If you’re planning to leave the Bay Area and you’re a homeowner, you’re faced with that age-old question: should I sell my house in the Bay Area, or rent it out? There are pros and cons for both selling it and renting it out, and these will be thoroughly examined in this article.
Selling – Pro #1 – Liquidity Event
Undoubtedly, the greatest advantage of selling your property is enjoying a significant liquidity event. If you are a long-term homeowner in the Bay Area, you will likely walk away with a substantial amount of money, which will provide you with a great deal of freedom and flexibility. You may purchase a home with cash someplace. You could spend the rest of your life on cruise ships. Perhaps you could support multiple college educations, purchase a home, and take a trip around the world. Clearly, this is the sweetest reward of selling your home. And if this is important to you, selling your home may be the wisest course of action.
Selling – Pro #2 – Less Responsibility
Another fantastic thing about selling your house versus renting it out is that it truly eliminates so much responsibilities in your life. Perhaps you’ve reached a point in your life where you’ve had children, raised them, pursued a lengthy job, and carried a great deal of responsibility for 30, 40, or more years.
And perhaps you’re simply done with it. Perhaps you simply wish to be footloose and fancy-free. Yet having a rental property that you manage from a distance, once you leave the area, does not necessarily provide you with the freedom you may be seeking.
Selling – Pro #3 – No Tenants to Worry About
I talk to a lot of folks who own rental properties. They all have tenants, of course, and there are in fact a lot of horrific stories out there. There are far more tenant horror stories than tenant success stories. And that could be because when people have nice renters, they don’t really talk about it, but when they have a nightmare renter, they always discuss it. Having a tenant in your life presents a number of significant complications, and many homeowners just don’t want to be landlords because they don’t want to deal with their tenants.
Selling – Pro #4 – Capital Gains Tax Exclusion
Another advantage of selling your home as an owner occupant as opposed to selling it as an investment is that if you have lived in your home for two of the past five years before selling it, you may be eligible for a capital gains exclusion of up to $500,000 if there are two owner occupants living in the property. This represents a considerable amount of tax-free income, as the gain is $500,000. If you end up renting the property for more than three years, you will not have lived in it for two of the prior five years, and you will lose the capital gains tax exemption. So, it is essential to keep this in mind.
Selling – Con #1 – Loss of potential rental income
Certainly, loss of prospective rental is a big negative for selling a home. Rents in the Bay Area are really expensive. Depending on neighborhood among other factors, if you own a three-bedroom home, you may be able to easily rent it out for $4,000, $5,000, or even $6,000 a month. There is a substantial amount of potential rental revenue if you rent it out instead of selling it.
Certainly, if you have a sizable mortgage, you may not receive a substantial amount of rental income, but you may still receive some, which might be of great assistance to you.
Selling – Con #2 – Loss of Appreciation
Fear of the loss of potential appreciation is, I believe, one of the most significant reasons why individuals do not sell their homes in the Bay Area when they move and wish to rent them out.
For example, if your home is worth $2 million and it’s appreciating by 5% every year, that works out to an annual increase of $100,000. That’s a substantial passive equity rise with no additional effort. Thus, many individuals have difficulty giving up such a substantial rise in their net worth. Thus, this is a crucial factor to consider.
Selling – Con #3 – Cost of Sale
Another disadvantage of selling your home is that there will be considerable transaction charges involved. Obviously, you will have to pay the commission, closing costs, clean-up and repairs, and you may also have to pay capital gains tax – which could be significant, especially if you’ve owned the home for a long time.
Selling – Con #4: Loss of Ties to the Bay Area
I believe that one of the primary reasons why people do not sell their homes and instead choose to rent them out is that they fear losing links to the Bay Area community. A lot of people are fed up with the Bay Area and are ready to go, but many of them actually love certain things about it.
They may have friends and relatives here, and there are many things they enjoy about the Bay Area, so they don’t want to sever their ties to the region should they decide to return one day. After all, what if they dislike living wherever they chose to move to?
Many individuals just do not wish to sell their properties for this reason. And if you’re among those individuals who are unsure as to whether they will ever return to the Bay Area, then you should definitely consider not selling your property and continue to rent it out on a long-term basis.
Renting it out – Pro #1: Rental Income
There are certainly many advantages to renting a home, such as having someone else pay down your mortgage. If you have a mortgage on your home that you wish to get paid down, a tenant can make that happen almost by magic In addition to paying your mortgage and taxes, they can also pay for other expenses that may come up from time to time. And after all those expenses are paid, you may end up enjoying positive cash for of a few thousand dollars per month.
Renting it out – Pro #2: Equity Build-up over Time
If you do not sell your property and instead rent it out, you will most likely see significant appreciation over time. As previously indicated, 5% on a $2 million home translates to $100,000 every year. So while someone is paying down your mortgage, thereby reducing your debt, you are also receiving an increase in the property’s market price.
By paying down the mortgage and receiving appreciation, you develop equity in two ways. Clearly, this is extremely advantageous for long-term wealth creation. Additionally, if you rent out your property, you can enjoy additional tax savings. You can take advantage of tax deductions for things like mortgage interest, property taxes, repairs, and maintenance. Some of these expenses cannot be deducted as a homeowner, but as an investor whose rental property is a business, you can deduct them essentially as business expenses.
Renting it out – Pro #3: Substantial Tax Benefits
There are large tax deductions associated with owning a rental property (but, I must stress that you should consult with a CPA or tax specialist about this, as I am neither a CPA nor a tax professional). You can potentially deduct mortgage interest, property tax, maintenance costs, insurance, and pretty much any other expense related to the property.
Renting it out – Pro #3: Keep your Options Open
Now, another fantastic reason to rent it instead of selling it is that you maintain flexibility. Just because you convert it to a rental property does not mean you can’t still sell it in the future. Also, if you need to move back, you can do so. Or perhaps you have children who grew up in the Bay Area, left the Bay Area to attend college elsewhere, and then wants to return to the Bay Area.
And obviously, the Bay Area is quite costly, and you know that if you don’t sell the house, your kids could return to live in it. Perhaps they will continue to rent from you, or perhaps they will inherit it after your death, inheriting your low property tax base along with it. By not selling your home, you obviously provide yourself with several possibilities.
Renting it out – Con #1: Good Tenants are Hard to Find
Good tenants are wonderful, but it is not always simple to locate them. And there are tenants who bring you interminable problems, such as not paying the rent, not paying it on time, ruining your property, or inviting their friends to reside with you.
Furthermore, the neighbors complain about loud music or parties, they take up parking, and they destroy the landscaping. There are a variety of potential concerns you could have with your tenants. It appears that the majority of landlords experience problems with their tenants at some time, which may be a headache and a nuisance.
Also, even “good” tenants don’t want them to inform you of any “minor” maintenance issues that come up with the property. That’s because they don’t want you to come around to inspect the property, get in their business, do repairs – which they fear may cause you to want to raise the rent.
Renting it out – Con #2: Vacancy Periods
As hard as it may be to believe, every rental property has periodic episodes of vacancy. That’s because most tenants will move out eventually. When you do have vacancy periods, obviously you’re not going to be receiving rent, and that may be pretty uncomfortable for you if you end up having two, three, or four months of vacancy perhaps between tenants while you’re working on restoring the property to a better condition so that you can charge a higher rent, you may experience a loss of cash flow, which may also be unsettling.
Renting it out – Con #3: Legal Obligations and Liability
Lastly, I believe that one disadvantage of continuing to rent out the home is that you have legal obligations. You are in some manner accountable for these tenants. You must ensure that they have access to a secure residence. You are required by your agreement with the tenants to provide them with a habitable dwelling. Being a homeowner, you also continue to be liable for certain obligations. Um, and, you know, those are significant commitments, and while they may not arise on a daily basis, they will continue to exist for the foreseeable future. These are the advantages and disadvantages of selling a home vs renting it out. In many instances, there is neither a right nor a wrong solution to this apparently complex equation.
The Future for Bay Area Real Estate is Hard to Predict
I would conclude by noting that the future is extremely difficult to predict. It is really difficult to predict what will occur with prices. It will be difficult to predict whether you will return to the Bay Area or never return. So, the only thing we truly know is the present moment. Instead of speculating about what the future may hold, I always advise my customers to concentrate on the present, as the only thing that can be known with certainty is what is occurring right now. I often warn my clients that predicting the future is actually extremely difficult. By discussing the future, you are essentially speculating or guessing. And whether you’re attempting to decide whether to sell your home or rent it out, pay most attention to your present circumstances and give that the most weight in your decision-making.