Sellers in today's housing market face a nagging question: Should I just rent out my home instead?
Owning a rental property is rarely as easy as it looks. But these days, the idea of becoming a landlord has an undeniable appeal. Higher mortgage rates have pushed many buyers out of the for-sale market and into rentals, leading to strong leasing demand and higher monthly rents. Meanwhile, for-sale homes are sitting on the market longer, and price cuts are more common, making that route decidedly less attractive than it was six months or a year ago.
These messages are reinforced by online communities such as BiggerPockets, where investors of varying experience levels exchange knowledge and preach the importance of amassing income streams from real estate.
But after two years of record home-price appreciation, and with signs of a coming recession, hesitant sellers are asking themselves if they'd be foolish not to cash out now. On the other hand, maybe they could hold out for an even better price and get their mortgage paid down by tenants in the meantime.
About 10% of sellers in Southern California and 9% of sellers in Texas recently pulled their listings and decided to rent their homes out instead, a July survey of roughly 1,000 real-estate agents conducted by John Burns Real Estate Consulting found. Nationally, about 4% of sellers made that move, the survey found.
"You can definitely see a shift in the marketplace to more buyers wanting to rent versus buy and more sellers choosing to rent their homes out versus sell them," Devyn Bachman, a senior vice president of research at John Burns, said. "That all ties back to the price volatility that we're seeing in the market right now."
Many buyers have been scared off by inflation, headlines about a looming recession, and, most critically, higher mortgage rates, Bachman said.
The average rate for a 30-year conventional mortgage was 5.66% at the beginning of this month, almost double what it was a year ago, according to Freddie Mac. Rents have also climbed, but not as much as mortgage payments — the average mortgage payment in the US at the end of the second quarter was $1,893, or nearly 1.5 times that of the average rent payment, according to the Mortgage Bankers Association.
There's still healthy demand for homes, and the median sale price in July was up 7.7% year over year, the brokerage Redfin found. But that median price was down from June, and homeowners may see rising demand for rentals and decide they're not willing to take a lower price on their home, especially after years of watching the neighbors' homes fly off the market, Bachman said.
Homeowners debate whether to pocket the quick cash or hold on to a nest egg
In January, Casey Conner bought a single-story home in a suburb of Nashville, Tennessee, and locked down a 3.2% rate on a 30-year mortgage. But he was recently offered a job in Kentucky that would require him to move. He told Insider he's now debating whether to sell or rent out his property.
Other homes listed for sale on his street sat on the market longer than he'd expected, Conner said, which made the prospect of listing his home "daunting." Meanwhile, the home next to his is being rented out for a little over $1.50 a square foot. At that rate, Conner estimated he'd make about 10 or 15% over his mortgage payment each month.
Conner said he's also reluctant to part ways with such a low mortgage rate, which provides more breathing room for him to potentially turn a small profit on the rental while paying down his loan.
But he's aware of the risks and "time suck" associated with being a landlord. Since he'd be living in another state, he'd most likely hire a property manager, which would eat into his returns. And he hasn't had much time to build up equity in his home, given that he just moved in January. At this point, he's still leaning about "80% toward selling it, 20% renting," he said.
Another homeowner, John, faces a similar dilemma. A 30-year-old who lives in a suburb of Denver, John asked that Insider use only his first name for privacy reasons. Almost two years ago, he purchased half of a duplex for just over $470,000. Recently, neighbors with the same floor plan sold their units for $650,000, John said, and a friend who's a real-estate agent told him he could sell for about the same price.
John said he's hoping to move farther north, away from the increasingly crowded Denver metro area. Now, he said, he's wondering whether he should pocket those gains or hold on to the property as an investment that could one day ease his transition into retirement.
Like Conner, John said he'd noticed homes selling at a slower clip than they were last year, and he's keen on having a nest egg. One drawback to selling is capital-gains taxes, which are applied to profits made from a home sale. But in November, John will have owned the home for two years, at which point he'll be eligible to avoid taxes on up to $250,000 of the increase in his home value. In that case, he could probably avoid capital-gains taxes entirely.
Homeowners' tax considerations vary, as do their appetites for taking on multiple mortgages in addition to the responsibilities of being a landlord. Owners who choose to hire property managers must be willing to stomach fees that typically range between 8 and 12% of the monthly rent, plus fees for leasing and maintenance.
Some property managers are preparing for more homeowners to choose to rent out their homes rather than sell. Michael Linnemann, the president of Linnemann Realty in Killeen, Texas, a little more than an hour drive north of Austin, said he's planning to add about five brokers to his staff of 18.
"As we move into fall here, and more and more properties continue to hit the market, the market becomes weaker and weaker," Linnemann said. "I think we're going to see a bunch of people come running to management. So we're hiring and we're training and we're making sure that we're properly staffed up to get ready to handle what I believe is going to be a wave of fresh business on the management side."
