Timing It Right: Selling Rental Property to Pay Off Your Primary Residence

Should I sell my rental property to pay off my primary residence?

To make a more informed choice, we’ve structured this post around a set of 10 questions designed to help you evaluate whether selling your rental property to pay off your primary residence is the right move.

These questions will cover various aspects of your financial situation, current market conditions, and your future goals, providing a preliminary decision-making map.

Each question is crafted to walk you forward to the next level of priority or potential impact. We start by asking whether the market is baked properly to maximize your investment proceeds. In most cases, this first question will either open the gate or cause you to hesitate.

1. What’s happening in the local rental market?

One of the first factors to consider is the state of the local rental market. Is your rental property in an area where demand is high, or has there been a downturn in rental prices? Understanding market trends can help you gauge whether selling now would be financially beneficial or if holding onto the property might offer better long-term gains.

Other things to keep an eye on in your local rental market are vacancy rates, rental rules, and new construction nearby. If a lot of units are empty, rents might be dropping, and strict rent-control laws could limit how much you can charge.

New buildings or commercial projects can also shake things up. While they might increase property values in the long run, they can temporarily make rentals less appealing. Construction can be noisy or disruptive, traffic may increase, and newer buildings often attract renters looking for modern amenities, which can make your rental home harder to fill.

Paying attention to these details helps you decide if now is the right time to sell.

2. Do I have a pressing financial need now?

Next, assess whether you have an immediate financial need that selling your rental property could address. Whether it’s paying off high-interest debt, covering medical expenses, or dealing with another urgent financial matter, selling your property might provide the funds you need.

You’ll need to balance this decision against the potential long-term benefits of keeping the rental income. An immediate cash flow solution may outweigh market concerns. However, there are other ways to generate a lump sum of money from your rental property.

3. Would a cash-out refinance be a better solution?

Instead of selling, consider whether a cash-out refinance on your rental property might be a better solution. A cash-out refinance is when you replace your current mortgage with a new, larger loan and take the difference in cash.

This option allows you to tap into the equity of your rental property while still holding onto it, potentially providing you with the funds needed to pay off your primary residence without losing your investment.

4. Is my rental property financed at a low rate?

Examine the current financing on your rental property. If it’s locked in at a low interest rate, selling might not be the best financial move, especially if you’re benefiting from positive cash flow and the low interest rates that were available during the pandemic era, when many homeowners refinanced. Compare the cost of keeping the property versus the benefits of paying off your primary residence before making a decision.

5. Can I make a better investment elsewhere?

Ask yourself if selling your rental property could free up money to invest in something that earns more. Not all rentals perform the same. Some may have high expenses or slow rent growth, while other investments, like stocks or different real estate opportunities such as a short-term vacation rental in a high-demand area, might give you a better return.

If your property isn’t making as much as it could, selling and putting your money into a more profitable opportunity could be the smarter move.

6. Am I prepared for the tax repercussions?

Selling a rental property can come with significant tax implications that you’ll need to be prepared for. Capital gains tax is what you pay on the profit from the sale. That’s the difference between what you bought the property for and what you sell it for.

Depreciation recapture happens if you’ve been claiming tax deductions for the property’s wear and tear. When you sell, the IRS may require you to pay tax on some of those past deductions. On top of that, state taxes could also affect how much money you actually take home.

It’s essential to consult with a tax professional to understand how these factors will affect your overall financial situation. Being aware of the tax burden ahead of time can help you decide if selling is worth the potential costs or if it’s better to explore other options.

7. Can I wait until my tenant’s lease is up?

If you have tenants currently living in the property, their lease agreement can complicate the timing of your sale. Consider whether you can wait until their lease is up to avoid potential legal or selling issues — or the need to negotiate early termination.

Selling with tenants in place is doable, but it can also limit your pool of potential buyers, as many may prefer a vacant property. Weigh the benefits of waiting versus the urgency of your financial need to determine the best course of action.

8. Will I regret selling in five years?

Consider whether you might regret selling your rental property in five years. Real estate tends to grow in value over time, but the rate of appreciation can vary depending on the neighborhood, local economy, and housing demand.

Properties in areas with strong job growth, low vacancy rates, and increasing population often see steady price and rental income growth, while slower markets may lag. Consider what experts are saying about trends in your local rental market, and weigh any personal or financial reasons you might later regret letting the property go.

Evaluating both market conditions and your long-term goals can help you make a more confident decision. Ultimately, the answer to whether you’ll regret selling comes down to balancing potential future gains against your current financial needs and priorities.

9. Am I looking for a debt-free life or retirement?

If your primary aim is to achieve a debt-free life or secure your retirement, selling your rental property might be a step in the right direction. However, consider whether the steady income from your rental property could also contribute to your retirement plans. Balancing the desire to pay off your primary residence with the potential benefits of ongoing rental income is key to making a choice that aligns with your long-term financial goals.

10. Are there other factors pressing my decision?

Sometimes, external factors can play a significant role in your decision to sell a rental property. These might include:

• Skyrocketing insurance rates in your area
• Health challenges
• Family changes (death or divorce)
• Area property value concerns
• Community changes
• Imminent relocation
• Local land use or zoning changes
• Landlord fatigue
• A sudden need for costly repairs
• Readiness for the next adventure

Each of these factors can add urgency or complexity to your decision-making process. It’s essential to prioritize and realistically weigh these considerations alongside your financial goals to determine if selling is the right choice for you.

How Much Is Your Home Worth Now?

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Bottom line: selling rental property to pay off primary residence

Deciding to sell your rental property to pay off your primary residence is a major financial decision that requires careful thought and consideration. By asking yourself the right questions — about the market, your financial needs, the tax implications, and other pressing factors — you can better assess whether now might be the right time to make this move. To reach a final assessment, consult your financial advisor.

If you’re leaning toward selling, finding an expert listing agent who understands the rental market can make all the difference. Transaction data shows that the top 5% of agents sell homes for up to 10% more than average agents. HomeLight can connect you with the highest-rated agents in your area who have experience with rental properties and can help you navigate the sale with confidence.

Header Image Source: (Curtis Adams/ Pexels)

Editor’s note: This post is meant to be used for educational purposes, not financial advice. HomeLight encourages you to consult your own advisor.