Should You Rent Out Your San Diego Home or Sell and Reinvest the Money?
Before you automatically re-rent your home do these numbers. Compare your estimated rent, current home value, expenses and return on equity before deciding to continue being a landlord in California.
What Is Your Home Worth Today?
Compare your possible rental income with your home's estimated market value and potential cash offer.
The Real Question Is Your Return on Equity
The question is not simply whether your home produces positive monthly cash flow.
You need to calculate what you are actually earning after the expenses, risk, work and amount of equity tied up in the property.
For example, suppose you have approximately $500,000 in equity.
Hypothetical 5% Return
A hypothetical 5% annual return on $500,000 would equal approximately $25,000 per year.
Hypothetical 10% Return
A hypothetical 10% annual return on $500,000 would equal approximately $50,000 per year.
The reason to deal with tenants, repairs, vacancies and landlord responsibilities should be that the property is producing a worthwhile return.
When the property is not producing a strong return, it may be time to compare your other options.
Gross Rent Is Not Your Actual Profit
A property renting for $4,500 per month appears to generate $54,000 per year. That is gross income, not your true profit.
Your actual return may be reduced by:
- Mortgage payments and interest
- Property taxes and insurance
- Increasing HOA fees
- Property management expenses
- Repairs and routine maintenance
- Vacancies and tenant turnover
- Roofing, plumbing or HVAC expenses
- Legal, accounting and tax expenses
- Your time, stress and landlord responsibilities
What If Your Expenses Are Rising?
Keeping the property may be less attractive when the HOA fee has gone up, property taxes and insurance are higher, repairs are increasing or the home has not appreciated much during the last few years.
The property may have substantial equity but still produce a relatively low return.
That does not automatically mean you should sell. It means you should compare the property with other realistic uses for your equity.
Would a 1031 Tax-Deferred Exchange Make Sense?
Depending on your situation, you may be able to sell an investment property and complete a 1031 tax-deferred exchange into another qualifying investment property.
You could consider:
- A newer property with fewer repairs
- A property with lower operating expenses
- A property with stronger rental income
- A property elsewhere in California
- An investment property in another state
- A property that better fits your long-term goals
A 1031 exchange has strict rules and deadlines. Speak with a qualified tax professional and exchange intermediary before selling or transferring an investment property.
Could Your Equity Work Better Somewhere Else?
Another option may be to sell the property and invest the proceeds outside of real estate.
You may prefer an investment with greater liquidity, fewer management responsibilities or a different risk profile.
The point is not that one choice is always better. Your rental property should compete with your other realistic options.
Get a Free Rent-versus-Sell Analysis
I can help estimate your home's current value, likely rental income, operating expenses, return on equity and potential proceeds if you sell.
We can have a quick phone call to compare keeping the home, selling it, completing a possible 1031 exchange or reinvesting the money elsewhere.