The rental property market is a lucrative one, particularly in the Phoenix metro area. When weighing the pros and cons of selling a home versus keeping it as a rental property, there are many factors to consider. Zillow reports that the average rent for a single-family home in Phoenix is $2,400 per month – 5 percent higher than the national average. While in Las Vegas, the average rent for the same property is just shy at $2,323, which is 2 percent higher than the national average. However, in Las Vegas, there are more rental homes available in comparison to Phoenix.
Making the decision to sell or keep a property as a rental depends as much on its location as it does on personal financial circumstances. If the property has appreciated, selling might be the best option to take the equity and use it for purchasing another home or to use the funds for expenses or invest in something else. Although, renting is a good option if you are moving somewhere temporarily and plan on coming back, or if you need an additional income stream now and into the future.
There are a variety of factors property owners must take into account. In this blog, we will identify the pros and cons to consider and discuss the best possible outcomes of selling versus keeping a home as a rental property.
Pros of selling
1. Money in your pocket
Receiving a large single payment from the sale of a home can be used for many purposes. Most notably, purchasing a new home, paying off debt or using the cash for another investment opportunity.
2. Avoid landlord responsibilities
Landlord duties can be a headache. Dealing with tenant issues and maintenance can be time-consuming and costly. The alternative to handling things yourself requires finding and paying a property management team you trust to get the job done effectively.
3. Take advantage of tax benefits
The tax benefits from selling a primary home are based on an individual’s situation. But as a rule, the seller is able to exclude capital gains – up to $250,000 as a single or $500,000 if filing jointly. Sellers can also write off expenses such as escrow fees, advertising and realtor fees.
4. Flexibility and freedom
Selling provides freedom to move without being tied to a property and any ongoing or potential costs for repair and maintenance.
Cons of selling
1. Capital gains tax
Depending on the total gain and tax bracket, the seller may have significant capital gains on the profit from the home sale, which will impact
2. Possibility of a lower sale price
If it’s a buyer’s market or the property lacks appeal, the seller may be forced to accept a lower sale price than previously expected.
3. Potential loss of income
When you sell a property that was a rental for a period of time, the owner will lose that income stream. Replacing needed income could require reevaluating current job or career to ensure there is a steady stream of money coming in to support desired lifestyle and goals.
Pros of keeping a rental property
1. Passive income
A rental property provides the opportunity to earn money with little ongoing work, after an initial investment. This prospect generates an income stream from rent payments, which can help offset mortgage costs and other expenses to upkeep the property to a specific standard.
2. Potential equity growth
Like any real estate property, a rental home or building has the potential to appreciate in value. This, in turn, offers the opportunity to increase overall wealth.
3. Tax deductions
Depending on a property owner’s situation, you may be able to withhold property-related expenses from taxes. Such expenses include mortgage interest, property repairs, property taxes etc.
4. Long-term financial asset
Investing in rental property is a way to build generational wealth and can provide other investment opportunities. Especially if you can tap into the equity of the property.
Cons of keeping a rental property
1. Tenant issues
Managing difficult or demanding tenants costs time, can cost money and in severe situations, it can lead to taking legal action including moving forward with an eviction. Common issues include late or non-payment of rent, lease term violations and poor care of the property.
2. Landlord responsibilities
Unless you enlist a trustworthy property manager, you are responsible for finding and vetting tenants, managing the upkeep of the property and dealing with any potential issues that arise.
3. Vacancy risks
There may be periods of vacancy, which can result in a loss of rental income.
4. Maintenance costs
Property ownership requires maintenance; painting and carpet cleaning between tenants is fairly standard. If an appliance breaks, there is a plumbing issue or the HVAC or heating is not working properly, it’s the responsibility of the owner/landlord to get it fixed.
5. Tax implications
While capital gains tax does not apply in the state of Nevada, it may still apply in Arizona if you decide on later selling the property and you may not be able to claim the same tax benefits as if it was a primary residence.
While there is much to consider, it’s best to lay everything on the table when making such a big decision. No two situations are exactly the same. Fortunately, evaluating the pros and cons of selling or keeping the property as a rental can offer the perspective needed. If you buying, selling or refinancing a property and require residential escrow services, the experts at Landmark Title can take you through the process. With more than 40 years of experience assisting clients with their residential transactions, Landmark Title has the unique ability to foresee potential challenges and overcome obstacles to ensure a timely closing. Learn more about our services and get in contact here.