Changes in life circumstances can lead to deciding to move from your home. It might be a new job opportunity, a growing family, or the chance to acquire a larger home. Others, such as empty-nesters, downsize for economic reasons or because they no longer need a large apartment. Whatever the reason, it raises an agonizing decision: should you sell your current apartment or rent it out?
It is not an easy decision. You’ll benefit from collecting monthly rental payments if you keep your apartment and rent it out. If you sell, you’ll get a sizeable cash payment, but you’ll also be giving up all that equity you’ve built up over the years and the chance to collect passive income through rental payments. However, you’ll still need to pay for upkeep, and not everyone has the time or patience to become a landlord.
To help you decide, find below all the key factors you need to consider when facing this problem.
Arguments for Renting OutArguments for Renting Out
There’s a High Demand for Rentals in Your AreaThere’s a High Demand for Rentals in Your Area
As with most things, the market will dictate your decisions. Start by investigating what the local rental market is like in your neighborhood. Are there a lot of rental properties similar to your own? What percentage of them are currently vacant? Has a recent spike in rental demand due to a booming jobs market or new developments? Without a favorable rental market, you may struggle to find tenants and keep up with your property taxes, common charges, and routine maintenance. In a worst-case scenario, lack of maintenance could lead to your property declining in value over time, forcing you to sell for less than you could have gotten at the start.
But renting can look like a good idea if the local rental market is favorable, with high demand and low inventory. Remember that this is only one factor out of many that you need to consider.
Your Apartment Has a Lot of Appealing Amenities for RentersYour Apartment Has a Lot of Appealing Amenities for Renters
Even if the local rental market is hot, you’ll still need to consider whether your apartment can compete. Does your property offer features that cannot be found in other rentals? In most surveys, the amenities that attract attention from potential tenants include parking for residents, outdoor space – exceptionally high demand since Covid, lots of storage, and an upgraded kitchen and bathroom.
Don’t forget to consider the building as well. Does it have a flexible pet policy? Are the common spaces well maintained? Is it close to a subway station or any significant points of interest like a university or great coffee shops and stores?
You’re Confident You Can Make a ProfitYou’re Confident You Can Make a Profit
It all comes down to the numbers. If they don’t add up, it doesn’t matter how attractive your property is. Perform a rental analysis to determine how much you could realistically charge in rental payments. For example, you decide on $2,500 per month or $30,000 per year. It would be best to subtract the costs of insurance, property taxes, common charges, and mortgage payments. This can bring down your projected net profits, even before you factor in additional costs like maintenance and vacancies.
Even if you still end up with a healthy profit margin, you need to consider whether it’s enough to make it worth the trouble of becoming a landlord. Most investors recommend a minimum profit margin/yield of 2% of the purchase price.
You Have an Emotional Attachment to the ApartmentYou Have an Emotional Attachment to the Apartment
We tend to get attached to the places we call home. This might be a non-issue for some homeowners, but it can be a big issue for others. Giving it up for good can cause emotional pain and regret later, especially if you plan to do something else with it. Don’t sell if you’re not ready to part with the home and never return.
Arguments for SellingArguments for Selling
It’s a Seller’s MarketIt’s a Seller’s Market
Nothing signals a good time to sell quite like a busy market. Low inventory and lots of buyers will likely mean you’ll get the maximum price when you sell. You may even get a bidding war that sees the property sell well above the price. Take a look at the current data in your local market. Over the last few months/years, have inventory levels gone up or down over the last few months/years? Has there been strong price appreciation? What’s the average days-on-the-market (DOM) for comparable properties? Good numbers on all fronts signal that it’s time to cash out.
You Don’t Have Enough Liquid Cash on Hand.You Don’t Have Enough Liquid Cash on Hand.
Becoming a landlord can look like easy money but only when it’s not vacant. You still need to pay for property taxes, mortgage payments, common charges, and routine maintenance, requiring plenty of liquid cash to keep yourself afloat. Even with a tenant, you’ll still need cash to cover emergency repairs and potential late rental payments. Most investors and real estate professionals recommend having an emergency fund that can cover a minimum of 6-months in expenses or, in some cases, a full year. If you don’t have enough savings to cover that, selling is probably the best choice.
You Have Other Plans for the equity You’ve Built Up.You Have Other Plans for the equity You’ve Built Up.
All that home equity you’ve built up over the years has been like a large piggy bank that has grown and grown. Selling means it’s time to crack that piggy open and turn it into cold-hard cash that can be used to cover the down payment on your new home. If you’ve built up enough, you may have enough to cover additional purchases like a new car, college tuition for your children, or a large deposit into your retirement fund.
However, you need to consider the costs of the sale, such as repairs and maintenance to get the property sale-worthy, commission charges for the real estate agents, closing costs, and capital gains tax.
Your Building Doesn’t make Renting Feasible.Your Building Doesn’t make Renting Feasible.
A significant factor in your decision to sell or rent will be your building’s policy towards rentals. Co-op apartments tend to have very tough restrictions against subletting, only allowing it when the shareholder has lived there for 2-3 years. Most co-op boards only allow subletting for 1-2 years. Some co-ops don’t allow subletting under any circumstances. Be sure to check your co-op’s house rules and subletting policy. In most cases with co-op apartments, selling is the best option.
On the other hand, Condos usually have little to no restrictions against subletting. This is why condos tend to be more expensive than similar-sized co-ops. You’ll still want to investigate whether the building’s board is planning any changes that could discourage potential renters—for instance, if the building has close to 50% of the units already rented, new residency fees, or review processes.
You’re Not Ready to Become a LandlordYou’re Not Ready to Become a Landlord
Not everyone has it in them to become a landlord. While you won’t live in the apartment, you’ll still be responsible for its maintenance and upkeep. You’ll also need to be willing to deal with interviewing and screening potential tenants, organizing lease renewals, collecting monthly payments, and answering late-night calls about broken boilers or HVAC systems. You can suffer considerable losses in time and money from dealing with a troublesome tenant or an eviction process.
You can, of course, shift all that responsibility onto a property manager. Hiring a management company would be the best option to distance yourself from immediate issues; however, management companies charge 4-5% of the gross monthly rent in monthly management fees that eat into your bottom line. Having a property manager won’t prevent you from still having to deal with more significant issues from time to time personally.
Final ThoughtsFinal Thoughts
Any decision to sell or rent is not one you should rush or take lightly. Gather all the information you can and seek advice when you need it. A local real estate agent can be very helpful in working out which option works best for your circumstances. Ultimately, it all boils down to how much you will earn by selling versus the benefits of passive rental income.
Once you have those numbers, your end goals are questioned. Would you rather have a sizeable once-off cash payment or a source of income for the future?