To rent or to sell? That is the question many homeowners face when contemplating the option of owning an income property. Before you decide to officially become a landlord, here are a few things to consider while you make your decision.
The very first factor to evaluate is whether or not you can afford to own two properties. You may be able to refinance your old home or borrow against its equity in order to come up with a down payment on your new one. But, once you officially own both properties, you will incur expenses that you might not expect.
For example, there will be times when there are no tenants in your rental property. No matter how consistent your tenants might be there will come a day when you just can't find a renter to save your life.
Also, you will have repairs; which are not always as easy to plan for as you might assume. What happens when one of your tenants decides to leave the bathtub running for a few hours on accident? Or worse yet, what if they turn off the heater in the middle of winter, go out of town for the weekend and let the pipes freeze and burst? Sure, you'll plan for the occasional coat of paint or garbage disposal repair, but oftentimes repair bills come in much higher than you budget.
You'll also want to think about other factors that are out of your control. What will you do if you end up with a deadbeat tenant? Some areas take months to evict a deadbeat tenant. Will you hire a property manager or handle the property yourself? If you plan to live more than an hour away, you might want to consider turning over some of the hassle to someone else. For example, if you live in San Diego but your rental is in Laguna Beach, it will be a serious pain to drive all that way to show the property to prospective renters. But be careful! Some property managers charge ten percent or more of the property's monthly rent.
If you choose to sell, current tax laws offer you a window of opportunity to avoid paying taxes on the gains from your former home. If you lived there for any two of the previous five years, you can sell a home, even if it is currently used as a rental property and any gain on the sale of the house is excluded from taxation. The limit is up to $500,000 for married taxpayers filing a joint return and $250,000 for single people. You will, however, still be responsible for the home's annual property taxes.
Being a landlord may be a serious pain, but it also brings in extra revenue each month. It's up to you to decide whether or not you'd like to venture into rental property waters. Even if you try it and decide it's not for you, you can always sell the property and walk away without having to pay a heaping amount of gains taxes. If you are serious about the endeavor, talk with an experienced real estate agent about your options.
