Why Sell When You Can Rent???
Choices in a seller’s and landlord’s market
In this frenzied sales market, you can sell your home before you know it. You’ll have few chances to change your mind, once you sign a listing at a reasonable price. What if you have regrets? What if you want to move back in later? What if you want to at least be able to move back into the area later? This blog is to demonstrate the effect of long term trends and shows a way to be able keep property, as rentals.
Here are some homes I used to own (and wish I hadn’t sold):
- A 2 bedroom bungalow in San Mateo, California, purchased in 1983 for $108,500. Zillow says it’s $900,000 now. I did sell with a purpose: to buy my next home. At the time I was not thinking about housing as a long term investment.
- A lovely craftsman house in Berkeley, California, purchased in 1986 for $180,000. Now well north of a million. I never wanted to sell it, but when in Berkeley, they let you live there and then you have to sell. To do otherwise, at least at the time, was to support tenants and their strong arm rent control.
Why should I keep my house as a rental?
Long term values
Values have gone up in the long run because the Federal Reserve has been doing two things:
- lowering the interest rates;
- increasing the money supply
Both actions have the same effect. Most people know that interest rates are not going to get any lower. The Fed is just talking up rates, however, not raising them very fast at all. Whenever there is a hiccup in the economy they rush to flood the market with more dollars. That activity is the technical definition of inflation. More dollars chasing the same amount of goods and services tends to drive up prices. The Federal Reserve’s stated objective is to achieve inflation to 2% per year. You can count on them doing just that.
What are the alternatives? Stocks and bonds are risky. CD’s are useless with at most 1% interest rates. So, what about a house? Here’s a first cut on how that works:
Purchase price: $170,000
Rental rate: $1195
$1195×12 = $14,340 per year
14340 / 170000 = 8.4% return per year
Remember to deduct the cost of your mortgage, vacancy, repairs, management, utilities, taxes and insurance. Lenders have a 30% rule of thumb regarding expenses when they evaluate your rental income (not including the mortgage).
$14340 x 70% / 170,000 = 5.9% return per year
When you have investment property, all of your expenses are deductible, including the interest. Even depreciation is deductible. A CPA can guide you regarding what value to deduct (your basis), so that you have a defensible deduction year after year.
For a simplified example, let’s say you buy a condo for $100,000, and 1% of the condo’s value is in the land. Then you can use $99,000 as your basis and depreciate over 27.5 years. This results in $3,600 per year to deduct, for the 27.5 years. I always recommend a tax advisor to come up with the correct basis for depreciation.
You love the house, or love the area
If you want to move back some day, this is the best way to keep it, produce income and maintain it in good condition. A house is the better for having good people occupy it. If you want to move back to the area, if not the house, keeping the property is an perfect hedge against inflation.
So what can I do later with my rental investment?
- Move back in! Perhaps you had a temporary need and want to return. If you rent it, you can come back some day!
- Use the rental income to help fund your retirement after the mortgage is paid off.
- Swap it for another real estate investment with zero tax consequences. You can buy 2 for 1, 1 for 2, residential for commercial, land or even cats for dogs (just kidding). It’s called a 1031 exchange. Very useful if you have a need for another place or find a screaming deal.
- Let your heirs or a charity inherit it. Defeat the tax man permanently by keeping it all your life. This is one of my personal goals.
How do I get started with renting my home?
Call Blue Sage at 360-406-5252 for expert property management services. We take very good care of nice homes, renting them to nice people who pay rents on time and also care about your/their home. I am happy to meet up with you, even if your plans may be months ahead. I’m here to help with advice about upgrades and upkeep, market values, and even referrals to good vendors to get work done.
Since Blue Sage keeps homes nice, they’re ready to move back into, sell or continue renting, year after year. I’ve been in this business since 2001, and I still love it!
MPM, RMP, GRI, MRE, CNE
Designated Broker / President
Blue Sage Property Management, Inc