sold sign on house

Should you sell or rent your home?

Should you sell or rent your home –  that is the big question many homeowners are asking themselves.

There may come a time in your life when you have to (or choose to) relocate, whether it be for professional or personal reasons, and you are faced with the decision on what to do with your family home.

It can be all too easy to become caught up in the idea of selling your home so that you can buy a larger property, to then repeat this process over the years to gradually accrue wealth. The reason this method is popular is that it generally works! According to the 2016 Census, 30 per cent of households owned their home without a mortgage, indicating just how powerful the Australian dream is of owning property. But there are other ways to build wealth in property, and one that not many consider is that of turning their home into an investment property.

The benefits of selling your home

The greatest benefit of selling your home is the ability to gain access to the capital gains accrued in the value of the property during the time you have owned it.

Along with an assumed wage increase over a person’s career and any other accumulations of wealth, such as through other forms of compound interest investments, the release of capital gains when selling your home is generally how homeowners are able to afford to upsize their homes or move into areas with greater prospects for financial growth and lifestyle.

Sounds great, doesn’t it?

However, remember that any release of capital gains is subject to taxation, which is felt most by those selling their Permanent Place Of Residence (PPOR). Correctly pricing your home to sell can make a significant difference in your eventual earnings once taxation plays its part.

Where planning to sell your home to afford a more expensive home can go awry is in your susceptibility to market fluctuations. There can come moments in a person’s life where they may have to sell their home within a certain time period, and this leaves them at a disadvantage if the market is not in their favour. The alternative is therefore to keep your home as a major asset and see market downturns through to the end of their cycle by turning your home into an investment property.

Let’s take the following financial scenario for selling your home.

Let’s say you have enough cash to pay for general buying fees such as stamp duty. If you decide to sell, you’ll have $400,000 to use as a deposit to buy your next property, meaning you’ll only need to borrow another $200,000 to buy the new property. Advantage: it’s a safer option as you’ll only have one new mortgage of $200,000.

The benefits of turning your home into an investment property

By far, the greatest benefit of turning your home into an investment property is the potential savings you can make through various tax incentives for property investors.

One relatively unknown tax incentive is known as the six-year rule. This allows property investors who have lived in their investment property for at least 12 months to claim tax breaks on any capital gains accrued in a six-year period following that initial 12 months. You can read more about the six-year rule here.

The second advantage to keeping your home is the ability to pay it off in full and be one of the 30 per cents of households in Australia that no longer stress over mortgage fees.

Of course, there are considerations to make before turning your home into an investment property.

While you will have the opportunity to borrow on the existing equity in your home, you need to be able to afford the daily costs of your new home and a business (the investment property). When costs exceed incomes from an investment, many choose to negatively gear their properties and make the most of the tax incentives for that scenario. However, with the costs of running a home running up to almost 5 per cent of the purchase price of a home per year, you need to be sure that you are not stretching your finances to their limit (especially with any changes to interest rates or your own employment). Tax incentives are policies, and these policies can change with new governments, so be cautious not to rely solely on these as a long term investment plan.

The decision of whether to sell you should sell or rent your home is one that must take into account a multitude of factors that are different for all homeowners, which is why it is important to first speak with an accredited financial adviser to see whether your finances can support the transition of your home into a business and source of income. Remember that if choosing to turn your home into an investment property, you will most likely have to sacrifice on your lifestyle, as your new PPOR will need to be affordable enough to account for the increased costs of running an investment property.

Let’s take the following financial scenario of renting out your home.

If you decide to rent out your existing property, you’ll still have your existing mortgage of $100,000 and you’ll need to borrow another $600,000. This means your mortgage repayments will now be higher. However, let’s say your rental return rate is 5% – you’ll be making a rental income of $25,000. This income will go a long way towards paying for these increased mortgage repayments. Your cash flow will improve as the rent increases. Advantage: You’ll own two homes worth $1,100,000 combined, and you’ll have a higher net worth over time. Disadvantage: You’ll have two mortgages worth a debt of $600,000 combined.

tax strategies on paper

Top 10 Considerations

Which option makes the most sense financially?

Cash is king in these situations and you need to work out what you can and can’t afford. 

Start by preparing a detailed budget, covering the period you will be away.

Your budget should account for all income and expenses associated with renting out your home, together with the costs associated to renting or buying your ‘new’ home.

Once this has been done, prepare a similar budget that assumes your property was sold.

This will quickly show you which option is the more financially feasible one for your circumstances, which may reveal the best course of action.

Think With Your Head, Not Your Heart

This step is easier said than done but it is critical to making smart and informed financial decisions. Firstly, take a step back and try to understand why you are considering the options at hand.

We often see couples that have lived in the one property for many years looking to downsize and keep their existing home as an investment. Their family has grown up in the home and they have strong connections in the area. But when we get to the crux of why they are considering holding on to their family home in the first place the reasons are far more emotionally based than financial. This is dangerous territory and can lead to poor financial decisions.

On the other hand, a range of circumstances can lead to homeowners rushing into a decision to sell. Without proper market advice and a thorough understanding of their individual financial situation, this may not be the right decision either. Essentially, knowledge is power and being properly informed can do wonders for your financial decision-making.

What can you handle emotionally?

This one is generally a major issue for many homeowners who are looking to turn their PPOR into an investment, but it can also be an issue when selling.

You’ve generally spent years looking after your property, making memories with your loved ones and getting your home exactly how you want it.

To then hand that over to someone else to live in as a rental can be tough – no one is going to look after your home quite like you would, and you need to be prepared that things may get broken or the garden may not look as good as you’d like.

If you feel that the emotional side of an investment property may be an issue for you, it may be more beneficial for you to sell. While this will come with its own emotional turmoil, you will know that you aren’t having to pay for any damages or maintenance.

Selling your family home can be quite an emotional experience.

You’ve built a life in this home and with this, you have some wonderful memories. 

On the flip side, it can be equally tough renting your home out to a total stranger.

Property investors are usually objective and detach emotion from the property they’re renting out, otherwise, mistakes can be made and financial returns adversely affected.

Of course, if you’re planning to come back to this home in the future, then the strategy of renting out your home might focus on maintaining your asset and earning some cash to cover the holding costs while you’re away, rather than maximising investment returns.

Tip: If you think you’ll have major emotional problems with renting your home out to a stranger, selling the property might be the best option.

adult kids moving home

Is there a rental demand for your property?

Market demand can be a very big indicator of whether you are better off selling or turning your home into an investment.

If there is no rental demand for a five-bedroom house on the outskirts of a small city, you may be better off selling.

However, if you have a three-bedroom apartment right on the beachfront, for example, you may find there is plenty of market demand which makes turning the property into an investment a better option.

Before putting your home on the rental market, you need to do some research and find out what the rental demand is in your area and see what the average rent level is.

This is an important part of your budgeting process.

If rental demand is low and/or vacancy rates are high in your area, that’s not good from a financial or a security perspective – you don’t want your property sitting vacant for extended periods of time as it could be the target of vandalism and theft.

Tip: Talk to a couple of local estate agents to get some rental advice, and visit to check rental yields in your street and suburb.

Is there good potential capital growth for your property?

Growth is always something that investment owners are looking for when purchasing a property.

When you are tossing up what to do with your current PPOR, you need to consider whether the area is already at the top of the market or whether there is room for growth.

If prices are already at the top of the market or getting that way, it may be more beneficial to put the property on the market rather than using it as an investment.

Again, conduct research on your suburb to get a feel of where property prices are heading in your area.  

While there are no guarantees when it comes to predicting price movements, there is enough information out there that can give you a good indication of what to expect.

If the market is expected to remain buoyant with strong demand, and if it is likely to be maintained while you’re away, then this indicates that it might be in your best financial interest to hold onto your home so you don’t forgo any future capital gains.

On the other hand, if the market has reached its peak, or is nearing its peak, it might be a good time to sell, especially if there’s some uncertainty over how long you’ll be away and whether you want to return to the same property.

In other words, bank your tax-free profits now rather than risk them when you return. 

Is being a landlord for you?

Renting out your property is essentially turning it into a business and you have responsibilities as the business owner to make sure it is adequately resourced, funded and fit for purpose. 

Are you moving for a change of lifestyle, a new job or to set off travelling?

If so, will you have the time to be a landlord, even with the assistance of a property manager?

Will you have the time to keep an eye on emails for maintenance, keep track of spending and maintenance and to keep up to date with all the paperwork needed for the end of the financial year?

You have to be prepared to take on or manage all relevant aspects of being a landlord, and more, while you’re away.

You must ensure you have the right people in place (e.g. rental agents, accountants, tax advisors, legal advisor, tradespeople etc.), adequate cash flow to meet all outgoings (it is likely your home will be negatively geared, meaning the rent earned will not cover all property holding and operating costs) and be prepared to discharge your legal and commercial responsibilities.

Carefully consider whether you have the time, or even want to spend time and effort being a landlord.

While there is plenty more to think about including tax implications and capital gains, deciding whether to rent your current PPOR or sell it before moving on can be quite a difficult decision.

It’s worth having a chat with your accountant to go through the financial side of things to work out which option is better for you in the long run.

hands exchanging house and money

Is the property suitable for renting?

Your home must be habitable, safe and free of any defects that may adversely affect the enjoyment and use of the property by your tenants.

You may need to do some repairs and maintenance work on your property to bring it up to marketable standards, not to mention to meet your legal responsibilities.

This will cost money, so you will need to decide on whether it’s best to invest or sell based on affordability and commercial considerations.

Are your tax affairs in order?  

There are a plethora of tax considerations to take into account when renting out your family home, so you should seek independent financial and tax advice before doing so.

For instance, while you want to maximise your allowable deductions (including depreciation), you also want to minimise your tax liability and protect your home’s capital gains tax exemption.

Therefore, tax planning and understanding your tax situation is vital when deciding whether to rent or sell.

Consider Your Cash Flow

When it comes to deciding whether to rent out or sell your current PPOR, your biggest decision will be based on what makes more financial sense.

You need to consider whether you can afford the maintenance on two properties, whether you can afford the various taxes and bills on both properties, and what happens if the rental is vacant for a period of time.

You should be sitting down and making a budget of what an investment property could cost (including management fees, accountancy fees, maintenance costs, advertising fees and more) as well as what your new home will cost.

Work out your income in comparison to these expenses (including any loans) and you will get a good idea of whether you are better off selling, or whether you can hold the property as an investment.

It’s true, holding on to an investment property could give your financial situation an injection in the future or could present sizeable tax breaks but what about your cash flow in the meantime? Keeping your situation manageable is often a very viable financial decision. If your investment is dependent on the projected rental income from the property (which is often the case) any number of things could impact this revenue. It’s important to consider things like maintenance costs and upkeep, possible body corporate costs and council rates depending on the property or what if the property is vacant for a period of time for whatever reason. All these things could impact the viability and manageability of your investment.

The Investment Itself

Ask yourself this, why did you buy your home in the first place? For the majority of people, buying a family home is not solely a financial decision. Most people take into account the neighbourhood, locality of family and friends, schools, work etc. While these things may impact the investment potential of your home, in most cases they won’t. This means by selling you could theoretically channel your money into a property with far more investment potential than your existing home.

On the other hand, if you have strong, reliable information (not just a gut-feel) that the area is set for amazing market growth then, by all means, the benefit of turning your home into investment may outweigh the associated risks.

Are you more confused than ever? Here are our top considerations when deciding whether to rent or sell your existing property:

  • Always, always, always leave emotions out of the decision
  • Understand your own financial situation like the back of your hand
  • Understand your market
  • Explore all options before ruling anything out
  • Could you see yourself moving back into the property in the future?

Do you have your ownership structure right?

The family home is usually held in joint names (e.g. husband and wife, life partners, defacto partners and so on).

While this is quite normal to help ensure succession in case of death and helps protect everyone’s interests in case of separation, it might not be optimal when it comes to property investment.

Adequate tax planning is required and it is very important to obtain legal advice around things such as the rights, obligations and impact of transferring the home into one name if that course of action was chosen for tax purposes.

Is your home loan the best available? 

There’s not much difference between a home and investment loan these days as the features and benefits are pretty similar.

The key question revolves around the appropriateness of the product to help you achieve your financial, investment and personal objectives.

A loan taken out to buy a family home may not be appropriate for an investment property.

It might pay to do an investment loan health check that takes your cash flow, tax position and how long you are likely to be away into consideration.

Trust your gut!

A final consideration is to trust your gut.

Reflect on what feels right as well as what makes financial sense.

If you can get to a position where you’re on the same page emotionally and financially, you’re well on your way to choosing the best option for you and your family.

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