Rent It or Sell It
Jul 01, 2015 12:36PM
● By Glenn Allen
by Glenn Allen
Whether you're downsizing or moving up the property ladder in
the Bay Area, you're faced with the same dilemma: is it better to sell your
primary residence, using the equity to purchase the next place and maybe have a
nest egg set aside, or should you keep the place and rent it out? In fact, this
is one of the top questions I get from clients. I'd like to take you through
some of the main advantages and disadvantages of using your current home as an
investment, so you can make an informed decision before you take the next step.
In the Bay Area, you already have a built-in advantage: the thriving job market, scarcity of multi-unit properties, and high cost of real estate add up to a strong rental market.
Here are some other points to consider:
· Equity Appreciation In a typical scenario, you might take a cash-out equity loan on what has been your primary residence and use that money to finance a second home. Assuming the rent you collect equals the mortgage payment plus the property tax and hazard insurance, it's not costing you much, if anything, to own the home. Meanwhile, the rental is building cash value at an interest rate that, on average, has exceeded the equity market since 2000.
· Positive Cash Flow If you're downsizing into a smaller home, the current home might be paid in full. In this case, any rent you collect can supplement your retirement funds. This sum may exceed the interest you'd get on the proceeds from selling the house and investing the money as a lump sum.
· Hedge Against Inflation A primary advantage to using the rent from a real estate investment to supplement your retirement funds is that, unlike most cash savings, rental income adjusts with inflation because rents themselves go up with inflation.
Even in a prime rental market, there are risks and responsibilities associated with becoming a landlord. These considerations must also factor into your decision:
· Tenant Vacancies There are no guarantees in the rental market. Any number of circumstances could lead to vacancies that drag on for months, forcing you to make the mortgage payments or lose passive income.
· Unreliable or Destructive Tenants Having bad tenants can eat into your profit margin, particularly if you are forced to file an eviction notice or they cause damages in excess of the maximum amount they can be sued in small claims court.
· Cost of Maintenance Ordinary wear and tear aside, you may need to pay for unforeseen damages to the property and to replace worn out or broken appliances. Although you can claim some expenses as a tax deduction, you should count on maintenance being a regular expense of investment property ownership.
As in most real estate crossroads, there are a lot of factors to consider. When I meet with clients, my goal is to shed as much light on their options so they can make the most informed decisions. If you are considering renting your property, a great way to minimize the hassle is to use a reputable management company.
To find out more about converting your current residence into an investment property, please contact me at 925-709-1000 or visit www.TalkToGlenn.com. To read more articles like these, visit www.GlennCF.com.