It’s one of the inevitable signs of a waning seller’s market—homeowners who list their properties with certain value expectations, but end up resorting to renting out those properties when they don’t get the price they want or need.
Renting out your single-family home, condo or TIC can be a good strategy to wait out a weak real estate sales market. But doing so can also have its downsides. Here are the basic factors you should consider if you’re deciding to go the rental route:
1. There is eviction control in San Francisco. The bottom line is that you can’t just ask tenants to leave, even at the end of a lease. I realize this sounds crazy, but it’s true. Which means that your tenants may not be ready or willing to leave when you’re ready to list your property again. Get to know the ins and outs of this topic so you can avoid creating problems for yourself.
2. Rent control only applies to certain properties. Make sure you understand whether your property is rent controlled. If it is, you can only raise the rent a nominal amount each year.
3. Expect potential wear and tear. People vary in terms of how well they take care of their homes. I’ve been a landlord for 25 years; sometimes a quick paint job is sufficient in between tenancies. But other times, I’ve had to call in floor refinishers, kitchen cabinet painting services, repair water damage, etc.
4. Revise your insurance policy to include landlord/rental coverage. This is huge. You should have the proper coverage that includes a wrongful eviction rider and other key rental items. Your insurance agent should be able to guide you on switching up your policy.
5. Consult your CPA about tax ramifications of having a rental property. Two key things: You have to live in your property two consecutive years of the last five in order to sell the home as your principal residence. And you should become knowledgeable about rental income-related deductions.
6. You may be out of pocket on monthly costs. Consider what portion of your property costs the actual rent will cover. In addition to mortgage, you’ll have HOA dues (in a condo), insurance, and property taxes. And you may want to hire a property management company, which chips away at what you’ll be getting in rent (see #8). It’s important to look at the larger picture if you’re paying rent or a second mortgage elsewhere.
7. Let the rental professionals help you find and secure tenants. Sure, you can download a random lease somewhere and post your rental listing on craigslist. But like real estate sales, a good rental agent is well worth hiring. He or she will give you a realistic rental range, guide and manage prep work, market the listing, find qualified tenants and make sure all the required paperwork is completed.
8. You might want to hire a property management company. You’ll likely want to contract with a property management company if you’re not going to be living near your rental (or don’t have the time to deal with resolving tenant complaints.) The standard property management fee is six percent of the monthly rent, which adds up to a significant chunk of money on an annual basis.
9. Consult with a reputable San Francisco real estate attorney before you move ahead with a rental. Gather all your questions together and have them ready for a phone consultation. Attorneys charge a few hundred dollars an hour, so being prepared will help you avoid an excessively expensive conversation. Be clear on what you can and can’t do as a landlord.
10. Remember that you are renting to people with their own lives and concerns, one of which is not how much your property is worth. Your future tenants will be looking for their next home and won’t be existing solely as real estate market placeholders, helping to tide you over until your property value finally reaches your desired range. If you’re uncomfortable with the uncertainty around when tenants will ultimately vacate your property, you might be better off making something work on the sale side.
Feel free to contact me if you’d like attorney, rental agent or property management referrals. I’ve developed a solid network of professionals over the past 20 years selling San Francisco real estate, and they would be happy to consult with you at my recommendation.