There was a great song written by the Clash in 1981 - Should I Stay or Should I Go? And that is the topic relevant to many Orange County property owners. Do you stay with your current investment? Or, do you go and sell it? Let’s have a look at some of the options.
OPTION ONE: Rent It
Rents in Orange County are and have been somewhat volatile. Since COVID pushed rents to a ridiculous median, the market has somewhat cooled off. Right now the median rent in Orange County according to Zillow.com is $3,192 for all property types, which is down both month over month and year over year.
Owning a rental property in Orange County is “Almost” always a great investment. There are some things that you always want to consider.
INCOME:
- Rental Analysis: What will the property realistically rent for? We can run a comprehensive rental analysis to look at the most recent active, pending and leased properties, to get an understanding of where your rents should be. From there… we take a look at the days on the market, list price to lease price ratios and schedule a time to review the facts and trends together.
- Rent-Ready: What repairs will be needed in order to get the property Rent-Ready and be able to obtain the highest rents that the market will realistically pay? Every landlord should understand that this is an “Investment” and sometimes an owner needs to invest in the property condition in order to lease the home quicker, or for more money. If a landlord isn’t willing to invest in their income property, experience shows that this will lead to more service calls, a lower overall monthly rent and a higher turnover rate. All of these items cost a landlord time and money.
EXPENSES:
- Management: Will you, as an owner, self manage or are you open minded to hiring a third party management company? If you are looking to manage it yourself what is the liability and what do you need to know. If you are looking for professional third party management, what are the costs associated with the services provided, and how does the property manager benefit the owner/investor?
- Mortgage: Is there a mortgage payment, or is the property free and clear?
- Property Taxes: When are they due, and how much are they, and are they paid monthly (through an impound account) or directly on your own - semi annually.
- Insurance: With the current state of the insurance industry in California, an owner will want to account for insurance costs. If this is a single family home, you want to make sure never to let your policy lapse. This is the number one reason we see owners loosing coverage in this market. If it’s a condo, do you have an “HO6” (Walls-In) policy and do you have renters insurance? These are great questions to speak with your insurance advisor about in advance. (BTW… Pro Tip - Do you have an umbrella policy)?
- HOA Dues: If applicable, this can eat into your monthly cash-flow and long term profit.
- Gardener: Does the property require a gardener? What are the costs and what do they cover? Does the property come with mature landscaping which will need to be trimmed annually? If so, what are the costs?
TAKE ACTION: If you aren’t sure what your property would rent for, how long it would take to prepare a property to get to the market, or you still aren’t sure where to start… we can help. Simply reach out to us today and we will happily run a rental analysis and provide you with an estimated/projected cost sheet.
OPTION TWO: Sell It
Wait!!! Then what? Before you even consider selling a property, you really need to know what the property will sell for and consider what you are going to do with the net proceeds. Here are the steps we would typically suggest.
STEP ONE:The first steps is to carefully consider how much money you will net out of the sale of this property. To do so, you’ll need the following.
- Review a Comparative Market Analysis: We can prepare and provide a Comparative Market Analysis (CMA) which will give you an idea of what the property will realistically sell for in today's constantly changing marketplace. Please note, that like the rental analysis we mentioned earlier, a property will have two gross/net figures. The first is… what it would the property sell for in “As-Is” condition, with no repairs or minor improvements. The second is… what it would sell for if you invested some money.How much money and what would be your Rate of Return on that investment? It’s often said in today’s market that some improvements will make your home more marketable and NOT necessarily more valuable?
- Up-Front Investment: If an owner is looking to sell the property in “As-Is” condition, then there’s no need for an upfront investment. If an owner is looking to get the higher end of the range then most likely there will be some work needed, even if it's minimal. Common items to address to increase value are a deep cleaning (including windows and carpet/flooring) or touching up the paint in some areas/rooms. Other considerations are having a handyman walk the home and repair closet doors and kitchen drawers since every buyer will open them to look into that space. Knock out your smoke detectors/CO2 detectors, strap the water heater and make sure that you have a nice clean air return/filter to start. These simple steps will put you ahead of the competition.
- Net Sheet: Once the above value has been established, we can help prepare a Net Sheet. A net sheet is a one-page document which shows you a hypothetical sales price (derived from the CMA noted above) minus your Cost of Sale. Your Cost of Sale will include your Mortgage Payoffif applicable, any Brokerage Compensation (which is always negotiable), Escrow and Title fees, Transfer fees, and a litany of other smaller line items. Once your approximate value is identified and we have an understanding of what your closing cost will be… we can provide you with your net income… or an understanding of what you will walk away with. But wait! You're not done just yet…
STEP TWO: As great as it is to see your Net Income, you still need to answer two very important questions.
- What Is Your Tax Liability: Now that you have a net sheet we strongly advise and recommend you to talk to, or meet with your accountant so they can help you with any tax related responsibilities. When selling a rental property, you more than likely will have to discuss Capital Gains, depreciation and recapture. It’s imperative that you know these numbers before selling, and not discover or become aware of them after them. My accountant always compared this to putting toothpaste back in the tube… it’s pretty much impossible. Now you know your income and tax liability, you can make an informed, educated and empowered decision! With this number you can now proceed to the next question!
- Investing Elsewhere&Expected Rate of Return: Once you have your approximate net, and know your potential tax liability… you have to ask yourself… what do you want to do?Are you going to Stay with your current investment? Or… Cash Out and pay your tax liability and live happily ever after? Or… roll it over and start the process over again through a 1031 Tax Deferred Exchange. Check out our article on Deferring Capital Gains HERE. Again… The absolute best thing to do in this situationis check with your tax advisor, and your financial planner, so you know your options, and can plan accordingly. You may even want to take this list of questions with you when you meet with your trusted advisors.
TAKE ACTION: If you decide that selling is your best option and you have a plan on where and when you want to make your move, now may be the best time to discuss the next steps in that process. We would be honored to meet with you for a no obligation strategy session. During our time together, we will have an open question and answer session, put together a specific timeline, discuss the pre-sale inspection process, schedule any necessary improvements, talk about the staging, pre-sale marketing and so much more!
BOTTOM LINE…
If you are thinking about renting… great, we can help! If you are thinking about selling… great, we can help!Feel good knowing that we are ready, willing and able to meet with you to discuss your options and carefully help you get from where you are to where you want to be. The only question is… HOW CAN WE HELP?
