Our Top Reasons Selling To Rent Is Not The Answer

| Selling

It’s easy to get caught up in the “what ifs” of life. In fact, the “what ifs” of real estate are plenty and often circle around finances. One of the scariest what-ifs homeowners face is “What if I had just continued renting? Should I sell my house and rent instead?” When those types of thoughts pop into your head, it’s usually with good reason. If you’re financially strapped, could it be worth comparing renting versus owning?

Since there’s no easy answer to these questions, here we show you the what-ifs of the sell-to-rent strategy to paint a more realistic picture.

What’s Driving Your Decision?

From increased interest rates pushing your mortgage payments past the affordable zone to making a killing from skyrocketing housing prices and downsizing to taking advantage of what appears to be more affordable rent, you need to determine why you’re considering selling to rent. The thing is, even if you find a gorgeous place, kiss those mortgage payments goodbye, and settle in for a few years until you feel financially comfortable enough to look into owning again, what if rent is just as high and housing prices become even less affordable? After owning, you’re going to want a decent home in a decent area, and this can cost you dearly. Also, you have to face the very real possibility you might find yourself renting far longer than you hoped because housing prices tend to get worse and you miss out on the long-term financial benefits of home ownership. So you need a strategy.

Looking for more pros and cons? Read our post, Rent Vs. Buy: Toronto Edition

The Strategy of Selling to Rent: Calculating Mortgage vs. Rent

The basic strategy behind selling your home to rent is worth considering if you have earned enough equity in your home to walk away with a nice chunk of change in your pocket. Have your home evaluated to calculate the realistic price you’ll get and subtract how much you still owe on your mortgage to show your potential profits. You also need to calculate your mortgage versus rent, which doesn’t always look better if you plan to downsize. It’s not uncommon to see one-bedrooms in ideal neighbourhoods go for the same rent as a two- or three-bedroom in a nice, but not quite as nice neighbourhood. So you have to research rental market trends to compare that to your mortgage to confirm you’ll be saving enough to make the long process of selling worth it. But there’s more costs to include…

Take a closer look at some of our mortgage resources here: 

Owning a Home vs. Renting: Expenses

To get a more realistic look at the financial benefits of renting vs. owning, add the additional monthly costs of home ownership like internet, cable (if you still use it), and utilities. Many leases include these costs in your rent, which impacts your owning a home vs. renting calculations. Other costs might include:

  • Gardening and home maintenance materials
  • Home insurance compared to renter’s insurance
  • Property tax
  • Common element fees if you own a condo (mind you, if you rent a condo, you actually end up paying these for the landlord)

Your Buy and Sell Budget

What if the fees of selling eat into your profits? We’re talking about commission, land transfer taxes, legal fees, moving fees, storage fees if you have to downsize, and more. You then have to do it all over again if and when you find the right time to buy. Oops, and don’t forget mortgage penalties. Here’s a hitch most homeowners don’t get: To avoid penalties when you sell, you need to buy another property at the same time so the lender can “port” your mortgage and transfer it to your new home. When you rent, the lender considers this breaking the agreement which can cost you thousands of dollars in fees. So always speak to your lender to discuss possible penalties.

The Dream to Own Again

If your plan includes saving to buy again, there are some hurdles that could put the kibosh on that plan, including:

  • Mortgage Stress Test: While you’re thinking you have a mortgage and so you’ll qualify again, this is not necessarily true. What if the mortgage stress test makes it harder than ever to qualify? If you’re struggling financially now, unless you get an amazing, new high-paying job at the time you decide to start your house hunt, there’s a very real chance you won’t qualify for a mortgage.
  • Interest Rate Gamble: Interest rates are unpredictable. While the past decade has shown record lows, it has also sent many homeowners into a tailspin trying to manage a major swing to beyond less-than-favourable rates. Higher interest rates equal higher mortgage payments that also make it harder to qualify for a new mortgage. In other words, if you do qualify, you’ll be far worse off financially than you were before you sold.

Learn more about interest rates and home values by reading our blog How Interest Rates Affect Home Prices in Canada.

Savings or Losses?

While the plan seems solid, you’ve got to consider the whole savings idea. One of the main benefits of home ownership is that real estate is one of the lowest-risk, highest-return investments around. Sell that asset and you might more likely be looking at losses over time, instead of the savings you hope to make between the sale and your lower monthly budget. If you plan to invest, the question is in what and how much? What if your money will be held up and difficult to access and will also not likely see the type of growth you’d like to see compared to your home equity? Your home equity is also tax-free, unlike most types of investments. So even if you ace your investment strategy, you’ll end up paying capital gains tax.

Any way you look at it, your plan is more likely to end up with long-term losses instead of short-term savings.

When Selling Might Make Sense

When looking at your housing expenses, do they exceed 32% of your gross monthly household income? The reason we ask is that it’s recommended you do not exceed this number to live comfortably. If you are living well above this number, then you clearly can’t afford your current home. And remember, your housing expenses include your mortgage, utilities, and property taxes. You also want to consider your debt-to-income ratio. It’s more math, but it’s important. When you add up all your debt and divide it by your yearly income, you should not be over, say, 40 to 45%. In fact, lenders look for the ideal percentage as being more like in the mid-to-low 30s. What if you’re rising above 45% into the 50s or lower? You’re getting into dangerous territory. Again, do your math and consider your position financially to determine if you’re in over your head and are losing by owning a home vs. renting.

Read more of our home-selling blogs here:

Two Options When Selling

So what can you do if you find yourself in this not-so-ideal financial situation? You have two options:

  1. Sell and rent in the hopes of finding a more affordable home to buy in a few years, or
  2. Sell and buy a more affordable home, such as a condo now.

The second option can be a happy compromise if:

  • You’ve got enough equity in your current home to pay for a condo down payment.
  • You’re not already living in a ridiculously small condo and can’t imagine downsizing any further.
  • You can afford the new mortgage AND the condo fees.
  • The benefits of home ownership in this strategy are:

You still gain from the equity from your sale

  • You have the down payment for your new home
  • You avoid mortgage penalties, so the buying and selling costs are more manageable
  • You reduce your overall monthly payments so you can live with less stress
  • You continue to build equity in your new condo, so you maintain all the benefits of still owning a money-growing asset
  • You have the bonus of a maintenance-free life if you’re going from house to condo

The downsizing plan might make the most sense, all things considered.

So, should I sell my house and rent instead?

While the idea of the sell-to-rent-again plan seems good in theory, it tends to fall flat in practice from a financial point of view. If you can’t afford your current mortgage, however, a good compromise is to consider downsizing, so you reap the rewards of your home equity, keep your foot on the real estate ladder, and avoid costly mortgage penalties.

Do you want to work with the best real estate agents in Toronto? We have a kick-ass team of experienced specialists ready to help you with all of your property needs.

We can work with you to determine what makes the most sense for your situation. If you’re ready to sell your Toronto home, just give us a shout at 416-291-7372. We’d love to work with you!