Sell our home or rent it?

Question

Scenario & Question

We are trying to decide if we should sell our home or rent it out because it's in a good location. Would it be better to rent out our home or sell it and invest the gains (50k).

My Thoughts

Theoretically we should get 3-5% increase per year owning the property while the more volatile S&P averages 12% a year. This screams to me that a well diversified portfolio should well outpace owning the home.

Am I missing something ?

EDIT

Additional Details:

This is regarding a property that is currently mortgaged (30yr 3% starting 6/2019). That said I do have another property that I may sell via 1031 depending on my findings of rent vs own (30yr 4.6% starting 7/2007).

Answer 1

Over the last 20 years average home price in Utah has increased ~6%/year, ~9.7%/year over the last 10 years. S&P500 over those two periods has averaged 2-3%/year more than home prices in Utah. It's anyone's guess as to what the markets will bring, real-estate performance can vary significantly within a state. Right now you have leverage amplifying your gain/loss potential compared to just investing the sale proceeds.

mortgage + repairs would wash out most of the rental income

That doesn't mean the only benefit you get is from increase in property value, you're getting equity every month by someone else paying the mortgage. Similarly, if the value continues to increase so too will your rent, which should increase cash flow. You'll want to properly calculate your ROI as part of your decision. I suggest setting up a spreadsheet and forecasting a few scenarios for each (historical average, optimistic, pessimistic) and compare that way.

Ultimately it depends on your preferences and outlook. If you like being a landlord well enough and you think home prices won't grossly underperform the stock market then being leveraged at a low interest rate could work out very well. If you are wanting to sell anyway and think real estate will underperform then you should sell.

Personally, I like being a landlord and view it as a form of diversification since my 401k/IRA/brokerage accounts are pretty much all stocks/options, but it's not for everyone and certainly not guaranteed to be profitable.

Answer 2

You mention you have 50k of equity and could earn 10-12% on it. That's 5-6k a year.

You seem to feel that the rental income will just cover the mortgage payment, property taxes, and the expenses of maintaining and renting the unit. Ok. What fraction of that mortgage payment is principal? If it's 400 a month, that's 5k a year your equity is increasing while the renters pay your mortgage for you.

Then there's the increase in the property value. If it's a 100k property, 5% a year is 5k - which matches what your equity could earn elsewhere. If you're highly leveraged and it's a 500k property, 5% of that is 25k a year. That's a lot more than 5. In fact, it's a lot more than 0, which may be all it needs to go up by if the principal part of your mortgage payment can match what the equity would earn elsewhere.