The Big Picture
A decade of managing rental properties and two decades of owning investment property have given us a decent grasp of and appreciation for keeping the big picture in mind when dealing with issues and making informed decisions. The purpose of the article is to help investors and homeowners take a step back from the details and ask more basic questions like, “Should I sell my home or convert it into a rental?” Failure to keep the big picture in mind can cost you tens of thousands of dollars in lost income or higher expenses and cause unnecessary stress.
Many homeowners that are leaving the islands contemplate renting out their home versus selling without crunching numbers or even asking if their home would make an appropriate rental property. The first question a homeowner should ask is: “Would I have purchased my home as a rental property?” In most cases, the answer will be no.
The first reason has to do with the low annual rental revenue of Oahu rental properties in relation to the market sales price. Some studio apartments have annual rents equal to about 7.5% of the sales price. The rent-to-sales price ratio gets rapidly worse as the property becomes larger and more expensive. The rent to sales price ratio for a $1,000,000 property is typically about 3%. If you hire a property manager to manage a property, then the rental income is reduced by another 14.5% when taking property management fees and General Excise Tax into account. In general, an investor will have to make a down payment on an Oahu investment property of at least 50% just to have their investment break even.
Homeowners in general, don’t want to live in a property that would make a great rental. Homeowners are typically wealthier and want to have nicer fixtures like granite countertops, hardwood floors, high-end cabinetry, etc. A great rental property on the other hand is one that will use moderately priced fixtures that hold up well to the wear and tear associated with tenants. Homeowners often decorate their homes according to their individual tastes. The best rental properties appeal to the widest percentage of potential renters by offering neutral, “boring” colors that will match most furniture choices.
Lastly, homeowners currently enjoy one of the best capital gains tax breaks available. An individual receives a $250,000 capital gains tax exemption and a married couple receives a $500,000 capital gains tax exemption. I am unaware of a better source of tax-free income available to ordinary American citizens.
One of the times that it makes sense to rent out your home is if you have plans to return to Oahu in a couple years or less and move right back in. Stott Property Management has successfully helped many clients accomplish this goal. In fact, we are currently renting out a condo for one family who is currently on a sabbatical in Europe. They will return at the end of the year while pocketing about six months of rental income while they were gone.