Should I sell or rent out my property? 5 must-read tips

By Katherine O'Chee ·

Buying your first home may be a huge milestone, but chances are you’ll eventually wave goodbye to that two-bedroom apartment or townhouse and move elsewhere. That could be due to a number of reasons, whether it’s needing more space to raise your kids or looking for a change in scenery. 

However excited you may be to hunt for your next home, that’s not the only big decision you'll have to make. You’ll also need to figure out what to do with your existing home: Will you sell or keep it as a rental property?

The answer isn’t always straightforward, as there are pitfalls to watch out for. 

Mortgage broker from Two Red Shoes, Rebecca Jarrett-Dalton says one mistake is letting your emotions drive your decision - growing so attached to the property that you aren’t willing to let it go.

“[Your decision] has got to be affordable and make sense. What you don’t want to do is cripple yourself that you can’t afford your new lifestyle,” she says. 

Instead she recommends crunching the numbers and consulting experts, such as a mortgage broker and an accountant, before locking in your final decision. The bottom line is, how much is your choice going to cost you and can you afford it? 

To determine whether selling or renting out is more financially viable for you, here are five key factors to consider.

1. Cashflow

A good starting point is finding out if your choice will generate a positive cashflow for you. That is, will it result in more money entering rather than leaving your bank account? Jarrett-Dalton says this is an easy way to make a decision, as it eliminates one option based on affordability. 

Say you want to keep your first home as an investment property: then you would need to subtract all expenses required to maintain that property (e.g. mortgage repayments, taxes, insurance, management fees, possible vacancy), from the income you’d make from rent. These can be monthly, fortnightly or weekly estimates, depending on what suits your situation. The maths will reveal whether keeping the property is feasible, and if not, you may consider selling instead. 

On the flipside, selling then buying again could also get expensive as it comes with a bunch of fees (e.g. for the agent, conveyancing, marketing and auction). In Jarrett-Dalton’s words, “People often don’t expect that it might cost them 50, 60, 70,000 dollars to change those properties over.”

So if you’re unhappy with the amount you’ll receive once you’ve deducted the sales fees, then you may decide it’s a better return on investment to hold onto the property until its market value rises.

2. Tax

According to Jarrett-Dalton, tax implications are “one of the biggest things that people forget about” when they’re weighing up the pros and cons of retaining vs selling their old home. 

For instance, even if you fully own your old home, it may not be the wisest move to keep it from a tax perspective. For one, any rental-related income you receive from that property would be taxable. Plus, you’d miss out on the opportunity to claim tax deductions on home loan interest as a property investor since you already paid your (non-deductible) loan off in full as an owner-occupier. 

That’s why speaking to a tax advisor can be useful. They can guide you through ways to minimise your tax bill, while also helping you understand how jargon like ‘capital gains tax’ (tax paid on a capital gain, such as a profitable real estate sale) and ‘land tax’ (tax levied on owners of land) might apply to you.

3. Market trends

When estimating the value you might get out of selling or keeping a property, you also need to factor in the bigger picture. 

For example, if you’re renting out your old home, then it may be worth knowing that thanks to lower rental demand amid COVID-19, the median rent is noticeably less now than earlier this year, and it’s also harder to attract new tenants. 

“If you think dropping rent might make the whole proposition [of retaining your property] fall over, perhaps that’s not an option you should consider," Jarrett-Dalton says.

“In the end, it might come down to if the income is critical and you have to get top dollar and you can’t afford to go without a week’s lost rent.”

Given that your financial position can handle those bumps in rental income, then the next step would be to build a buffer into your budget - surplus cash to cover for any potential falls in rent value. One good place to park that contingency money is inside a high interest savings account, where you can still earn a decent return of up to 3.00% with Westpac Life (18-29 years old) and 2.10% with HSBC Serious Saver.

4. Home loan

If you’re renting out a property you’ve previously lived in, it’s likely the bank will require you to switch from an owner-occupier loan to an investment loan. While these loans have slightly higher rates in theory, Jarrett-Dalton says the gap could be almost non-negligible if you shop around for a bargain deal.

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It’s also common for investors to take out interest-only loans. These are loans where the borrower only has to pay interest plus any fees over a fixed period, typically five to 10 years, before reverting to principal and interest repayments for the rest of the term (20 to 25 years).

But is interest-only right for you?

“The plus of an interest-only loan is that it’s going to help with your cashflow for the immediate future,” Jarrett-Dalton says. 

In other words, by making smaller minimum repayments on your tax-deductible investment loan, you’d be able to channel more of your income into paying off the loan for your new owner-occupied home - which is non-tax deductible. This strategy can help shave dollars off your tax bill, although it’s best to check with your accountant before making any moves here.

“However the negative [with an interest-only loan] is that once the interest-only period expires, you'll have a shorter time to pay off the bulk of the loan, or you'll have to do something else [like refinance or sell],” Jarrett-Dalton adds. 

And since having larger repayments and more debt means the bank won’t be willing to lend you as much money, interest-only loans “could actually constrain your borrowing capacity,” she says.

“So if you’re trying to buy that absolute dream home, you might get pulled right back.”

5. Long-term goals

Maybe you’re an Aussie homeowner seeking out a ‘tree change’, but you’d like to keep your metro-based property as a fallback in case things don’t work out. 

Maybe your first home is located somewhere close to the city, so it’s a good spot to return to once your kids start uni. 

Or maybe you’re only planning to stay in your current home for a few years before uprooting and finding a bigger house. 

Whatever your property goals may be, it’s important that your decision-making is aligned with them. Speak to your mortgage broker and accountant to see what strategy might work best for you, financially speaking.

What's next?

Once you’ve determined whether you want to sell or keep your first property, it’s time to look around for your next home. 

The good news is, ultra competitive deals are up for grabs right now, thanks to record low interest rates and property prices dropping across Australia. Compare your options today over at our home loans comparison table.

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Katherine O'Chee
Money writer

Katherine O’Chee is Mozo’s international money transfer and forex expert and business banking writer. She keeps Mozo’s readers on top of the latest news and writes in-depth features to inform and help Australians make smarter financial decisions. Her work has been published in major media outlets including Sydney Morning Herald, SBS News and Bangkok Post. She has a Bachelor of Arts (Media and Communications) from the University of Sydney.