I was asked this question by a non-real estate investor. This is a person who has a passing interest in real estate investing, doesn’t know much about it, and is looking to compare the two. They have a mortgage on a 2 bedroom / 1 bathroom house and are planning on upsizing. This person wants to know whether it is financially better to do one or the other. That’s the wrong question. Here’s the only important question:
What Are Your Long Term Goals?
Are you looking for a nice payout right now? Chances are, you have a mortgage on your home. And, that mortgage leaves you with 5-20% of equity in the property (depending on your down payment and how long you have owned it). On a smaller place like that, you might have $10-50k that you could pull out simply by selling it right now. If you’ve lived in this house for 2 of the past 5 years, or are moving for your job, you likely have no capital gains tax to pay, so you can pocket the money and use it to buy a new boat. That’s pretty nice. I don’t recommend this, of course.
Are you looking to diversify your investments and have something for retirement? Chances are that this single house won’t be enough for you to retire on, so you will need more. If this would be a one-off, kind of an afterthought property, you are likely to not enjoy managing this rental. Even if you hire a property manager, It’ll be a headache for you and you will regret holding it. In this case, it’s better to sell and put the money in the stock market. Choose a real estate ETF.
Are you looking to start building long term wealth, not just for retirement, but for any purchases you want and to live without worrying about money? Sounds like a sales pitch for an investment guru, I know. But, that’s what real estate investing can do. If you adopt that mindset. Then, by all means rent out the place. Probably it is a good idea to get a property manager. I admit that I self-managed for a long time. I learned a ton. It didn’t save me much money. A good property manager is efficient and can save a lot of money while freeing you up to do your important day job (and your even more important job of finding new investments!).
Set your goals now. Figure out what you are searching for. Don’t force the real estate thing. On the other hand, if you are uncertain, you could try your hand at renting it out. You can always sell later. Owning this place is a great step forward in your net worth. Good for you! Don’t take your foot off the gas.
