Rent it vs. Sell it
As a property management company one of the most common questions people ask us is: Should I rent my property or sell it? This is a difficult question that depends on what you want and what your goals are. I have seen this article written many times by different types of authors. A real estate agent almost always encourages people to sell and avoid the hassle of being a landlord. Property Management authors encourage the readers to hang on to the property and build wealth. So full disclaimer I am on the property management side and just like everyone I am biased. However, I will try to give you some sound information that will ultimately help you make your own decision. Remember, Renting your property is not for everyone so keep watching and ultimately as you watch hopefully your decision will be made more clear.
People that ask this question fit one of the following customer profiles:
. You inherited a family house, condo, or apartment building
. You are moving locally or out of state, job transfers, buying a new home.
. Your tenant moved out
. A person is moving out of their house and into a family members home or to an assisted living or a senior care facility and you’ll need to figure out what to do with their house.
. You are going through a divorce or separation
All of these customer profiles need to answer this same question: should you rent it out or should you sell it?
So rather than give you very specific advice regarding each situation here are some general questions that can help you understand what you really want.
. Do you want to build wealth?
. Do you think you would ever want to come back to live in this property or live in this area again?
. Do you want or need money now?
. Do you want to be a landlord?
. Do you want tax deductions?
. If you sell, do you want to do a 1031 exchange?
So let’s address the first question: Do you want to build wealth? If you sell your property and do not have plans to reinvest the proceeds you will stop building wealth. When you sell there may be capital gains taxes incurred. If you are paying off debts, buying things, going on vacation then you would actually be decreasing your wealth. Putting that money in the bank may seem like a good idea because it’s safe but it stops any future growth until it is placed into some other asset or investment. So if you are not concerned about building wealth and you are ready to consume or use your equity, then you should probably sell. If you want to build wealth then keeping your property as a rental makes the most sense. One major reason real estate is such a powerful investment is the power of leverage. If I can buy a $500,000 house with $100,000. Then that $100,000 allows me to control an asset that is 5 times bigger than my investment. So if that investment grows at the rate of 7% every year then after ten years that same home is now worth over a $1,000,000; then that means my $100,000 investment has increased 500% during that time. If I had put that same amount into some other investment at the same 7% annual return (which is a great return) I would have a little more than $200,000 after 10 years. Which means I made $100k which is a 100% return. So would you rather have a $500,000 return or a $100,000 return. There is great wealth building power in the leverage of real estate. So if you would like to continue to build wealth then keeping that money in real estate might be for you.
The 2nd question was: Do you want to return to live in the property or return to live in California? If you are leaving the area and have no desire to return then it might be time to sell. However if you want to come back and maintain some roots in Orange County, California then keep your property as a rental. Your property will be ready and waiting for your return all the while earning you more income and more equity.
Question 3: Do you want your money now? If you want your money now then you have two options. Sell it or do a cash out refinance. Selling it is pretty straight forward. You sell it, pay the real estate agent and pay the closing costs, and if the property is not your personal residence then you will have to pay capital gains taxes ( which is between 28-33%). If the property is your personal residence a single person can cash out $250,000 without capital gains and a married couple can cash out $500,000 tax free. However there might be a better option… by doing a cash out refinance. A Cash out refinance allows you to pull out some of your equity without having to pay taxes on the cash you are pulling out. Then you can use that money for whatever you need. Your monthly mortgage payment might increase so run the numbers to make sure you are okay with your new mortgage payment. So if you need to tap into the equity without selling, a refinance can give you the cash you need to complete whatever project or purchase you are looking to make. If it were me, I would probably lean toward a cash out refi between these two options in order to get some money now. Because it allows me to keep my asset rather than liquidate it.
Many people want to cash out their portion of equity to separate themselves from sibling disputes and divorce situations. Relationships can sour and when the relationship ends real estate assets may need to be liquidated or sold in order to finalize a full separation. We typically recommend that when people cannot get along and are no longer agreeable, that they sell their real estate. Sometimes if there is enough equity in the property a cash out refi can cash out one the upset partners. As managers we do not like to be in the middle of a constant fight and would rather not play referee to the two feuding sides. Best for everyone involved if people in conflict sell the asset so that both sides can move on and end the drama. If you can, we do recommend that you do a 1031 exchange and buy a separate property when circumstances allow (we will discuss more regarding 1031 exchanges later). So if there is partner drama, cash out the other party by refinancing or selling. Life is short, don’t prolong the drama.
Question 4: Do you want to be a landlord? If you are up for the challenge and want to learn new things then maybe being a landlord is a good idea for you. Landlords should be good at dealing with conflict and enforcing the lease terms. Typically small business owners can be good at this as well as managers of employees; their skill set will lend itself to being a landlord because they are good at conflict resolution and record keeping. There can be a learning curve especially with the ever changing legal landscape of landlord tenant laws, but it is definitely doable if you put in the time and effort.
Being a landlord can be difficult and stressful, landlords and tenants have a volatile relationship. If you do not want to be a landlord you have two options: Sell it or hire a property management company. By the time most of our clients own their first rental property, they are looking to simplify their busy lives, so many do not want to be a landlord and handle the management on their own. A management company can save you from paying the dumb tax, of making costly mistakes that can result in bad tenants, lawsuits, and less income. In most cases a good property manager can make owning real estate easy, painless and more profitable. It’s as simple as reading your monthly statements and occasionally approving maintenance items. A property management company can handle the rest: advertising, showings, calls, maintenance coordination, rent collection, accounting and bookkeeping, lease renewals, property inspections, lease enforcement, tenant communications, bill payment, turnover and rent ready services, posting of notices, evictions, etc. All the benefits of property ownership without the stress and hassle of doing yourself. So you know yourself best, can you handle the rigors of being a landlord? Do you even want to handle the rigors of being a landlord? If not sell the property or If you want to own real estate without the hassles hire a manager to simplify and protect yourself.
Question 5: Do you want or need tax deductions? Our clients that are in higher tax brackets are constantly looking for ways to keep more of their income. Keeping your property as a rental will allow you to deduct any rental property expenses from your taxes; this includes management fees, HOA fees, mortgage interest, maintenance costs, utilities, lawn care, etc. Also you are able to take a depreciation tax deduction on the useful life of your property and its improvements (this produces significant tax savings and is worth a conversation with your tax professional). One of the best tax strategies to help you keep your income and build wealth is owning rental property to take advantage of the many tax deductions available to rental property owners. So if you are not concerned about taxes and deductions, selling might be the right move, but if you need deductions I would consider keeping your property as a rental.
Question 6: If you are selling a non-owner occupied property, do you want to do a 1031 exchange? There is one way to sell your non-owner occupied property and continue to build wealth in real estate and that is by selling and doing 1031 exchange. This allows you to cash out your equity from one property and roll that equity into another rental property without incurring capital gains tax. Using a 1031 exchange can be a powerful tool to upgrade your investment. In many instances a client can sell their current rental property and roll the equity into a better investment that will produce more income and more equity over time.
I hope this video is helpful in determining whether you should sell your property or rent it out. The question: should I rent my property or should I sell it? Is an individual question that is best determined by deciding what it is that you want. When I know what you want, then I can help you achieve it. So figure out what you want and let’s figure out the best way for you to get what you want.