Ryan Severino liked the location of his family's home in Scotch Plains, N.J., but he also thought they needed more space. So in the summer of 2011, they decided to buy a bigger house. Mortgage interest rates were down, and so were home prices. "We were outgrowing our house," Severino says. "We didn't want to wait for prices to go back up."
But one thing he didn't realize was exactly how long it would take to sell the first house or to rent it, if that turned out to be the better option. "It comes down to more than pure economics," says Severino, senior economist and associate director of research at Reis, Inc., a real estate research firm.
Finally, in the spring of 2012, eight or nine months later, Severino found a buyer for the first house. In the interim, Severino weighed the pros and cons of renting versus selling, and he reflected on the decision he ultimately made. "It was tough to sell it in that market," Severino says. "We had the house on the market for sale while we were getting inquiries for renting it." But Severino knew he didn't want to be a landlord, and "didn't want the money tied up in the house."
Determining whether a property is a good investment takes research and analysis, and it's wise to take your time in making the decision because it's a major one, real estate experts say.
"You will break even if you rent out a place in some cases, and in most cases you will be profitable," says Walter Molony, an economic issues spokesman for the National Association of Realtors. "Investors swooped into the markets in 2011, 2012 and 2013 when they could buy up a place at a lower price," he adds. But the situation in many U.S. markets has changed with housing prices and rents on the rise, depending on the market. If you're thinking of renting your house, condominium or coop, do a comparative market analysis on your own or with the help of a licensed real estate salesperson or broker, he suggests. "Figure out how much money you will have to spend to get it up to market standard," Molony says.
Evaluating whether a property is a good investment and worth renting is both a monetary and personal decision that depends on your situation and tolerance for risk. "Figuring your costs – that's the easy part," says J. Frank Barefield, Jr., president of Abbey Residential, LLC, in Birmingham, Ala., and a member of the National Apartment Association. "The hardest part is the one variable that we can't control – time." A second factor is the unknown: Who is the person or people who will occupy your home and, hopefully, pay you the agreed monthly amount? "I would want to know everything I can find out about my potential renter," Barefield says. Whether you do it yourself or work with a management company, make sure you pay for both a financial and criminal background check on prospective tenants, he says.
To evaluate whether to rent or sell your property, here are six tips from real estate experts:
Evaluate current market conditions. Before you decide which way to go, consider the current situation in the area where your property is located. Determine the demand for rental properties like yours is in the neighborhood, Molony says. Through a comparative market analysis, which real estate professionals use, determine the value of existing properties in the neighborhood and the price similar properties rented for within the last six months. You can research online or ask a real estate professional – either a licensed salesperson or broker – to help you.
Consider the longer-term outlook for the neighborhood. "Where is the property located? Is it in an area that is likely to be improving or declining?" Barefield says. It's not always easy to determine which way the property values are moving in a neighborhood. You can find comparables from the last three to four years to detect a trend. If the neighborhood's property values are on the rise, you might want to keep the property and give it time to appreciate. If values are declining, and you will still make a profit, you might prefer to sell and take the profit before the market declines.