To make the rent-vs.-sell call, you need to know what your home could fetch today. Get a ballpark figure at a home-valuation site like Domania.com or, better yet, sit down with a realtor.
Be prepared: Her appraisal may fall far short of what you dreamed – especially if you hoped to get what the Joneses did when they sold in 2005. In that case you have two choices: Take what you can get (and maybe swallow a loss) or rent and hope to do better a few years later. Take the latter course if:
* You can charge enough in rent to cover your costs
You’ll need to suss out what typical rents are in your area and then compare that with your carrying costs. Those include not just mortgage payments, taxes and upkeep but also a bigger insurance tab: Your homeowners policy may go up if you don’t live in the house, and you’ll need additional liability insurance (for roughly $250 a year, you can get a $1 million umbrella policy).
Add on another 5 percent to 10 percent for unexpected maintenance or a gap between tenants. If you want to hire a property manager to handle paperwork and repairs, cut your projected rent by 10 percent.
* You have other funds for a down payment
If you have to rely on the equity you’ve built up in your current home to buy your next one, you’re probably not a candidate to rent.
You’d have to finance your down payment with a bridge loan or a home-equity loan or line of credit, which at today’s high interest rates would push up your carrying costs, making it even tougher to break even.
* You’re sure prices will rise
Becoming a landlord is a bet that you can earn more renting your home and selling later than you would by moving on and putting sale proceeds to work elsewhere.
How much rent you can charge is important, but so is what’s ahead for home prices (see forecasts for 100 top markets at cnnmoney.com/realestate). In fact, even if the rent doesn’t cover your out-of-pocket costs, a big turnaround in your market could make the numbers work.
* You’re not giving up a great tax break
If you rent for more than three years, you endanger a precious benefit of home ownership – the capital-gains tax exemption. Live in your house for two of the five years before you sell and you’ll pay no taxes on the first $250,000 in profits ($500,000 for a married couple).
But become a landlord for three years or longer and you’ll owe capital-gains taxes on all profits in your home since you bought it. That could wipe out more than a year’s worth of recovery in your market.
Are You Landlord Material?
Even if the numbers add up, you can’t assume you’ll thrive as a landlord. Take on the job only if:
* You can handle the risk
Your local housing market could stumble, your house could sit vacant for months or you could get stuck with a renter who doesn’t pay up.
If such unexpected bumps would deplete your savings, you’re probably better off staying out of the rental world.
* You have the time
Since you didn’t set out to be a landlord, you likely have a full-time job. If you have a responsible tenant, managing the property may not take much time. But even small tasks can crop up at inconvenient moments.
“It might only be 10 hours a month, but those 10 hours are not going to be when you want,” says Robert Irwin, author of The Landlord’s Troubleshooter.
Can’t stomach the idea of leaving your warm bed at 3 a.m. to meet a plumber? Then rethink your plan – or hire a property manager.
* You can bear some wear and tear
Just as not everyone is meant to be a landlord, not every house is meant to be rented.
“If your home has French windows, chandeliers or stuff that could easily be broken, it may not be the best one to rent,” says Irwin.
A house with lots of bedrooms will likely attract families with kids – and the damage they inflict. Get used to the idea that not everyone will care for your home the way you do.
By Kate Ashford, Money Magazine staff reporter