Sell vs Rent in RPQ

[relocator]

Hi:

We live in the Park village area in Rancho Pensaquitos and will be relocating up the coast.

We’re having a tough time deciding if it would make sense to sell or rent our home in San Diego. IMHO, I feel the market soared over the last 2 years that there is a correction due in the next year or so. So, selling may be a good option out on the other hand renting out will be cash-flow positive for us, so that looks like a decent option for the short-term at least.

What criteria should we consider and what do folks here suggest?

[EconProf]

Above all, be realistic about the costs and revenues of renting out. Beginning landlords usually underestimate costs and overestimate rents. They especially ignor fix-up costs, vacancy periods, opportunity cost of your equity, and the notorious Tenant-From-Hell.
On the other hand, I am optimistic about San Diego’s housing prices over the next couple of years, unlike you. So the appreciation of your old house may nicely offset the possible losses on renting out a SFH.

[The-Shoveler]

I don’t see a big downturn in housing in SD IMO.

10% can happen because it’s Sunday however, but holding long term I think you will do well.

anyway IMHO.

[spdrun]

10-15% has already happened.

I see quite a few units that would have sold for $190k-$200k last (2013) spring sitting on the market without offers in the $170k range right now. The only question is whether further declines will happen. Here’s hoping *clink*!

Frenzy is over.

[CA renter]

If you can honestly earn income from the house as a rental (taking into consideration all of econprof’s very valid points), and IF you think there’s a possibility that you will be moving back down here in the future, then it might be a good idea to rent it out.

OTOH, if you’d barely be breaking even, or if you’d be losing money, then it might be better to sell. Also, of you don’t think you’ll be living here again, it might be a good idea to sell, as well…a bird in hand and all.

Best of luck with your decision, and with your move up north!

[SD Realtor]

Pretty easy question to answer if you know what your goal is. If you wish to add the home as an asset to your portfolio for a long term holding AND the numbers look okay for the home as a rental, then hold onto it. Having a nice mix of 401k with equities and/or bonds and stuff like that along with some real estate is not a bad way to go.

As Econprof noted be realistic about the cash flow when calculating your returns. Find comparable rentals and see what people are asking for them. Pretend you are a tenant and go visit them and see if the landlord will lower the rent so you can worst case your monthly rent. Factor in a little vacancy and maintanence but don’t kill yourself.

Understand your conversion to a rental will also help your taxes significantly between depreciation and being able to expense other line items such as insurance and other expenses you would incur but not be able to deduct as a homeowner. Also this is not an immediate make/break case. You can convert it to a rental and you still have two years of non owner occupancy to sell it if being a landlord is not for you.

I would not worry to much about the overall market. Ignore statements that compare your locale and crappy small condos that are primarly investor owned as those markets are orthogonal. Agreed with other advice about no huge downturn but my caviot would be IF interest rates stay in a limited range. Yes we had a huge runup the past 2 years. That will not continue. We will even out and normalize so you will see some up/down activity in a limited range… Honestly though I would try to keep it as long as the cash flow was not horrible. If you can maybe refi to a lower rate while it is still owner occupied if your rates suck compared to prevailing rates.

[an]

First, it’s PQ, not RPQ :-).

Pertaining to your question, would owning this home affect your ability to buy your home in your new area? Some lender (maybe most?) won’t take rental income into consideration for DTI until you’ve own the rental for 2 years. That’s also something you should consider as well.

Landlording is not for everyone. You should read up on it and see if you really want to go down this path. If you plan to only do it for short term, what happen if the market correct in a few years and you can’t sell for more than current value. Would you be OK with holding on even longer until you can get the price you want? I’m not sure being a landlord short-term make sense at the moment.

[relocator]

Thanks for the replies folks. Based on them, it looks like

1. Most of the folks are reasonably optimistic about the housing market for the next couple of years at least.

2. The decision has very little to do with cash flow from rent, but a lot to do with housing price trends due. This of course is unpredictable and hence makes this a tough decision.

Do you agree?

What also concerns me as far as our home is the increase in inventory in the Carmel Valley/Del Sur areas? Or would those be targeting different buyers at different price points? Thoughts…

[exsdgal]

Frankly a single family house valued 700K+ in PQ does not make a good rental property. Please don’t get me wrong, PQ is a great neighborhood. IMO the deciding factor to sell or hold a primary residence (assuming holding 2 homes at the same time is not an issue) is how comfortable one is in foregoing the $250K/$500K tax exemption. If the goal is to take advantage of the tax exemption, then it is best to sell at the earliest and move on.

Yes there are provisions to utilize the tax exemption at a later date (2 year rule, moving back, etc), and these options come with complicated tax rules.

Good luck with your decision.

[livinincali]

While most people believe modest appreciation going forward, I’m not sure how likely that is. Every kind of valuation chart that has had this large quick run up hasn’t resulted in us staying at those levels or generally going up from those levels. Usually those valuations have fallen pretty substantially after the peak.

Improving per capita income, lower interest rates, and comparable rent rates going up help, but how likely are those 3 things acting in unison going forward. If incomes and rental rates are increasing then you’ll have a significant headwind of higher rates most likely. Certainly we might have modest appreciation in the short term, but the inevitable recession, the likely hood of higher rates create a lot of headwinds for housing appreciation over the longer term, especially when Rich’s valuation index is already at the highest level other than the bubble peak.

[CA renter]

I’m with livin’ on this. Though many would disagree, there are a lot of reasons to believe that housing prices are at a level that would be conducive to selling right now.

[Myriad]

So like CA Renter indicated, the primary decision should be whether you want to eventually move back to SD.
If not, then the decision on whether you would rent or sell the house should be dependent on Return on Equity & capitalization rate based upon the current selling price of the home. Since no one can predict the future value of housing in the short term, long term investment timeframe should be considered for real estate. In addition, the balance between real estate investments vs other investments should be considered.

Other investments may be as tax efficient and provide dividends equal to the rental income as well as potential capital gains.

[SD Realtor]

I don’t think the question had a focus on the short term dynamics of the market. There is no doubt the market is slowing down, it has been for quite awhile now. However that is due an extraordinary fast runup in prices due to very poor inventory levels and low rates. Now that prices have runup so much, buyers are taking caution and being more selective. At the same time sellers are pricing well beyond comp levels. So yes the market is slowing and will normalize, inventory will continue to grow and prices will drop. Maybe it will take 6 more months, maybe a year or two.

However that was not the question.

Long term behavior will be more determined by rates. The long term outlook for the market seems reasonable as long as rates are held in check.

[Anonymous]

[quote=CA renter]I’m with livin’ on this. Though many would disagree, there are a lot of reasons to believe that housing prices are at a level that would be conducive to selling right now.[/quote]

I’m surprised so many folks on here believe the market outlook is still good. If you have any desire to sell for whatever reasons, I think now would be a great time.

The only think keeping prices up currently are 1. historically low interest rates and 2. large investor demand (which is related to #1). So, realistically interest rates cannot go lower AND the Fed will be scaling back QE which will be guaranteed to raise interest rates to some degree.

So BEST case scenario is that the Fed is able to continue the market manipulation a little longer which will keep interest rates at current levels. If this is the case, home prices may level out near current prices. However, if interest rates creep up significantly that will be a double whammy. Investors will leave the market completely and organic buyers will have less purchasing power.

So downside risk seems way higher than upside in terms of appreciation at least.

[CA renter]

Exactly, deadzone.

[Author]

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