If you’re in the position to decide whether to sell a property or hold on to it and rent it out, there are a number of factors to consider. Some are purely financial, while others relate to your personal timeline, your tolerance for being a landlord, and your other responsibilities. Here are some items to consider when making this important decision.
Financial Considerations
The financial aspect of this decision has multiple layers. If you don’t have to sell your existing property to finance the purchase a new one, then look at holding on to the existing property as you would any other investment in terms of ROI.
Deciding to hold on to a property and rent it out means you’re bullish on the longer term potential for the local real estate market. Despite any costs associated with it, you believe you’ll get a better return if you sell at a later date vs. now. While there are no guarantees, in the San Francisco Bay Area, with its historically strong real estate market, holding on to a property can mean a solid return when you sell in the future. In fact, you might even be willing to rent out the property at at a loss, if you think it will net out to a higher return once you sell at a future date.
If you do decide to hold on to a property, it’s important to factor in all of the costs that will be associated with renting it out, above and beyond paying the mortgage. In addition, you’ll need to factor in your current and future financial situation, income projections, and other obligations, such as the cost of maintaining your primary residence.
Ownership Costs of the Rental Property:
- Study up on real estate forecasts from reputable sources to estimate what you might be able to sell the property for in the future.
- Understand the federal and state taxes associated with keeping the property and renting it out.
- Consider the condition of the home, including roof, foundation, appliances, etc., and estimate the ongoing maintenance costs. As a landlord, you’ll be on the hook for all of these things.
- Calculate insurance costs, including property insurance and liability insurance for you as the landlord.
- Factor in any homeowners’ association fees, if applicable, which you’ll still be required to make, even if you don’t live there.
Rental Costs:
- Look at local rental prices to get comparables, so you can estimate your potential rental income.
- Talk to a professional property management company, like Intempus, to better understand local rental prices and the costs associated with being a landlord.
- Understand local laws related to rent increase limits and rent control.
- Be familiar with local tenant eviction laws, in the event you have to contend with such a situation.
- Learn about the costs of using a professional property management company to avoid the typical challenges of being a landlord.
- Plan for periods of vacancy in between tenants when you may not be generating any rental income.
- Understand marketing and advertising costs, including your time, related to promoting the property if you’re not working with a professional property management company to do the marketing for you.
Opportunity Costs
In addition to the direct costs associated with keeping a property and renting it out, you also want to consider the opportunity costs associated with remaining invested in the property vs. putting those funds into other investments, like the stock market.
Taxes
Tax savings can be a deciding factor for whether you hold on to a property and rent it out or sell it. According to the real estate blogger Bill Gassett, one of the tax benefits of having a rental property is that you can write off all of the costs that are associated with the property. So, you’ll be taxed on the profit (vs. the revenue) from your rental income.
Furthermore, you can claim a tax deduction for depreciation on the rental property. In addition, if you have a loss, you may be able to use that loss to offset some of your income if your adjusted gross incomes is less than $150,00.
Be sure to talk to a licensed tax advisor for more details on taxes related to rental properties and selling a property.
Other Considerations
While the financial aspects of renting or selling a property may dominate your decision process, it’s important to consider the other aspects of renting vs. selling. Here are some to consider:
Your Personal Timeline
Time is one resource that is finite for all of us. So, it’s important to consider the timing of major life milestones when making this kind of decision, such as getting married, kids going off to college, retirement, taking care of elderly parents, and more.
Sometimes the decision to sell or rent is the result of a job relocation. If you plan to return to the location of your property at some point, then holding on to it may make sense and provide you with added security when you return.
If you’ll be living far away from where your rental property is located, such as overseas, hiring a reputable property management company can give you peace of mind that your property is being taken care of.
Dealing with Tenants
It’s important to remember that few tenants will love your property as much as you do. So, you have to be comfortable with having people who aren’t you living in what is probably one of your largest financial investments.
Having good tenants will also be important if and when you decide to sell the property. You’ll want them to be cooperative and easy to work with once you start scheduling showings. This is another compelling reason for working with an experienced property management company. A property management company that has a history of working with hundreds of properties and thousands of tenants will bring the benefit of experience that few individual landlords have.This can give you the best odds of getting high-quality tenants for your rental.
The Responsibility of Owning Multiple Properties
Another factor to keep in mind is that owning multiple properties is a big responsibility. You’re now responsible for two roofs, for the electrical systems in two homes, double the appliances, etc. But as with any opportunity where there is a strong upside, you have to weigh the responsibility against the potential gains, which, in the Bay Area, can be significant.
Partner with the Bay Area’s Experts in Real Estate and Property Management
Being a landlord shouldn’t be stressful, as long as you’ve got an expert on your side. Intempus Property Management has been serving happy clients in the Silicon Valley and San Francisco Bay areas for well over a decade. Our friendly team of property management experts can handle every aspect of your property rental, from paperwork to maintenance to property upgrades and more. Contact us today to tell us about your real estate and property management needs. We’ll be happy to serve you!
