When I mentioned to my friends I was doing a newsletter about being a landlord, the horror stories came out of the woodwork! A very close friend shared her story about a beautiful home they rented to a couple who NEVER took the trash out! They simply put it in garbage bags and stored it in the basement! (true story) Inevitably, they had to evict them for nonpayment of rent. That’s when they discovered the mess and the vermin. After ten dump truck loads of garbage and $10,000 they had their house back! They knew since the tenants could not pay rent they would be stuck with the cost of the cleanup. Tainted by the whole situation, they sold their house and got out of the landlord business for good!
Imagine the landlords in Hawaii during the pandemic. The Governor stated tenants did not have to pay rent! How fair was that? Landlords still had to pay mortgages, fees, etc. and perhaps lost their own jobs! Who could have EVER planned for such a scenario? In reality, it is the unknown that keeps many would-be landlords turning and running the other direction!
Let’s be brutally honest. If you plan to self-manage your own rental property, you can go ahead and kiss your time goodbye! You will need to be a leasing agent, tenant screening professional, bookkeeper, handyman, property inspector, and a property manager! Having to deal with personalities and solving problems better be your passion or it can be mentally draining.
Maybe you are already a landlord and have had nothing but great tenants! Count your lucky stars!
Chances are your current home will not always suit your needs. You may want to size up or down or have to relocate. Now comes the big question: Are you better off keeping your home as a rental or selling it? While renting allows you to potentially pay off your mortgage, it comes with a fair amount of risk and added tax complications. Expect to pay income tax on the yearly amount of rent you receive, even if you are only breaking even or losing a little each month. You can deduct mortgage expenses and other costs associated with being a landlord.
Beware of the capital gains tax! Decide how long you are willing or able to hold on to the rental property, even if it’s value does not increase. If you have not lived in the home two out of the last five years, it is no longer considered your primary residence and you will be assessed up to 20% depending on your tax bracket upon the sale of the property. If you are not satisfied with your current home value, renting out the house can provide some income while waiting for the home value to rise. Of course, you will still be on the hook for any property taxes whether you reside there, or not. However, renting out your home can diversify your investments, enabling you to reduce your financial risk. For example, if you lost your job, you would still have some income from the rental, (assuming you own the home outright) or if your retirement savings are insufficient, you’ve got a piece of real estate you can sell.
Equity is another consideration when deciding to sell or rent. The only way some homeowners can come up with the down payment on their new home is to cash out the equity they have in their old home. Can the family scrape up enough money to put down 20% on the next home without selling the existing one? Often homeowners need to sell their existing homes to afford the down payment.
If you plan to return to your home at some point, renting is probably the way to go. If, on the other hand, you are planning a permanent move to a new city, it makes the most sense to sell. Managing properties from afar has a whole new set of challenges. In Hawaii, the law requires an off island landlord to use a professional property manager to oversee a rental property. More importantly, if an owner of a rental property moves to another State and then elects to sell their investment home in Hawaii, HARPTA (Hawaii Real Estate Property Tax) will apply when the home is sold. This tax is 7.25% of the sale price, whether a capital gains is realized or not. If the owner resides in a foreign country, FIRTA (Foreign Investment in Real Property Tax) will be paid at closing. This tax is 15% of the sale price.
If homes in your area are selling quickly and for higher prices, sell, sell, sell! It may be the perfect time to sell your second home and there is no guarantee it will always be a seller’s market.
Should you sell or rent if your home needs repairs? In general, renters do not put as much emphasis on needed repairs as potential buyers. You may want to rent and slowly make repairs as you can afford it and then sell at a later date. Whether you rent or sell, you must address the big ticket items such as the roof, water heater, air conditioning and electrical panel, et cetra. Consider selling the property “as-is” if you must leave in a hurry or have no desire to do any fix-ups. Your profit will reflect that decision.
Whew! Clearly making the decision to rent or sell is a tough one. You must weigh the pros and cons of both. Just be sure you look before you leap into the final decision with realistic expectations and a solid game plan.
LET’S EAT OUT!
Last year my son Alex told me about one of his favorite restaurants in Honolulu, Chengdu Taste. It had been open and then closed to reopen in more spacious quarters near Sam’s Club in Honolulu. This place is not your old style North American Chinese restaurant serving chop suey or General Tso’s chicken. In fact it is a small group of eateries specializing in Szechuan food in Los Angeles, Los Vegas and fortunately for us. Honolulu. The New York Post called the LA branch the #1 Chinese restaurant in the US. The Honolulu location is owner and Szechuan native Tony Xu’s fifth . It is both authentic and offers up delicious dishes. Their food is famous for a mélange of Szechuan peppers, shiny chili oil certain to numb your mouth unless you ask your server to dial it down. But why would you want to spoil the experience? Alex’s favorite and mine as well, was the cumin lamb on toothpicks. I also really enjoyed the delicious boiled fish with re pepper sauce. The mung bean jelly noodles bathed in chili paste and peanuts are nice to look at and ingest. The noodles are thick and slippery. Try the savory sauteed eggplant with garlic sauce and you will not be disappointed. Jonathan Gold the godfather of LA cuisine, commented that while quite spicy, the food is flavored with a vast array of fresh, dried, pickled and ground chiles that may numb you but will not give you pain! 🙂 Alex and I, along with many locals and tourists love this restaurant. They are open for both lunch and dinner.
Open, 11:00 AM–3:00 PM, 5:00 PM–11:00 PM daily
Recommend calling for reservations
808 Sheridan St
Honolulu, HI 96814
There is street and valet parking
WHAT’S HAPPENING THIS MONTH ON OAHU?
It seems most fitting to comment this month on what we have done rather than what we could be doing. It is with a level of pride to say the residents of Hawaii are doing great. The transformation from the frightening dark days of spring, where we avoided others and were bombarded, not with weapons, but cries of impending doom, has been remarkable. Aloha is alive and well in Hawaii. We respect and care for others with compassion and understanding. Yep, we really do live in paradise…
Cathy, Mary and Jeff