Should I sell or should I rent (out)?

(To those of you who now have the song stuck in your head -- you're welcome!)

Alright -- you've decided to upgrade/downgrade/relocate to a new home, and your financial situation is such that you don't have to sell your current home to do so. So: once you've moved, should you sell your old home, or should you rent it out as an investment property?

I'm a former engineer (insofar as there is such a thing as "former" engineer), so my first instinct is to run some sort of opportunity cost analysis...but I understand that this instinct is not only not universal, it's actually quite rare. So: let's talk about why your instinct might be different, and then talk about how to run the numbers.

Why renting out feels like the safe choice

In our work with clients, we've found that the most common reason that folks instinctively hold onto their old home is simple inertia. Even engineers are prone to this, in the form of "analysis paralysis" ("I don't know what the right answer is, so until I do, I'm going to keep doing what I'm doing") -- in this case, continuing to own the property in question. Of course, like most financial decisions, the longer it takes you to analyze the problem and come up with the expected optimal choice, the higher your opportunity cost, so it's worthwhile to put some thought into it sooner rather than later!

The second most common reason is feeling like they "should" keep their old home. Maybe they watch TikTok or read "Rich Dad, Poor Dad" and decide that a real estate empire is The Way To Go. Or maybe their family has ingrained in them the idea that real estate is simply the highest and best form of wealth; if you're going to e.g. leave something to your children, it should be a house, and you should buy it sooner than later. But if you've been reading this blog for a while, you'll know that we're fans of mostly-liquid, diversified portfolios that match your risk tolerance and risk capacity as the highest and best form of wealth -- of which real estate is only a part. (And please, please don't use the phrase "passive income".)

Another reason to hold onto the home is to hedge against rising housing prices -- and this one can make sense. If you're quite sure that you're going to move (back) to a certain place, then keeping the home can "lock in" the price so that you don't have to worry about how it might fluctuate in the future. But while this can make sense, I worry often about the "end of history illusion"; as humans, we consistently underestimate how much our lives and plans are going to change. Because of this, at Seaborn we try to lean towards maintaining flexibility, rather than carving plans in stone. (Also note that hedging works both ways -- sure, the housing market might appreciate higher than your diversified portfolio, but it could just as easily lag!)

Case in point re: the housing market: I personally bought my home in Austin not 2 years out of college, when I could barely afford it (and before I knew anything about anything), and I've stayed there for 25 years. Over that time, thanks to Austin's housing boom, my home's value has increased by 3.16X! That's a great investment, right?

...well, it's not bad, but it's not actually great. That's a 4.7% annual growth rate (roughly in line with the rest of Austin). A diversified portfolio would have grown by 6-7% annualized over that time, depending on how much you had in stocks versus bonds. (Not to mention that the 4.7% doesn't reflect the money I've had to sink into the house over the years; A/C units aren't cheap!) So while it turned out okay in the end, it definitely wasn't an optimal choice -- present-me would definitely have advised past-me to do things differently!

Running the numbers

But surely sometimes renting out your prior home can make a lot of sense, right? Well, sure. And there are a lot of ways you might run the numbers on that, a lot of which depend on speculation, i.e. how much is the housing market going to go up? If, like us, you don't trust your crystal ball, you can use a different method: calculating "cash-on-cash yield".

It's a fairly straightforward calculation: (annual rental income - annual expenses)/(net proceeds if you were to sell the home). It's literally the "yield" on your home: the amount of net income you generate as a percentage of its net worth, very similar to the yield on bonds or company dividends.

And to be clear, we're talking about "cash on cash" -- in other words, including all of your mortgage payment, even the principal payments, but not including depreciation. Cash flow, pure and simple, which allows us to make more apples-to-apples comparisons with other asset yields.

OK, so what's a "good" yield, then? Different folks will tell you different things, but I've commonly found professionals consider anything less than 4-5% not remotely worthwhile, and unless it's higher than 7%, you should only do it if it's something you love. For comparison, as of this writing (7/30/25), the Vanguard REIT (real estate investment trust) is yielding 3.8% -- and it is highly diversified and extremely liquid. If you're going to own a highly concentrated, illiquid asset subject to all kinds of risks from maintenance to vacancies, then you should only hold it if you're going to be compensated for the risk, hence the thresholds above!

Another point of note: as of this writing, more than a few Seaborn clients have come in with rental real estate. Literally none of them have calculated cash-on-cash yield, and when we run the numbers, we find that the yield is almost unilaterally less than 2.5%...if it's positive at all! (And by the way: we use Schedule E on their tax return to compute the expenses, and we find that folks generally underestimate just how much it costs to maintain a rental home!)

Finally, as I mentioned earlier: please run the numbers sooner than later. When you sell your residence, you're eligible for a $250K ($500K if you're married) capital gains exclusion; once you've rented it out for 3 of the past 5 years, though, the exclusion goes away!

No, seriously: run the numbers!

"So you're saying that 90%+ of the time the optimal decision is to sell your old home?" That's what it seems. And honestly, that's to be expected; while the housing market isn't as efficient as the stock market (not by half!), it's efficient enough that a good deal isn't easy to find, and thus is highly unlikely to just fall in your lap. But: run the numbers yourself, even if you're just using approximations! Sure, you'll likely miss some subtleties, but if you factor in mortgage, property tax, property manager fees, maintenance, and a "vacancy factor", you'll get close enough to make a reasonably wise decision -- based on analysis, not cognitive bias.

Now, we firmly believe that the value of your home goes far beyond the numbers -- while you're still living there. Want to sink $50K into a new kitchen, even though it almost certainly won't increase the value of your home by nearly that much? If it's worth it to you compared to what else you could spend the $50K on, be our guest! Once you've moved, though, your home is just another investment in your portfolio, to be analyzed like any other. Do the math, and if it doesn't check out, give yourself permission to make the wise decision and let go of the outcome -- in this and all other decisions, big or small.

Britton is an engineer-turned-financial-planner in Austin, Texas. As such, he shies away from suits and commissions, and instead tends towards blue jeans, data-driven analysis, and a fee-only approach to financial planning.