Recently I’ve had a couple of conversations with clients who are considering either renting or selling their primary residence. However, renting out or listing your Ventura County home for sale is not a simple process.
There are many things that you must consider in either of these situations. For instance, one of the first things I’ve been asking clients is to think about their long-term plan.
If that plan is to rent out a property indefinitely and keep it in your investment portfolio for a number of years, you should consider capital gains taxes.
A primary residence that is rented out for three or more years becomes an investment property. This means there are different tax implications that come into play.
If you would ever happen to want to sell that residence after it’s become an investment property, you would have to pay capital gains.
However, doing a 1031 exchange you could help you avoid some of these taxes. This is a little more complicated, though.
Something I recommend to clients is to look at whether the market is in a place where it is likely to appreciate over the next few years. In this case renting out a primary residence for less than three years makes sense.
For example, let’s say you were faced with this decision in 2014. Assuming you rented out the property for less than three years and sold right before that mark, then it would have been a good decision.
A primary residence that is rented out for three or more years becomes an investment property.
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However, if you had made this same decision in 2007 you most likely would have been forced to hold onto the property for more than three years.
Another thing to consider outside of the length of time you plan on renting out a property is the opportunity cost of your capital.
Let’s say your primary residence is well-maintained and in a good, safe neighborhood. You have to determine whether it makes sense to rent it out or to take the money out of the primary residence and invest it in a duplex, triplex, fourplex, or something that has better rental potential and could earn a higher return.
In short, the question to ask yourself is, “What is the opportunity cost for my capital?”
I had a couple of sellers last year who owned properties in River Park and Oxnard. After running the numbers of what they were going to rent the property at as well as what they were going to collect in rent, I found that after all expenses they were going to have about $200 of positive rental income on their properties.
With this in mind, I asked them if they could perhaps take the $100,000 to $200,000 they had in equity and buy additional property to earn a better return by investing in another asset.
In fact, I have personal experience with this situation. On one of my properties I was earning $200,000 a month and had $100,000 worth of equity tied up in it. So instead of letting it sit, I took that $100,000 and invested it into a fourplex that now earns me a better return.
Making the best financial decision ultimately relies on asking yourself these two questions.
If you want more information or have any other questions feel free to give me a call or send me an email. I look forward to hearing from you, soon.
