The decision to keep a former home as a rental often feels like a purely financial question, but it starts with a lifestyle choice. If the "hassle factor" is too high—due to relocation, lack of time, or simply not wanting the stress of tenant management—the financial upside rarely justifies the burden.
However, if you are open to the work (or hiring a manager), the decision moves to the numbers. This framework simplifies the complex financial metrics into a step-by-step guide to determine if your old home is actually a good investment or just a savings account with a roof.
Note: This is essentially the flip side of the Rent vs Buy decision—instead of asking "should I buy or rent my next home?", you're asking "should I rent out or sell my current home?"
1. Should You Become an Accidental Landlord?
Before diving into the numbers, ask yourself if landlording is realistic for your situation.
🛑 Sell If:
- • Moving out of state without local support
- • Not prepared for rental management burdens (see Consider Renting If)
✅ Consider Renting If:
- • Have time to manage the property yourself
- • Or can afford a property manager (8-10% of rent)
- • Have emergency reserves for repairs & vacancies
2. Rent vs Sell Financial Analysis: Cash Flow & ROE
Two questions determine if the numbers work: (A) Does the property pay for itself? and (B) Is it a good investment compared to alternatives?
A. Will the Property Pay for Itself?
Calculate monthly cash flow to see if the property covers its own costs.
Cash Flow Formula:
Other Costs and Reserves cover vacancy loss, repairs, HOA and property management fees.
Example: Year 6 After Living There 5 Years
Based on the Investment Metrics Guide example:
Income:
Expenses:
B. Will It Be a Good Investment?
Return on Equity (ROE) tells you if the money tied up in your home is earning a good return compared to alternatives.
ROE Formula (Back-of-Envelope):
- • Equity = Current Home Value − Remaining Mortgage Balance
- • Principal Paydown = Amount reducing your loan each year (check your statement)
- • Appreciation = Conservative estimate, e.g., 4% of home value
Example: Year 6 ROE Calculation
Continuing from the cash flow example above (originally $300K purchase, 6.5% mortgage, 20% down):
Current Position (After 5 Years):
- • Home Value (4%/yr): ~$365,000
- • Mortgage Balance: ~$223,000
- • Equity: ~$142,000
Year 6 Returns:
- • Cash Flow: $5,880
- • Principal Paydown: ~$4,800
- • Appreciation (4%): ~$14,600
- • Total Return: ~$25,280
ROE = $25,280 ÷ $142,000 = 17.8%
Now compare your ROE against alternatives. The right comparison depends on your next move:
Scenario A: You Need a New Mortgage
If you need to buy a new primary residence and would have to take on a mortgage (had you not sold the old home), compare your ROE to the new mortgage rate (~6.1% as of Jan 2026). Selling the old home frees equity that can reduce your new mortgage balance, saving interest at that rate.
- • ROE > mortgage rate: Keeping the rental earns more than you'd save by paying down debt
- • ROE < mortgage rate: Selling and using equity to reduce the new mortgage is typically better
Also consider the 75% rule: Lenders only count 75% of rental income to offset the old mortgage when qualifying for your new loan.
Scenario B: No New Mortgage Needed
If you don't need to take on a new mortgage (e.g., you're renting your next home or buying with cash), compare your ROE to other investment options where you could deploy the equity locked in the old home:
| Alternative | Expected Return | Risk |
|---|---|---|
| High-Yield Savings | 4% APY | None |
| 1-Year Treasury | ~3.5-4% | None |
| 60/40 Portfolio | ~6-7% avg | Moderate |
| S&P 500 Index | ~10% avg | High |
Rates as of January 2026. Your rental also has concentration risk (one asset) vs. diversified portfolios.
| Your ROE | Verdict |
|---|---|
| <4% | Below risk-free rate — likely sell |
| 4-7% | Comparable to 60/40 portfolio — weigh hassle factor |
| >7% | Beating most alternatives — strong case to keep |
3. The 2-out-of-5-Year Tax Rule: Test Landlording Risk-Free
If your financial analysis is borderline, but you want to test landlording, the tax code provides a safety net.
The 2-out-of-5-Year Rule
To sell tax-free (up to $250k single / $500k married profit), you must have lived in the home for 2 of the last 5 years. See our Section 121 Guide for the complete eligibility rules.
The Strategy
- • Since you just moved out, you've met the 2-year residence requirement
- • You can rent the property for up to 3 years and still qualify for the exclusion
- • If you hate landlording or prices spike, sell and take your capital gains tax-free
4. Rent or Sell Decision Framework
The Decision Process
- 1. Lifestyle Check: Are you ready to be a landlord? If not, sell.
- 2. Cash Flow Check: Does the property pay for itself? If negative, be cautious.
- 3. ROE Calculation: Calculate your Return on Equity.
- 4. Compare ROE:
- • Scenario A: Need new mortgage. Compare to mortgage rate (~6%)
- • Scenario B: No new mortgage. Compare to alternative investment returns (e.g., ~7% for a 60/40 portfolio)
- 5. Make Decision:
- • ROE below benchmark → sell; similar → weigh hassle factor; above → keep
- • Unsure? Try renting for up to 3 years to test while preserving the Section 121 tax exclusion
Decision Flowchart
Related Guides
Ready to run the numbers on your property?
Try the CalculatorDisclaimer: This guide is for educational purposes only and does not constitute financial, tax, or legal advice. Consult with qualified professionals before making investment decisions. Market rates and returns referenced are as of January 2026 and are subject to change.