landlord has been a headache, but it is nice that every month it is building us equity. It has come in handy quite a bit knowing all of the maintenance issues with the house; when things need to be fixed I have a very clear picture of what needs to be done in my head based on previous repairs.

    • retirebyforty June 5, 2015, 9:00 am

      Are you planning to keep it as a rental for the long term? I’m sure you’ll get better at being a landlord.

      • John C @ Action Economics June 5, 2015, 10:07 am

        Yeah, we’ve hit a good stride with it now; the current plan is to keep it at least until we hit early retirement.

  • Ernie Zelinski June 5, 2015, 1:02 am

    I once purchased a condo and decided not to move into it. The market had taken a downturn so I decided to rent it out before I sold it a year later. Being a landlord was not a pleasant experience for me. I could have played with a Ouija board in a dark abandoned mental institution late one Halloween night and not have invited as much discontent into my life. Even getting involved in dubious pharmaceutical experiments while severely overworking my vital body parts would be an easier way for me to make some extra income than being a landlord. Fortunately, I don’t have to do that either because of the prosperity my intellectual property brings me. If I go to Vancouver for 5 months this winter, I will not consider renting out my half-duplex. I prefer to have a trusted friend or relative stay there f0r free instead of renting it out to a stranger.

    • retirebyforty June 5, 2015, 8:58 am

      Intellectual property is the best way to go. It really depends on your personality. If you don’t like being a landlord, then don’t. At least you found out pretty quickly, right? 🙂

  • Michelle June 5, 2015, 12:46 am

    This is something that we have been thinking about a lot lately. Our house is priced super cheap (significantly cheaper than comparable homes) and it still hasn’t sold. We may decide to rent it out if it doesn’t sell soon.

    • retirebyforty June 5, 2015, 8:57 am

      You should try it out. It’s a great way to generate passive income. You need to screen the tenants really well, though.

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