It’s a common and exciting life milestone: you’re moving! Maybe you’re upgrading to a bigger home, downsizing for retirement, relocating for a job, or wanting to be closer to family. Whatever the reason, you’re now facing an important financial decision — what should you do with your current home?

If you have enough liquidity to buy your next property without selling your existing one, you might be tempted to keep your old house and rent it out. It feels logical: why sell a familiar property that could generate passive income?

In fact, according to the National Association of Realtors (NAR), approximately 10-15% of homeowners choose to convert their primary residence into a rental property when they move, rather than sell it outright. It's a relatively common path — but does it actually make financial sense?

The answer: Probably not.

Here’s a deep dive into why — and when it might still make sense.

Non-Economic Reasons to Keep Your Home as a Rental

Before diving into the hard financials, it's important to recognize that not every decision is purely economic. There may be emotional and personal reasons to keep a property:

• Sentimental Value: It’s the home where you raised your children, celebrated milestones, and built memories.
• Family Strategy: Maybe you want to rent it to a relative or preserve it for future generations.
• Familiarity and Comfort: You know the property intimately, giving you a sense of safety in keeping it.

These reasons are important. However, if you’re trying to optimize your financial future, you’ll want to carefully run the numbers before deciding to become a landlord.

The Key Question: Would You Buy This Home as a Rental Today?

Set emotions aside for a moment.

If you had cash in hand, would you buy your current home today purely as a rental investment?

If the answer is no, that’s a major red flag.

Many homeowners fall into the trap of keeping a property simply because they already own it — even if it would be a poor investment relative to other opportunities.

Step 1: Evaluate the Alternative — Selling Your Home

First, figure out what selling would realistically yield:

• Estimate Net Proceeds:
• Sale price
• Minus closing costs (typically 6-10%, including realtor commissions)
• Minus any rehab or staging costs needed to sell
• Estimate After-Tax Net Proceeds:
• Remember the primary residence capital gains exclusion: if you’ve lived in the home for 2 of the last 5 years, you may exclude up to $250,000 of gain ($500,000 for married couples).

Now, think about how you could invest these after-tax proceeds:

• Low-Cost, Diversified Index Funds: Over the past century, stock returns have provided attractive risk-adjusted returns.
• Treasury Bonds: Safer, lower-risk returns of 4-5% in today’s environment.
• Other Opportunities: Including residential real estate with specific characteristics that make them ideal rental properties in the long-run.

In many cases, selling and redeploying your equity elsewhere yields better long-term returns than trying to manage a single rental property.

Step 2: Analyze the Rental Scenario

If you’re still considering renting, here’s what you need to do:

Estimate Realistic Rental Income

• Get a local property manager or leasing agent to provide a rental market analysis.
• Don’t forget vacancy rates: Expect 4-10% vacancy annually, depending on your location and tenant turnover patterns.

Estimate Operating Expenses

Consider both obvious and hidden long-run costs of operating a rental property:

• Property Taxes: Understand whether they reset to market value periodically (especially in states like Texas). With property taxes as the single largest rental property expense in most situations, understanding how those taxes can change over time is really important.
• Insurance: Rental property insurance is more expensive, and rates have increased 20-40% in many states over the past two years. If your property is located in an area seen as high-risk or a growing risk for natural disasters such as wildfires, wind/hail or flooding, you may be exposed to higher insurance costs and overall costs for maintenance and capital replacements over time.
• Maintenance and Repairs: Budget annually for routine maintenance, plus make-ready costs after each tenant leaves.
• Capital Reserves: Set aside funds monthly for big-ticket items like HVAC replacement, new roofing, flooring, etc.
• Management Fees: Professional property managers typically charge 8-12% of monthly rent, and may also charge other fees for property management, including site visits/inspections, leasing and administration.
• Other Costs: HOA dues, licensing fees, legal costs for evictions, etc.

Calculate Net Cash Flow

Net Cash Flow = (Gross Rent – Vacancy) – (Operating Expenses) – (Mortgage Payment)

In many cases, cash flow is neutral or even negative after accounting for all costs — especially if you bought your home to live in, not as a purpose-built rental.

Step 3: Understand the Full Investment Return

Your rental property return comes from three sources:

1. Net Cash Flow: As calculated above.
2. Principal Paydown: Each mortgage payment builds more equity, if you have a conventional, amortizing loan (and not an “interest-only” loan).
3. Appreciation: Hopeful long-term property value increases, which, nationwide, have tended to track inflation more or less (but with a lot of variation by geography and timeframe).
4. Taxes on Sale: If you rent the property for the long-run, while you will be able to take advantage of non-cash depreciation over time to offset some or all of the taxable net income of the property, you will likely lose the primary residence capital gains exclusion described above, and unless your sell the property in a tax deferred exchange for other real estate (primarily through a “1031 exchange”), you will pay full capital gains and depreciation recapture taxes when you sell.

Step 4: Carefully Consider the Additional Significant Risks Inherent with Rental Real Estate

• Unexpected Large Expenses: A roof or HVAC system fails suddenly, a tenant causes significant damage to the property that is not covered by the security deposit, or a liability occurs on the property that is not covered by your liability insurance policy.
• Market Cycles: Real estate markets can decline, sometimes sharply, impacting property values and rents.
• Inflation Risks: Costs like insurance, taxes, capital replacements, and repairs can rise faster than rents.
• Geographic Risks: Your city could experience economic decline or your neighborhood dynamics can change for the worse, leading to dropping property values in the longer-run that are not just cyclical.
• Concentration Risk: A large portion of your net worth is tied to a single asset – without the benefit of diversification, you are much more exposed financially to one or more of these issues.

Plus, despite the promises of “passive income,” rentals are rarely passive. Even with property management, effective oversight and occasional involvement are necessary.

Step 5: Factor in Other Considerations Unique to Your Locality

For example, if you’re in California and 55 years or older, Proposition 19 allows you to transfer your low property tax basis to a new home. If you turn your principal residence into a rental instead of selling for the long-run, you forfeit this valuable tax break.

Other states and municipalities have their own unique regulations and incentives, so be sure to do your homework.

The Bottom Line

Keeping your old home as a rental is a common strategy — but it’s not usually the best financial choice.

Unless you have compelling non-economic reasons (family use or sentimental attachment), it’s crucial to conduct a full economic analysis.

In most cases, selling the home and investing the proceeds elsewhere leads to stronger expected long-term financial outcomes, with less risk and fewer headaches.

Take the time to run your numbers, consult with real estate, tax and financial professionals if needed, and make a thoughtful, informed decision.

Moving is a new beginning — make sure your financial strategy supports the future you want to build.