Imagine, if you will. You got that great job offer in Nashville you were hoping for. However, you live in Long Beach, California. Moving out is a no-brainer, and you’re excited at the options you can afford.
But, what to do with the Long Beach home you own? Should you sell it? Should you keep it as an investment?
We get this question all the time. Especially in the Los Angeles/Orange County area. All concerns seem valid: the fear of not being able to afford a comeback, after selling your home. Two, your attachment and affection to your home. Or you consider renting out your primary residence as an entry point to become a landlord.
There is no right or wrong answer. Every household is unique in its specific situation.
Here is a list of 10 things you need to consider when deciding to sell or lease out your home:
- Know how leasing out your old home will affect the purchase of your next one. You will generally qualify for a lot less. Talk to your lender to find out how this affects you. Our experience tells us most people become disappointed at the turnaround.
- Understand the treatment of capital gains. If you lease your home for over 3 years you will lose the primary home capital gains tax exception of up to $250,000 per person. That’s up to $500,000 of tax-free income for a married couple.
- Understand the tax benefits to own rental property, like writing off expenses such as interest, repairs, property management, and HOA dues. Plus, the non-cash expense of deprecation.
- Have a realistic understanding of the monthly cash flow. It might be a monthly negative, especially in the Southern California market.
- Remember the secret value of Principle Reduction. Your loan balance goes down over time.
- Understand the importance of cash reserves to handle repairs, maintenance, vacancies, and potential evictions. These expenses do happen.
- Have a realistic forecast of market appreciation and realize that prices go up and down. It is especially true in the Los Angeles/Orange County markets.
- Be prepared to see someone else living in your home. They will be causing wear and tear.
- Know who will be managing the property, as this is a requirement. You can self-manage, hire a professional manager, or use your cousin Vinny.
- Understand that owning rental property comes with certain inalienable risks. They need to be compared to your risk tolerance and financial resources, to see if it is appropriate for you.
There are certainly other things to consider, but if you start with these ten, you will have a sound foundation for the best decision for your household.
It may not just be a lease or sell. You may decide to lease for a year or two to see how it goes. However, don’t let that 3-year period slip past you without understanding the tax consequences. Sometimes, in this Los Angeles/Orange County marketplace, we have clients become landlords because they can’t afford to sell. We call them accidental landlords.
We hope this helps you get a better understanding of what to consider when you try to decide if selling or renting your home.
It may be a lot. At the Mike Dunfee Group, we are happy to discuss this decision with you. Please get your tax preparer and loan officer in the conversation early as well.
Dunfee Real Estate Services
DRE # 02026232