A Bay Area family talks of moving to Portland, Oregon where they have friends and family and can secure a nice-size house and even land (what a concept!) for what it might cost to buy a two bedroom condo in San Francisco. But it just doesn’t seem to be the right time to sell the 40’s era family home Gary Hauser grew up in, and now shares with his wife and daughter. It also doesn’t seem to be the right time to invest in something new. The answer? Rent with no repent.
“We’re thinking of renting out our house while renting something either in Portland or an apartment in a sunnier location in San Francisco until the market picks up,” Hauser says. He may be onto something as renting could very possibly be replacing buying as the new American dream.
There are strong arguments for renting instead of buying including the steady climb of mortgage interest rates along with the difficulty in securing in loan.
An average 30-year-fixed went up 12 basis points to 5.23 percent April 1, while a 15-year fixed climbed to 4.53 percent and a jumbo 30-year fixed loan jumped to 5.92 percent. And while housing prices might be lower, renting costs have dipped as well, making it easier to get a better deal on a nice house in an upscale hood.
“It’s just a chain reaction since properties are going down in value, the property owners will eventually lower their rent to keep up with the market,” says Stop Stupid Stuff, a mortgage tutorial site.
While more people may be able to afford buying right now, the mortgage sites argues you can actually save a great deal by renting in certain locations.
“Some would argue that the difference in mortgage and rent is not that much that makes renting a bad idea but if you are living in a posh location where the mortgage could reach $5,000 a month, you will be able to rent a property within the same location with less than $4,000 a month,” it tells us. ” The $1,000 difference per month is just too large to be ignored.”
According to James L. Harrison of the Real Estate Blog, if you can afford not to sell your home, you can benefit from a steady cash flow that you can apply to your expenses and taxes while retaining ownership and making a profit. If you are relocating, you avoid the risk of selling and losing money, and can simply enjoy the income until you come back. He argues you also unload a lot of headaches assumed by the renter.
“You shall no longer have to pay the mortgage interest payments, insurance payments, property taxes, maintenance, repair and cleaning services,” he says. “You might be surprised to know that all costs of collecting your rent like traveling, local transportation, maintaining, and repairing your rented property can be deducted form the tax. Moreover, the depreciation expense is also taken care of my the amount of rent that you are getting. Hence, you have a good tax shelter, and save a lot of money.”
Disadvantages to Renting
The biggest disadvantage is having to play landlord, according to Alla Gershberg, MBA and a principal with the Paragon Real Estate Group in San Francisco. “Managing a rental house and tenants can be a hassle and cost a lot if you choose to hire a professional property manager,” she finds.
She adds that once you decide to sell, it can be tricky. “If you decide to sell because of rent control laws, evicting tenants to sell the home later may be problematic, prohibitively expensive or even impossible. If it’s impossible to evict the tenants, then you have to show it while it is tenant occupied, which can bring up multiple issues pertaining to appearance, showings and open houses. It makes it virtually impossible to perform any staging of the home to make sure it shows in its best possible light.”
She adds that rental properties rarely show as well as owner-occupied properties and renters often neglect basic upkeep and maintenance. Agents also find most buyers don’t want to buy tenant occupied homes and those buyers willing to deal with the issue expect a significant discount on the price.
“Renting for an extended period may affect the $250,000-$500,000 exclusion from capital gains for ownership occupied properties upon sale.”
Like most agents, Gershberg discourages clients from putting off selling homes because it can be difficult to predict when the market will actually pick up, and meantime, the rental market also can weaken at the same time. She figures in terms of making an investment, you will probably fare better in the end from selling.
“It depends on the property,” she shares. “Rents in good neighborhoods are doing well but unlike multi-unit rental properties, single family home rents typically don’t generate income commensurate with current values. In other words, you could invest the proceeds of a current sale more profitably than the return one gets from rental income on a single family home.”
Renting a Room, Good Compromise
Until you decide about renting or selling, it might pay to simply rent a room in your house to eke out some extra income, just as our grandparents did during war time and the Great Depression. It will also give you a sampling of what it is like to play landlord, including collecting monthly rent and asking your tenant to do his or her part to keep up the room and shared grounds. Just follow the m.o. of best landlords, and do a good background check! Remember, you can also take something in trade for that great green gardener, organic chef or babysitter that happens to need a room. It could be a great win-win situation.