Should I sell or keep renting?

Asked by Nervous_pa_home_owner, Palo Alto, CA Mon Mar 8, 2010

I have a house currently rented rented out for around $4700/month in Bay Area. The house is probably worth $1.3M to $1.6M, it's a big range because it is hard to say how uch we can get in this market. It was our main residence and has been rented for 1 year now.

The tenants will move out soon, so the question is what do we do with this house?

Here are the pros and cons:

Selling:
1. tax benefit on gains ($0 to $200K depending on sale price)
2. no more headache on tenants
3. rent barely covering the expense, so no ore negative cash flow
4. cost associated with selling, upgrading, loss of rent income, staging etc. The cost could go pretty high to above $30k.
5. risk of unable to sell at the desired price.

Renting:
1. More gains potentially in the future
2. still easy to rent, and rent ay go higher than $4700, so no immediate impact on cash flow.
3. more headache on renting related problems.
4. risk of real estate market down turn and lose the tax benefit

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Answers

20
David Tapper, Agent, Burlingame, CA
Mon Mar 8, 2010
I'm getting nervous, nervous. Do not do anything without talking with your CPA. Please. You said you bought up in price and took a loan out to purchase. From the sound of everything, I think you are going to sell this home it's just a matter of when.

My answer is the same whether you are a buyer or a seller. It's impossible to "time" the market. There is no doubt in my mind that real estate will come back, it's just a matter of when.

Rentals can be great investments and also have tax advantages, but like you said, there are maintenance issues. In the last week alone, I had one tenant of a single family home tell me the water heater is leaking and we need to add 4 lines to the electrical. And this house is in very good shape. Another tenant said there is a leak after the storm, and the roof is less than 10 years old. So it tries your patience sometimes.

Real estate is great, but it's for the long haul for most of us.

Follow your instincts and don't go against your gut feeling. If you make a mistake, you can still move forward, if you go againts your gut feeling and make a mistake, it will trouble you for a long time.

Tap
Cashin Company
http://www.DavidTapper.com
http://www.TeamTapper.com
650-403-6252
1 vote
David Tapper, Agent, Burlingame, CA
Mon Mar 8, 2010
Hello nervous Pa. I can't share with you what's best for you, but I can point out a few things you may want to consider.

You probably know you have two more years to sell your home before you can no longer claim it as your personal residence and take advantage of the seller exemption. I cannot give you tax advice, so it would be best to talk with your CPA.

The real estate market seems to have leveled, but no one can predict if the mareket will go up or down. With that said, I don't see values going up that much in the next year or two because of the unemployment figures. They may go up, but not like the old days.

So if you are waiting hoping that home values will appreciate, it's a gamble like anything else. Same with interest rates. Rates are very attractive now, so that's a good thing if you decide to put it on the market once your tenant moves out.

The rental market has softened since you had your last tenant, but your home is in Palo Alto and shouldn't be problem to find a good tenant. If you need a referral to a good leasing agent, please let me know.

If you decide to put your home on the market, make sure to interview 2-3 agents who know your area well. Do not hire the agent who promises to get you the most money. Hire the agent who has the best marekting plan to get you the highest and best price.

You might ask the agents you interview to tell you the truth what your home is worth, not what you want to hear. Pricing your home corrrectly is the most important thing you and your agent can do.

Good luck,

Tap
Cashin Company
http://www.DavidTapper.com
http://www.TeamTapper.com
650-403-6252
1 vote
Michelle Car…, Agent, Coppertino, AL
Wed Aug 28, 2013
My best advice is to allow me or another agent here provide you with a free and confidential market analysis of your home-and a market snapshot of what's happening in your area.

Palo Alto homes are in high demand, however keep in mind there are proposed changes to the capital gains tax benefit, so talk to your tax professional ASAP.

Do you have other sources of income? If you plan to sell and claim the capital gains tax benefit, you must have lived in the home 2 of the past 5 years-so keep that in mind as you make your decision.
0 votes
, ,
Thu Aug 15, 2013
I was just looking through old post and I noticed yours. If you were not able to refinance at the time of the post, I can certainly help you out now. You can call me at 408-352-5147 or email me at AGreer@themortgageoutlet.com. You can check us out at http://www.TheMortgageOutlet.com. I will look at your situation and present you with some options.

Alex Greer
NMLS #1056079
0 votes
Ron Rovtar, Agent, Boulder, CO
Sun Mar 21, 2010
Hi Nervous:

I notice that under both "selling" and "renting" you express some distaste for the problems of owning a rental. If all else is equal after talking to an accountant or other financial adviser, you might want to take some time to figure out just how much you dislike the situation and go from there.

One option you did not mention, would be to find renters who have reasonably good furniture and are willing to keep the home looking good and clean for buyers (and to move on short notice if you sell) in return for a reduced monthly rent. This would provide you some income during the sales process and eliminate staging costs. As always, it would be up to you to check references and make sure you are comfortable with the renters.

Best,
Ron Rovtar
Prudential Real Estate of the Rockies
Boulder, CO
303.473.1926
0 votes
Tungsten11, Home Buyer, Los Angeles, CA
Sun Mar 21, 2010
I'd personally look to sell if I were you simply because i do not think the market you are talking about is even close to bottoming. In fact there is a lot of pure mathematical data that the entire SF and penninsula area remain extremely overpriced given such things as median home price to annual rent ratio which remains well above 30 for both areas I just mentioned. Sorry, but when a RE market has its median home price at a 34:1 ratio to its average annual rental that is not within lightyears of being near a bottom. In fact that type of ratio indicates just the opposite = lots of fluff still built into bay area home prices.
0 votes
Bedlam Realty, , Tulsa, OK
Fri Mar 19, 2010
I currently own rental property and I am also in the process of building a new home. We had to decide whether or not to sell our existing home or keep it as another rental. I've decided to keep it for a couple of reasons. I love the tax benefits I get from keeping it. The main reason is the simplest: Buy Low/Sell High. The market is low right now and it's a great time to be buying investment property, but as an owner I want to get the maximum return on investment. It won't be long before the national market rebounds and prices begin to climb again. Get a one year lease and then re-evaluate the market conditions at that time.
Web Reference:  http://www.bedlamrealty.com
0 votes
Norman Aless…, Agent, San Jose, CA
Fri Mar 19, 2010
Hi Jonp,
Buying a home is completely up to you as to when and WHY you are buying. If you wait and interest rates rise the high end homes will be tougher to sell as fewer people will qualify for loans and those that do will be able to afford less. If I were you and I was buying for the long term then I would buy now as I don't believe we will ever see interest rates this low again. If I had all cash and or a very heavy down payment and interest rates aren't that important to you, then I'd say wait until next year or the year after. This is all based on the spending of the fed gov., the deficit, and the raising of taxes. you can't keep spending money you don't have without consequences.( interest rates being one of them, plus the fed is almost done buying MBG's).
There is always a trade-off you might get a lower price later but your monthly payment will be about the same or higher. This not set in concrete, this is my opinion based on the available facts, what you do with them is up to you. Realtors get slammed a lot for people thinking all we do is say "buy now", but it all depends on YOUR objective of home ownership. Talk to your Realtor about what's important to you about home ownership and if it is doesn't fit for you to buy, then please DON'T buy.
Regards,
Allyson
DRE#01397256
0 votes
Jonp, , Palo Alto, CA
Wed Mar 10, 2010
So Allyson - I was curious about your recommendation to sell now (in Palo Alto). I figure if it is a good time to be a seller, then logically it must be a bad time to be a buyer.

Is it then your opinion that potential buyers looking in Palo Alto should NOT buy right now, but wait a bit? (given the reasons you and Optimized Prime describe below?)
0 votes
Norman Aless…, Agent, San Jose, CA
Tue Mar 9, 2010
Nervous, you seem to be leaning towards selling, I agree with David that you should talk to your CPA, with that said, THIS is the time to sell your home in PA. Here is why what Opt said about interest rates tied to home pricing is basically true, and I also don't see interest rate staying down this low much longer, as the FED is almost done buying Mortgage backed securites, when that happens interest rates will begin to rise and this will affect the High end homes as less people will be able to qualify. So the market in PA is stable NOW, but I'm not sure of the future. If you don't want to sell now be prepared for the long haul as the market is not going to stay like it is and it is going to be a rocky next few years.
I hope this helps, feel free to contact me with any questions.
Regards,
Allyson
408-705-6578
allyson@homesbyallyson.com
DRE# 01397256
0 votes
Optimizedpri…, , Los Altos Hills, CA
Mon Mar 8, 2010
You should sell now.

The bubble has not fully burst at this price level and right now you will be able sell your place for the most you will ever get for the place in your lifetime.

Interest rates are impossibly low: they cannot possibly go anywhere but UP. Home prices are virtually indexed on interest rates, so this is just one reason there is no place for prices to go but DOWN.

Take a look at your own price/rent ratio. The "rule of thumb" for a price that gets back to fundamentals is about $5k/million. This prices your place at about $950k. If you can really get $1.3m for it, that's probably $300k more than you'll get if you wait. That's of course assuming rents will stay as high as they are.

The housing bubble was caused by financial games that almost bankrupted our country (and may still). They will soon be outlawed for a generation just like laws were changed drastically after the Great Depression.

There are dozens of "once in a generation" factors happening all at once right now: all-time record unemployment; all-time record deficits as a percentage of GDP; all-time record bank failures; all-time record homeowners underwater; all-time record (temporary) government intervention into the housing market.

Baby boomers are causing the most dramatic shift the housing market has ever seen as they retire from their large, close-to-work expensive homes to small, middle-of-nowhere homes. Silicon Valley is seeing global competition it has never seen before as high-tech guest workers are finding great jobs back home.

This isn't the stuff of a "temporary dip", this is a once-in-a-lifetime market change.

So I'd suggest you read up on the market conditions (see link), stop listening to local Realtors and start looking at REAL economic data. Get out now, it's a terrible time to sell, but it's the best you're ever going to see again.


OP
0 votes
Dan Chase, Home Buyer, Texas City, TX
Mon Mar 8, 2010
I would also ask, you are spending $300 a month on the house. (helocs are bad)

Look at your mortgage. How much are you paying off each month via amortization?

If you are paying in $300 and paying off $500 it could make sense to rent.
If you pay $300 and take $75 a month off what you owe it might not.

Still, it sounds like a great deal to buy that house for only $300 a month. I doubt you could get it that cheap any other way.
0 votes
Glen Mitchell, Agent, Half Moon Bay, CA
Mon Mar 8, 2010
Nervous, when you say you have negative cash flow of $300 per month are you including any tax savings? depreciating your house on your taxes, writing off interest and taxes. Your CPA should be able to tell you what your tax bill would have been had you not owned the home. If you do your own taxes on a program such as Turbo Tax you can run it both ways and see what your tax savings is. I would highly recomend speaking with a tax pro though if you haven't and possibly a financial advisor.

Glen
Broker
650-260-GLEN
0 votes
Dino Morabito, Agent, Coronado, CA
Mon Mar 8, 2010
Hello nervous Pa... I must agree with David. As a fellow homeowner, we question everytime what to do with our properties when they come available for rent... and it is tiring and troublesome and stressful... ALL at once. Being licensed Realtors ourselves, we remain cautious as to where our business will be coming from year-to-year as we live in a vacation community.

I will say, to add to David's answer, that if you are interviewing to sell your home, one thing I always recommend my sellers to do is to, and do this one a whim, ASK the brokers you are interviewing for a referral of another Realtor that they could interview. Their reaction will immediately confirm or deny two things:
(1) How calm and collected your Realtor truly is
(2) Who they consider (in their industry) themselves equal to as far as a level of expertise.

Personally though, if you can rent the property for close to the same amount you were getting, just rent it. You'll know when it's the right time to sell :-)
0 votes
Nervous_pa_h…, Both Buyer And Seller, Palo Alto, CA
Mon Mar 8, 2010
Thanks a lot for your replies.

A little more details on my situation. The house is in Palo Alto, and I bought another house early last year, so it was a "move-up" situation for me. I did draw equity from the old house to pay for the new house. Combined with the first mortgage, I have negative cash flow on the old house (about $300 per month).

The old house has too many features, it has a swimming pool and sauna etc. There are definitely maintenance concerns for that house. Tenants have been great. However I am not sure I can always get good ones.

I can keep it rented, but I would be more cautious on spending if I do. But on the other hand I need to find some good investment if I sell the house and get some cash out.
0 votes
Dan Chase, Home Buyer, Texas City, TX
Mon Mar 8, 2010
I see on other potential benefit you left out.

If you can rent the property for about what the mortgage costs each month (with taxes and insurance) you have the tenant paying the house off for you. Even if prices drop 50% it does not matter as your tenants will be paying the house off. Once paid off you have the equity.

It is true that you will have some expensive repairs come up at times. But if the tenants are building up equity for you it is still not really a loss for you.

The right way to go depends on you. Do you mind (and can you afford) to rent like this forever? If you do not mind it looks like it will pay you well over time. If you do not like the arrangement sell quickly.
0 votes
Lynne Mercer, Agent, Palo Alto, CA
Mon Mar 8, 2010
Hello nervous. That is a hard question to answer as it depends on your circumstances, how long you have owned the house, what you paid for it, etc. I am all in favor of owning income property and if you have a positive cash flow and don't need cash from this house to buy a replacement home, it is very tempting to suggest you hold on to it. Historically both housing prices and rents tend to trend up (although, as we know from the past 2-3 years, that is not guaranteed) so it becomes an investment with the potential to be even more profitable later on.

You mention that this was your principal residence and it has been rented for just one year. If you decide to sell and you have owned it and lived in it for at least 2 of the last 5 years immediately preceeding the sale, you probably qualify for a $250,000 tax exemption on the profit per qualified owner. Technically you could rent for another couple of years and still qualify, but be careful. If you close escrow even 1 day late you lose the exemption.

If you go past the 5 year period for the tax exemption before selling the property, you would still qualify for the long term capital gains rate on your profit, after the amount you depreciated is recaptured. OR you could do defer the taxes by doing an exchange to purchase a different investment property. But beware again, as the tax laws change regularly and may be quite different a few years from now.

From your list above it looks like you are making a list of the pros and the cons, which is a good way to work through it. If I can do anything to help (maybe look at your house to give you a better idea of what it might be worth, or answer more specific questions) please don't hesitate to call or send an email to me.
0 votes
Dallas Texas, Agent, Dallas, TN
Mon Mar 8, 2010
I believe up to your business plan, review with CPA

However if home is valued $1.3 Mil to $1.6 Mil how many homes sold in this price range.?

You can list home for sale or lease then determine which offer comes in first if you like deal submitted. Also allows your home have more exposure to agents (buyer/tenant agents) Many times I can show a property for lease or sale, perhaps I may not have one client HOWEVER another client could have interest.

I am a real estate investor understand your problem, nice have cash flow can come with headaches.

Lynn911
Web Reference:  http://www.lynn911.com
0 votes
Arn Cenedella, Agent, Greenville, SC
Mon Mar 8, 2010
Dear Nervous:

That is the 64 Million Dollar question!
This is a difficult question to answer and no one answer will fit everyone's situation.
Items for you to consider:
Do you need equity out of house to do something else you want to do?
if you did sell, where would the equity go to?
Is it is financial strain to keep as a rental?

In terms of the real estate market, I believe we are approaching bottom.
In the past month, inventory is down and multiple offers are more prevalent.
I may be wrong but I do not expect values to fall much further.
That being said, I do not expect them to jump up dramatically either.
I believe people are feeling more positive about the economy.

So I think there is a reasonable chance property will be worth more in the future.
Of course you can only rent home for another 2 years before you lose your tax free gain benefit but it sounds like you will not have much profit anyway so maybe that is a moot point.

I guess your decision will come down to:
what will happen in the market over the next few years
being more optimistic pushes your decision towards rent and hold.
less optimistic pushes your decision towards sell now.

I guess the question for you is that assuming you can sell for another $100,000 in the next two years, is the $100,000 worth the stress of keeping this house as a rental? Of course, no guarranty house will be worth more in the future.

Hope this helps.

I will be happy to provide current market analysis to help you narrow that $1.3M to $1.6M gap.

Arn
0 votes
Eric Trailer, , Palo Alto, CA
Mon Mar 8, 2010
Good afternoon PA Homeowner,
My initial reaction was that selling may make the most sense for you, especially given the very low inventory of SFR's in Palo Alto, yet demand is still quite high. However, I think that it's in your best interest to meet with a reputable real estate professional, lender and accountant to:
1. understand your current and future goals
2. determine whether selling is truly superior given those goals
3. understand the impact on your financial plan whether you sell or rent
4. understand the tax implications of selling versus continuing to rent using a forecasting model.

if I can be of any further assistance, please feel free to contact me any time at 650.543.8001.

Kindest regards,
Eric
0 votes
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