It’s the perfect financial situation on paper: you’re a homeowner who hit the real estate lottery with your 3% fixed mortgage interest rate that you secured a few years ago. But when life changes and your housing needs do as well, this golden deal may feel more like “golden handcuffs,” holding you down to a place that isn’t right for you anymore.
You’d like to move on. To sell your existing home and buy something else, but leaving that sweet interest rate behind would be tough. Buying a new home now means that you’ll be facing much higher interest rates, something that you’d like to avoid if possible, which is why you feel stuck in your current situation.
If this sounds familiar to you, you’re not alone. A new survey from Realtor.com says that 82% of seller-buyers in the U.S. feel locked in by their current low mortgage rate.
It sounds like a catch-22, but the good news is that selling doesn’t have to be the only answer. If you want to keep your low interest rate, but still have the freedom to relocate or move into a different home that better fits your needs, then renting out your property could be an option that you’ll want to consider.
In this article, we’ll look at the implications of being a reluctant home-seller, considerations if you’re thinking of selling to buy, and how renting out your existing home could be a viable option.
Who’s Affected by the Housing Market's "Golden Handcuffs"?
Across the board, golden handcuff victims share a common thread: they’re tethered to their current homes by the attraction of their low mortgage rates, making it difficult for them to sell.
And it’s a legitimate concern. High interest rates can add considerably to the cost of your loan. Not only does it impact how much you’ll have to pay in interest over the lifetime of your loan, but it’ll also impact your monthly payments. For instance, a homeowner with a mortgage today could end up with an interest rate that is more than double what it could have been back in 2021.
Aside from the financial repercussions, there’s also an emotional side to the golden handcuffs scenario. There’s a sense of security in knowing you’ve got a killer deal, and stepping away from that can feel scary. This fear of missing out on continued savings can make you feel like you’re in a bind, caught between the desire for something new and your current financial comfort zone.
To Hold or to Sell Your House?
Home interest rates hit record lows between 2020 and 2021, going down as much as 2.65% for a 30-year-fixed mortgage in January 2021. They didn’t stay that way for long. Since 2022, interest rates have been rising, which is not a pretty picture for those new homeowners who realize that home wasn’t for them. The jump in interest rates effectively pushed them into a golden handcuffs situation. Today, mortgage rates stand at around 7%; buying a new home with the current mortgage rates means higher monthly payments, reducing affordability for many.
Many areas continue to experience low housing inventory, which helps to drive prices higher. This is an advantage for sellers, but it’s a problem when you become a buyer yourself. The combination of rising interest rates, low inventory leading to high prices, and the various costs associated with selling and buying mean that it could be a challenging time to sell.
In addition to the fact that your next mortgage could end up having a much higher interest rate, selling a home to buy another also involves several costs beyond just the new home’s purchase price. These include real estate commissions, closing costs, moving expenses, and potentially capital gains tax if the property has appreciated significantly. Note, however, that in the case of capital gains tax, you can potentially defer the tax that you’d owe with a “like-kind” exchange, which means purchasing another property with the proceeds.
Renting Out Your Property and Build Equity
So what’s the best option for you? That depends on your situation and circumstances, whether it makes sense to sell and buy a different property, or whether it could make sense to stay put a bit longer.
However, there’s another option that you may want to consider if you’d like to move house, but aren’t ready to let go of your home that has a low interest rate: renting your home out.
Renting offers a number of advantages, allowing you to keep your home, and benefit from the low mortgage rate, while at the same time freeing you up to reside elsewhere. You can opt to buy a different house, if you choose, or even consider renting yourself while you wait for interest rates to go back down. Meanwhile, your current home can become an investment, allowing you to generate cash flow each month.
For those feeling the itch to move or upgrade, renting out your home while waiting for more favorable market conditions could be a more financially prudent option that’s worth considering. Becoming a landlord allows you to hold onto a valuable asset that will (ideally) appreciate over time, and allow you to generate income long term.
Plus, it’s a great way to leverage your low mortgage rate while making the much-needed change.
Benefits of Renting Out Your Home:
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Cash Flow
For those venturing into renting out their property, having a lower mortgage could result in potentially higher returns, which can add up significantly over time.
While landlords that invest in new property today would face higher interest rates, you already have access to an income-producing asset that you were able to secure for a low interest rate. This could be significant when you consider that over the lifespan of your mortgage, a low interest rate could result in a significant amount of savings compared with a higher-interest mortgage. This savings could be tens of thousands, or even more, depending on the size of your mortgage and the difference in interest rates.
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Appreciation and Equity Growth
With lower interest rates, you’re essentially getting cheaper money to invest in a tangible asset. In many locations in the U.S., and over the long term, properties tend to appreciate over time. This means that you could potentially have an income-producing asset that’s also growing in value over time, and experiencing equity growth as well as the tenants help to pay the mortgage down.
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Tax Advantages
Rental properties can offer various tax deductions, including mortgage interest, property tax, operating expenses, depreciation, and repairs. These can help boost income and reduce your tax liability.
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Flexibility
Renting out your home can provide flexibility. If you decide you want to move back or sell the property later when the market is more favorable, you can do so.
Things to Consider Before Becoming a Landlord
However, there are also considerations to keep in mind you’re planning to become a landlord. These include:
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Property Management Responsibilities: Being a landlord is a serious business. It involves dealing with tenant issues, maintenance, repairs, and more. These responsibilities can be time-consuming and stressful, especially for an inexperienced investor.
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Vacancy Risks: There’s always the risk that your property could sit vacant between tenants when you could be saddled with the mortgage and other expenses without rental income to offset them.
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Legal and Regulatory Challenges: Managing a rental property means complying with landlord-tenant laws, which vary by location and can be complex. You’ll need to be prepared to navigate legal requirements, such as obtaining permits, complying with safety and health regulations, and more.
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Financial Uncertainty: While rental income can cover expenses, there’s also the risk of unexpected costs, such as emergency repairs or legal fees from disputes. Or there’s always the chance that property values won’t appreciate at the rate that you were hoping for, which could leave you with less capital than you had initially anticipated.
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Impact on Financing: If you’re considering buying another home after turning your current one into a rental, be aware that lenders might view your financial situation differently. The obligations related to your rental property can affect your debt-to-income ratio and might influence your ability to secure favorable terms on a new mortgage.
Steps to Transition Your Home Into a Rental Property
Transitioning your home into a rental property is a big decision that you must thoroughly plan for. Here are some tips to help you navigate the process.
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Assess Rental Demand in Your Area
Understanding the rental market dynamics before turning your property into a rental is essential. Investigate whether there’s a demand for rentals in the vicinity. What types of properties are most sought after? Look into online rental listings, consult with local real estate agents, and consider the trends in your neighborhood to get an idea of what your property could rent for.
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Conduct a Financial Analysis
Dive into the numbers to ensure renting out your place makes sense financially. This means comparing the potential rental income against all the costs involved, like your mortgage, property taxes, insurance, and the money you’ll spend on maintenance. Understanding how tax deductions and depreciation affect your bottom line is also smart. A bit of research to determine the right rent price is important, you want to price your rental competitively, but still make a profit.
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Understand Legal Considerations
Get to know the rules of rental property investing. This involves brushing up on landlord-tenant laws in your area, which cover everything from security deposits, to lease agreements, evictions, and more. Familiarizing yourself with the nitty-gritty details of landlord-tenant laws is always a good idea.
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Establish a Team
You’ll also want to establish a team of reliable professionals that you can call upon when the need arises. Being a landlord can be time-consuming and having the right professionals on your side can help. A few people you’ll want to consider adding to your team include:
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General contractors
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Plumbers
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Electricians
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Attorney
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Property manager
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Learn About Property Management
Before you jump into the landlord game, take the time to truly understand what you’re signing up for. You’re not just there to collect the rent; a good landlord will know how to handle late payments, maintenance requests, and everything in between. Plenty of resources exist, from online courses and books to local real estate investment groups. The more you learn, the better prepared you’ll be to handle the ups and downs of renting out your property.
If playing landlord sounds like a headache, consider handing off the day-to-day responsibilities to a property management company. A reputable property manager will be able to manage your property for you, performing most of the day-to-day tasks on your behalf. They should be able to handle everything including tenant sourcing and screening, arranging for repairs, handling lease enforcement, and even evictions. Always check with the property manager first though, to familiarize yourself with their fees, and to make sure they will be able to handle the most pressing tasks on your behalf.
Ready to rent out your home? See: Step-By-Step: How to Rent Your House to see how you can get started.
It’s difficult to let go of a home with a low mortgage interest rate. But instead of thinking of it as a burden, think of your property as your stepping stone to real estate investment. With the right moves, this could very well be the leverage you need to grow your wealth and achieve your goal of financial freedom, while also allowing you to find the proper place you want to call home.
Want to turn your home into a rental income-earning property? See how much your home could be earning with your FREE rental price analysis.
Finally, be sure to check out the Renter’s Warehouse Education Center. Get access to free articles and guides to help you on your rental investment journey.
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