Some Ventura County residents are eventually put into a position where they need to decide whether they want to sell their home or rent it out. Whether you want/need to move by choice, or forced to by work or other life events, this situation is not out of the ordinary. If you happen to be in this situation, or think that you might be in the near future, below are 4 things to consider when making your decision.
Monthly profit or loss
When deciding whether it’s a good idea to keep your Ventura County home as a rental, one of the first things you should consider is whether you stand to lose money each month or make money each month (also known as cash flow). While some sophisticated investors have their reasons for buying/keeping a negative cash flow property (expenses are greater than profit), that is probably something that most of us should not attempt. To begin with, you need to calculate your monthly expenses.
Many new landlords make the mistake of thinking that their only expense is the principal, interest, taxes, and insurance (PITI) payment to their lender. What also needs to be factored in is a buffer for vacancies, repairs, and other unexpected expenses. Some experts even suggest budgeting for property management, even if your plan is to manage the property yourself, as you never know what the future may hold.
Once you have a good idea of your expenses, you can then do some research to determine the amount of rent you can reasonably expect to collect. A few ways to do this is to check out how much similar properties are being advertised for on craigslist or look on Rentometer and similar sites.
One of my personal favorites is to call a couple of property management companies and explain to them that you are thinking about renting out your home and was wondering what it could rent for. Most companies will help you in the hopes that you will use them for property management of your rental.
Now that you know your projected income and expenses, you will know if you should walk away making money every month or losing money.
Your Return on Investment
Along with your cash flow, you should have a good idea of what your return on investment will be. One of the first steps I would take is to consider how much money I would pocket if I sold the property. Do you have a high amount of equity or very little? If you will make only a small amount by selling the property, you may want to hold onto it as a rental (assuming you have positive cash flow).
The ideal situation would be to calculate what your return on investment would be if you kept it as a rental against investing the money from the sale of the house in another form of investment. Of course you should be familiar with the risks of any other investment you are considering.
Especially in hot markets like Ventura County and the rest of Southern California, housing prices can rise rather quickly. If you are strongly considering selling your home, you need to understand that there are different tax implications for rental properties than there are for your primary residence.
One of the main implications that may concern landlords is that a capital gains tax is collected when you sell real estate for a profit. However, if the home is currently your primary residence, or if it has been for at least two out of the last 5 years, you are able to exclude a good chunk from taxes. As of this writing, you can exclude up to $250,000 in profit if you are single or $500,000 for a married couple.
For a better understanding of your potential tax obligations, please be sure to consult a tax adviser or a good CPA.
Being a landlord
Last but not least, you need to decide if you are willing to be a landlord. Everyone has heard horror stories of nightmare tenants and the damage they have done to homes. Or about the late night phone calls at 2 A.M about a clogged toilet.
If you are not willing to deal with the possibility of these issues, you may not want to keep your home as a rental. However, if you do a good job with tenant screening, you can greatly reduce the risk of getting a bad tenant. Please see our previous post for helpful tips with the screening process.
Another way to avoid being directly involved with tenants is to hire a property manager. A great property manager should handle most, if not all, of the tenant issues for you. Of course you will be charged for their services, but if you budgeted for this expense to begin with, you will be prepared for it. The downside is that not all property managers are created equal, but that is a topic for another post.