Should You Rent or Sell Your House?

February 26, 2015

Should You Rent or Sell House San Diego

When it comes time to upgrade or move due to work many of us wonder what we should do with our current home. Should I keep it and rent it out, or sell it?

There is a lot to consider and I’ve broken it down to the main points to help guide you. It could be a smart financial move depending on a few key items. Lets cover them and see what you should do.

The most important factor to consider…

Will the rent cover the mortgage? If it will rent for $1750 and the mortgage is $1700 don’t even dare try telling me yes. Properties need maintenance, repairs and don’t forget about those occasional tenants who would prefer an eviction on their record rather than paying rent to you.

A good rule of thumb is 40% expenses off the rent. So if you are collecting $1750 in rents, you want your mortgage to be no more than $1050 this leaves you a safety net to handle those repairs and should things get tricky and you need to evict you are covered.

If you must pay out of pocket to keep a rental property functioning you are taking a big risk. Should you lose your other source of income it could put you in the uncomfortable situation of having to decide what bills to pay each month. Be calculated on your decisions and plan ahead.

All thoughts below should ONLY be considered IF the rent will cover the mortgage and expenses. If not, stop right here. Do not pass go, do not collect $200 and setup plans to sell your property.

Are you well funded?

This falls into the category above but needs to be mentioned more specifically. Do you have an “oh crap” budget? Should a water heater go out or any other big ticket item need addressing can you pay out of pocket for it? Many states have strict laws on the living conditions you must provide and you must always be ready to handle repairs and emergencies right away.

Are you ready to be a landlord?

If not, that’s okay but you’ll need to employ a property manager. That will eat up 10% of the rent collected and usually increase the costs of repairs as they mark up their services as the project manager. There’s nothing wrong with hiring a good property manager, but it is an added cost to take into consideration.

Being a landlord can be a really rewarding experience, you will be faced with tough decisions and awkward conversations. If you are the type person who dislikes these types of confrontations be prepared, if you ignore them with your rental it will have negative results.

Tax implications… 

Depending on where you are in your career, owning a rental can be a great write off. That doesn’t mean you want it to lose money, but mortgage interest is a write off. You can earn a property and tax benefits by keeping a rental as long as you are prepared for the work involved to manage it.

On the flip side, we have a thing called capital gains tax in the United States. Thankfully some legislator created a nifty loophole for homeowners that shouldn’t be ignored. You can avoid taxes on capital gains of up to $250,000 per individual ($500,000 for couples) as long as you have occupied a home for 2 of the last 5 years.

Strategically this will make the most difference if you live in an area that has appreciated well and what your time line is. It is wise to consider the tax amount you would be forced to pay should you sell your home after that window has closed. In some cases it makes more sense to either sell now or hold but only within that five year window.

Are you planning to come back to the area?

If you are relocating but think you could return, it may be wise to keep the home. Sentimental attachment can make it hard to part with a property, but if its a great home and you could see yourself moving back into it one day it may be worth keeping.

Just be prepared, your tenants will not love your home like you do. Typically we aren’t talking major repairs, but be prepared to spend some money when you come back to turn the house back into your home.

Basic rules to keep your sanity if you do rent your home

1. DO NOT let family live there for free. First of all you aren’t renting it and secondly they become entitled quickly. Should you suddenly need to charge rent it won’t go well.

2. DO NOT ignore your property for extended periods of time. Tenants seem to love living in deteriorating homes and never notice those water leaks until its a river. Make quarterly visits or have a handyman check for you. Preventative repairs can save you thousands.

3. Keep that emergency fund and DO NOT tap into it for anything besides your rental property.

4. If you have a property manager, keep tabs on them. I’ve seen homes destroyed by tenants while the owner was none the wiser because the property manager was supposed to be watching things.

5. Treat your tenants how you would like to be treated. We’ve all had that horrible land lord before. Don’t be that person, demand rent on time and respect for you and your property but always take care of your tenants. They are paying for your house after all.

san-diego-house-market-update

Are you wondering will San Diego home prices will drop in 2023? You came to the right place to get data-driven information to help you understand what is happening in the local real estate market. While no one has a crystal ball, we can utilize the best data available to have a good idea of what is ahead for home values in San Diego. To understand this properly we need to take a look at how we got here after two years of rapid appreciation in San Diego. 

Interest rates have a lot to do with San Diego home prices, let’s explain why

Most homes are purchased using a mortgage, typically 80-97% of the value of the property is funded through a mortgage. Throughout 2020 until the spring of 2022 rates were at all time record lows (2.6-3.5%). Rates so low they’d never happened before and these record low rates meant the cost to borrow funds had never been cheaper. Cheap money means your buying power increases.

This caused several things to occur that increased demand for houses in San Diego

1. More people could afford to buy a house in San Diego, Increasing demand.

2. It lowered the monthly payment for a house, so you could pay more for a house in San Diego and your payment would stay the same as before rates were lowered.

3. People could refinance their existing homes, withdrawing equity and they used that money to buy more real estate, increasing demand.

COVID19 impacted demand of San Diego homes too, here’s how.

COVID19 surprised everyone and it altered the behavior of people in a way that increased the demand for houses locally and nationally. Here is how COVID19 encouraged people to buy homes in San Diego

COVID19 related events that increased demand in San Diego

1. Remote work encouraged people to relocate to places they wanted to live, especially nice climates like San Diego.  

2. Families wanted a home to live in to avoid living in close quarters in apartments and condos during the pandemic.

3. People retired early, changed jobs, and made big life changes to relocate to nicer areas for outdoor activities.

4. Student loan payments were paused, increasing disposable income making it easier to fund the purchase of a home.

5. No travel, limited eating out and opportunities to spend caused increasing savings and people chose to spend that money on a house.

6. Less people sold their homes during the pandemic, restricting supply and increasing demand for house buyers.

 

san-diego-house-inventory

High demand, limited supply, growing savings and record low rates meant prices go up.

The perfect storm of increased disposable income, lowered interest rates and increased demand to own a home meant home prices could go up 30% and the payment would look the same as a home in 2019 with a higher rate mortgage. Homeowners didn’t care if the price was higher, the payment was the same. This drove San Diego real estate values up over 38% in two years.

 

The shift that occurred in 2022 that is leading to prices dropping, fast.

Many of the events that led to rapid price increases are no longer present. Interest rates the single most influential factor in the rapid increases of San Diego house prices, are increasing at the fastest rate in US history. This will impact how you can sell your house and for what amount.

Here is a table to show how much impact the changes in interests rates factor into what a house will cost you in San Diego. Your payment on a $700,000 home has increased 57% over last year. Home prices must come down. 

san-diego-home-price-dropping

When rates go up, prices go down. Its just that simple. 

San Diego home prices increased artificially due to the low supply and record low interest rates. Now that both of those factors are no longer present. Real estate values in San Diego are dropping, fast. We have not seen interest rates this high since 2007 and they have never been raised this fast in US history. There are some mitigating factors but this table shows just how much difference a payment would be to make sense at the new rates. 

A $700,000 home in San Diego with a 3% interest rate has a payment of $2951

To reach the same monthly payment at 7% interest rate that San Diego home would need to cost $550,000 

 

san-diego-home-sales-volume

With homes unaffordable due to interest rates, sales are plummeting. 

In summary, are San Diego home prices dropping? Yes. There is an increase in supply, a drop in demand and interest rates can no longer support the prices. No one knows how much San Diego home prices will go down, but the table listed above shows it could be as much as 25-30%

If you have any questions or would like to review the data used here to assess the San Diego home prices please don’t hesitate to reach out. 

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