Life happens, and a time may come when the home you currently own may no longer suit your needs and you’ve decided it is best to move to a new residence.
For example, you may need to get a place with more square footage as your family grows, or you may need to downsize as your children move out. Also, there is always that chance of being relocated due to work.
But, regardless of the reason for moving, the big question still remains: should you rent or sell your old home? To make the right decision, here’s everything you need to know about these two options for your San Diego house.
Renting Out Your Home
Renting out your home means you could make passive income, and you may be able to use those rent checks to pay off your mortgage. Basically, you could build up equity in your home through potential rental income.
Besides earning passive income, renting out your home can also fill the desire to diversify your investment portfolio. In most cases, your San Diego property will increase in value over time, given the current market trends. Also, if you think that someday you may want to return to the home as your permanent residence, holding the property in the interim and gaining cash flow in the meantime is a great way to go!
What Costs Are Associated with Renting Out a Home?
Some property owners who are brand new to the rental business may think they’d keep 100% of the rental income. However, renting out a home does come with a fair share of expenses.
The following are some common expenses you’ll face as a rental property owner:
Mortgage Payments. Are you servicing a mortgage on your home? If you are, this is an expense you should consider. You may also need to pay mortgage insurance premiums if your down payment is less than 20% of the value of your home
Property Taxes. Generally speaking, expect to pay around 1.1 to 1.2 percent in property taxes based on your San Diego home’s value and its neighborhood
HOA Fees. Does your home belong to an association? If it does, then you may be required to pay a homeowner’s association fee
Landlord Insurance. This helps provide coverage to a landlord in certain situations, such as tenant damage
Maintenance. After every tenant turnover, you’ll need to do some touch-ups to your property. For example, repainting walls and having the carpet professionally cleaned
Repairs and Replacements. You may need to do some repairs and replacements every now and then. These may include things like roofs, carpets, walls, doors, windows, and major appliances
Rental Advertising. This is also another expense you’ll have to deal with once a tenant vacates
How Much ROI Should You Expect to Get?
To get a fairly accurate estimate of how much profit you can make, check neighborhood postings. You can do that by either going online or by speaking to a reputable property management company like North County Property Group.
A good property management company like us will provide you vital insights to help you know historical rental trends for your region.
To be profitable, your rental income must exceed the expenses of running the investment. Luckily, some expenses are tax-deductible, which can help you bring down your expenses considerably.
How Do You Calculate Rental Profitability?
If you’re just getting started, hiring a professional may be in your best interest. North County Property Group can help you get insights into the long-term profitability, often referred to as Return-on-Investment (ROI), of your rental by assessing a myriad of factors.
ROI factors include rent price and property expenses, as well as maintenance costs, property management fees, and vacancies. They will also factor in how long you intend to own the property.
Which Should You Consider: Renting vs Selling?
Before making the decision, here are a couple of more things you may need to consider:
1. The Sale Price
Are you satisfied with your San Diego home’s current value? If so, then great! You can be content with selling your home if you aren’t looking for investment potential.
However, if you aren’t happy with your home’s current value, then renting out the San Diego property can be the right decision as you wait for home values to rise. You may also want to avoid selling if property values are appreciating rapidly in your area.
Sadly, this tactic doesn’t always work. If you wait too long to sell, sometimes it can backfire on you. You see, once you rent out your home for a certain number of years, you can no longer claim it as your primary residence. But what does that mean? If you sell your property, you’ll be required to pay capital gains taxes.
Capital gains taxes can vary from anywhere from zero to 20 percent, depending on which tax bracket you belong to. Keep in mind that if this is your primary residence, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Of course, North County Property Group always recommends checking with your tax advisor when making such a decision!
2. Tax on Rental Income
While we already touched on rental income taxes, there are some misconceptions on how exactly they work.
Your rental income attracts a tax the same way stock dividends or job wages do. Luckily, you may be able to write off many costs associated with renting out your home. Suppose your gross rental income and property expenses are, for example, $40,000 and $30,000 – respectively.
In such a case, your assessed tax will only amount to $10,000. Besides deducting cash expenses, you may also be able to claim deductions for property depreciation as well.
3. Rental Expenses
Hopefully, you’ll be able to keep your home rented most of the time. That’s because vacancies can be costly. Besides losing out on the rental income, you’ll still incur some rental expenses like those we mentioned above.
Also, despite your best efforts to screen potential tenants, you may find yourself dealing with a difficult tenant. This carries a whole new set of expenses. The tenant may end up causing excessive property damage or even refuse to pay rent. In such cases, evicting the tenant may be the only solution left. That said, evicting a tenant can be a costly and time-consuming affair.
4. Time & Stress
Being a landlord isn’t for everyone. It’s a big responsibility, and it can be emotionally draining and time-consuming. In fact, it’s for the very same reasons why savvy property owners turn to property managers like North County Property Group for help. We can take the burden of managing a rental property off your shoulders.
5. Tenant Rights & Responsibilities
You’ll also need to familiarize yourself with the California landlord-tenant law. These law helps to govern the landlord-tenant relationship, from how much you can increase rent by to when you must return security deposits.
It can be difficult to understand all the nuances of the laws and to keep updated on any changes relating to them. North County Property Group is well-versed in all the details of landlord-tenant law. By hiring us, you’ll avoid unintentional legal complications.
There you have it – everything you need to know when it comes to renting or selling your home. If you choose to rent out your San Diego home, North County Property Group can help!
We are a professional property management company servicing San Diego and the surrounding areas. Whatever your needs may be, you’re sure to have them covered by our reliable management and stellar success record. Contact us today to learn more about our services!