Personal Finance

We're planning on moving and have a house that's valued at $3 million - we should keep it and rent it out or just sell it?

Kristin Hitchcock

Published: December 8, 2024 2:03 pm

A recent post on Reddit’s FatFire forum brought up a classic financial question: rent or sell? Many higher-income individuals eventually find themselves looking to move, only to wonder what to do with their current home. 

The poster is currently navigating what to do with their $3M home as they prepare to move to a new city. Despite a low-interest mortgage and solid equity, the choice isn’t straightforward. Taking on a rental property is a lot of work, too. 

Key Points from this Article

• Financial decisions are rarely a one-size-fits-all answer, and this Reddit post is a great example of that!
• Whether the Redditor should rent or sale depends somewhat on the numbers, as well as whether or not the poster wants to deal with a rental property (which can be a job in itself).
• Also: Take this quiz to see if you’re on track to retire ^(Sponsored)

The Numbers

Here’s a breakdown of the information that Redditor provided:

• Current Home Value: ~$3M (including a $600K remodel paid in cash).
• Mortgage: $1.2M at 2.5% fixed, $5,100/month (with over half going to principal).
• Expected Rent: $12K–$15K/month.
• Cash on Cash Return: Estimated at 2%–4%.
• Total Return: 8%–10% (factoring in 3% appreciation and mortgage paydown).

The poster isn’t relying on money from a sale to purchase their next home, so they have plenty of time to make this decision. However, they want to know whether capitalizing on their $500K capital gains tax exemption by selling now instead of holding the property makes the most sense. This is a common strategy to help lower your taxes. 

Here’s what I would recommend they look at a bit closer. Remember, this is just my opinion, not financial advice:

How to Analyze This Decision

To make an informed choice, I would recommend the poster take these steps:

1. Calculate Net Cash Flow

Factor in property management fees, maintenance, insurance, and taxes. Ensure rental income comfortably exceeds these costs.

2. Compare Returns

Use projections for rental income and appreciation to estimate your annual return. Then, compare this with what you’d expect from stock market investments.

3. Account for Risk

Owning a rental property does allow a fair bit of work. For instance, you have to deal with vacancies, tenant issues, or unexpected repairs. On the other hand, stocks are volatile, but they are liquid and require less hands-on management. 

4. Factor in Taxes

Evaluate the tax implications of selling now versus renting long-term. Keep the $500K exemption in mind, and consult a tax advisor if needed. Sometimes, talking to a professional will help you see things in your finances that you wouldn’t have otherwise. 

My Take

This is a classic “math vs. emotion” scenario. Renting offers a way to keep cheap debt working for you, generating cash flow and long-term growth. Selling provides simplicity, liquidity, and the chance to diversify.

Selling is absolutely the easier path, but renting can provide some cash flow and might be better in the long run. If I were in their shoes, I’d lean towards renting, especially if:

• The rental market is strong
• Managing the property doesn’t feel overwhelming
• The opportunity cost of tying up $1.8M isn’t too high

However, for those who would prefer a hands-off approach or don’t want to deal with a rental, selling is still a sound move, especially with the capital gains exemption.