Some homeowners, especially if they’re wealthier, don’t need to sell their current place in order to move—and an especially strong rental market is one reason why they probably shouldn’t.

“Deciding what to do with your home is more than a math decision,” said T.J. Williams, a financial adviser and regional vice president with Wealth Enhancement Group in New York. “There’s an emotional conversation to have about whether you want to be a landlord and about the risks and rewards of either choice.”

The hassles of being a landlord can be mitigated by hiring a property management company, Williams said, but that won’t entirely eliminate the headaches or the risk of a lack of tenants in any market.

In Phoenix, an influx of corporations and their executives means there’s a strong luxury rental market, said Sacha Blanchet, a realtor with Coldwell Banker Realty in Phoenix.

“Lots of people decide to keep their luxury property as a rental if they’re relocating because their mortgage payments, especially if they have a low rate of 3% or 4%, can be covered by the rent,” Blanchet said. “Short-term rentals are also an option but there’s been a big increase in mandatory fees in Phoenix for them and most homeowners prefer long-term renters.”

In the Tampa, Sarasota and St. Petersburg areas in Florida, demand is high and supply is low for luxury homes, including both rentals and sales, said Liane Jamason, broker/owner of Corcoran Dwellings in Sarasota, Florida.

“Homeowners can sell for a great price right now, often with multiple bids and over the asking price,” Jamason said. “But there are plenty of professional athletes and millionaires from other states who are relocating here or want a second home but prefer to rent and get to know the area before they buy, so renting can be lucrative, too.”

Most people want to sell and be done with their property rather than take on landlord duties, especially if they can get a good price, she said.

“If you own a condo, you should ask your agent to see how many units are available for rent or sale in the community,” Jamason said. “If there are five others in your building for rent, you may not get the rental income you want.”

Responsibilities, risks and liabilities of landlords

Homeowners who become landlords need to take multiple steps to make sure they meet the expectations of potential renters, follow local rules and maintain their property to keep it rented and to hold its value.

“Maintenance costs are higher on a larger or nicer home because if you need to replace something, you’ll want it to be of equal quality,” Williams said. “If you have a pool and extensive landscaping, you’ll need to pay for their upkeep because you can’t usually make your tenants responsible.”

In some jurisdictions, you need a business license or a permit to rent your property, he said.

“You need to hire an attorney to be certain that the lease protects your interests,” Williams said. “You also need to review your mortgage documents and possibly contact your mortgage company to let them know that you’re not using the house as your primary residence. In some cases, that could trigger a need to refinance into an investment property loan.”

Your homeowner’s insurance policy also needs to be updated to a landlord’s policy. Williams recommended purchasing an umbrella insurance policy for additional liability coverage.

The biggest risk, Williams said, is that you won’t have tenants for long periods or that your tenants won’t pay. There are carrying costs such as taxes, insurance and maintenance even if you don’t have a mortgage. He suggested setting aside at least four months of those costs in case you don’t have a tenant.

Property manager solution

Turning over landlord duties to a property management company may seem like the best solution but “there’s no free lunch,” Blanchet said.

“Even with a property manager to take care of routine items, you’ll need to be alerted when something goes wrong and to oversee repairs or make decisions about whether to repair or replace things,” he said.

In addition, you’ll pay a significant fee depending on the structure of your rental terms and the services you request.

“Property management fees are typically 10% to 15% of the monthly rent,” Jamason said. “It can be higher if you want the manager to take on more responsibility.”

For short-term rentals, expect to pay 12% to 16% of the monthly rent, Williams said. In Phoenix, property management fees for short-term rentals can be as high as 25%, Blanchet said.

Capital gains and other tax implications

If your property has significantly increased in value since you purchased it, you’ll want to consult a tax adviser before choosing to rent it, Williams said.

“The capital gains tax exclusion on a profit of up to $250,000 for an individual or $500,000 for a couple depends on the house being their primary residence for at least two of the last five years,” Williams said. “You may have more of a financial incentive to sell rather than rent if you’ve had lots of gain in equity.”

In some cases, you can replicate the capital gains tax savings through rental income, he said, but the longer you hold it, the higher your equity could be when you sell.

Consult a tax adviser about the implications of converting a primary residence to an investment property, Williams recommended.

Opportunity costs and potential profits

Homeowners should estimate their return on investment for a rental or a sale, Blanchet said.

“Many people like the idea of earning rental income and owning a property that will increase in value, but others prefer to take their profits now and invest them in something else where they think they’ll get a higher return,” he said.

Jamason has seen greater interest in upscale rental property recently.

“More people like the safety of holding onto real estate for the long-term now because of the volatility in the stock market and nervousness over the bank crisis,” Jamason said.

On the other hand, there’s always a risk that property values could decline.

“When you make your primary residence into a rental property, you’re deciding that this is the best use of resources,” Williams said. “If it’s in the right location and you find great tenants who pay on time, that could make sense. But all real estate is local, and you really need to consult a local market expert.”

It’s also important to consider your decision in the context of your timeline.

“If you plan to move back to that area and live in the house again or your kids may want it, that’s a reason to rent it,” Williams said. “If you’re looking at this as extra income in retirement, then you may want to evaluate whether it makes sense to sell now and buy a different rental property that could be more lucrative or have a larger pool of potential renters.”

In a hot rental market, the pros of renting are more likely to outweigh the pros of selling, but it’s always smart to take a step back and review all the ramifications of your choices.

The post Do You Sell or Rent Your Old Home? It’s the Mover’s Dilemma in the U.S.’s Roaring Rental Markets. appeared first on Real Estate News & Insights | realtor.com®.