With the current real estate market being so uncertain, many people in Southern California are choosing to rent their homes rather than sell. Renting can be a great option, especially if you’re unable to sell your home quickly, or want the flexibility to keep your home for the future.
Renting your property can often be more beneficial than selling your property, depending on your circumstances. There are a few things to consider when deciding whether you should rent or sell your home.
Questions to Ask:
- Does renting or selling align better with my financial goals?
- Do I plan on moving back in the future?
- Do the market conditions favor selling or renting?
- Do I want to engage in the process of selling my home?
- Do I want to become a property manager?
- Is a cash buyer a better option?
Short vs Long Term Financial Goals
Existing Capital
Many people need to sell their homes because they require the capital from the sale to finance the purchase of their new homes. While there are a few alternatives to selling, the need for existing capital is a major factor in why people choose to sell.
If you need capital, but don’t want to sell, then you do have options to obtain capital. A bridge loan or a home equity line of credit (HELOC) are both good options for obtaining cash without having to sell your home. The choice between them would largely depend on how quickly you need the cash, and how long you think you’ll need before you need to repay.
Mortgage Rates vs Return Rates
Fewer homes are being sold year over year in part due to the high interest rates that make it difficult for people to finance the purchase of a home. Many people are reluctant to let go of their pre-2022 mortgage rates that were as low as 3%. Meanwhile, a booming rental market means that you can easily keep your home at its low interest rate and make money on renting out your home. In Southern California, the mean housing price increase is 11-14% year over year, which often means that holding on to a property is the better long-term investment option.
Cashflow Needs
If you need a large sum of money immediately, then selling can be an appealing option. However, if you’re wanting sustained monthly income, then renting can be a better option. This allows you to get regular cash flow while allowing your property to appreciate in value.
However, if your property costs more than you’re able to rent it out for, then it makes more sense to sell. Houses are expensive and repairs can be a hassle to arrange, especially if you’re not going to be in the local area.
Risk Tolerance
Depending on both the home sale and rental markets, one or the other holds less inherent risk for you. You may also be nervous about the potential of getting a bad tenant who doesn’t pay on time, damages the property, or is generally difficult to work with.
A sale is often an attractive option as it provides a clean break and a known cash value which can then be reinvested in lower-risk options.
Short vs Long-Term Plans
If you find yourself in a position where you have inherited a home, or need to temporarily relocate, then renting your home out until you’re ready to move back in may be a great alternative to selling. This not only gives you a bit more flexibility when it comes time to move back, but it also gives you the security that you’ll have a home in the location you want. It also prevents you from being at the whim of the rental or real estate market once you are ready to move back to the area.
Renting is also a good option if you want to keep the home in the family and are saving it for a future generation. Properties will almost always appreciate in value over time, given that you maintain them, so it can be a good way to pass on generational wealth without some of the challenges associated with leaving cash.
Market Conditions
Real Estate Market
The current average time to sell a house in California is 79 days, though this can be substantially less in larger cities. For example, San Diego homes spend an average of only 15 days on the market.
If you’re in doubt then you can ask a real estate professional to evaluate your home and provide comparables to recent sales in your area. Many real estate professionals offer this service, even if you don’t list with them.
Rental Market
Zillow describes the current rental market in California as ‘warm’, with a median rent of $2,800. Rent prices have dropped from 2022 numbers, but in cities such as San Diego, Los Angeles, Long Beach and Pasadena are seeing increasing rent prices.
Despite the drop in rental prices, the vacancy rate in California remains low at just over 4%. The time it takes to rent out your home will vary depending on the area, the condition of the home, and the price. For example, San Diego homes are rented out within a month. Your property will also be more desirable if it’s close to local amenities like shopping, parks, schools and public transportation. Your property may also be close to a fixture such as a military base, university, or hospital which makes it more desirable to rent for members of those institutions.
Considerations of Selling Your Home
Selling your home can be an undertaking in and of itself. If you sell the traditional way through a real estate agent then it’s likely that the process will more or less follow:
- Find a real estate agent: find a reputable real estate agent to assist you in the sale process. You can also choose to sell your home by owner, and we’ve detailed that process here.
- Prepare your home for sale: Make sure your home is sale-ready by making repairs, decluttering the home, making improvements and staging the home. It’s also a good idea to have a pre-inspection done to avoid costly surprises later in the process.
- Prepare the necessary paperwork: This includes disclosure statements, HOA documents, and ownership documents.
- Market the home: If you work with a real estate agent, then this will mostly fall on their shoulders. However, you will need to make time for listing photos and videos.
- Conduct open houses and showings: Try and be as flexible as possible to ensure the greatest number of people can view your home. You’ll want to make sure the home is tidy before any showings.
- Negotiate offers: Many offers will come with conditions. Be sure to carefully review the offers and communicate with your real estate agent what concessions (if any) you’re willing to make. You may also want to consider whether there are conditions you’d like (ie. a rent back period).
- Hire a real estate attorney: If you have a straightforward sale, then an attorney is not always necessary. An attorney is recommended for more complicated sales including homes that require repairs.
This can be an arduous process depending on your home’s condition, location, and how likely it is to sell. If you’re in a highly desirable area, and it’s a seller’s market, you may not have to do as much work to get a good price for your home. However, if you’re in an undesirable situation, then it may be quite a bit of work to make your home sale-ready.
Considerations of Renting
Can I Rent Out My Property?
First and foremost, you’ll need to find out whether you can rent out your home at all. There are often limitations placed by local ordinances and zoning or by the HOA. These bodies along with the California tenancy regulations will determine the specific rules for your rental. For example, you’ll need to determine:
- How many people can you have in your rental (typically it’s 2/ bedroom + 1)
- If you want to split your home into multiple units, then you’ll need to review the requirements for such.
- Whether you’re eligible to rent out individual rooms
- What needs to be included in a rental agreement
- What type of deposits are allowed, how much they can be, and how they should be used?
- What are the enforceable rules
- How to handle disputes
Property Management Responsibilities
Property management can be seen as a hurdle for many in renting their homes. Many people don’t want the hassle of finding renters, maintaining the property, or taking care of the administrative tasks associated with being a landlord. However, hiring a reputable property manager may be a good solution. The services that property managers offer will differ by company, but generally, they offer the following:
- Determining rent prices
- Marketing the property & conducting showings
- Review tenant applications
- Advise and execute tenancy agreements
- Collect rent payments
- Address maintenance and repair issues
- Conduct walk-throughs/ inspections
- Handling the eviction process
If you feel comfortable taking on the role of the property manager, then the choice to rent becomes easier. This is especially true if you plan on staying close to the property and are available for repairs and inspections.
Renting is also a good option if you know someone who is looking to rent as marketing and screening are the biggest challenges when first renting out a property. A rental agreement is highly recommended regardless of whether you know the potential tenants so that the expectations are clear to all parties.
Tax Implications
You should always consult an accountant or financial advisor to review your specific situation, but there are some tax benefits to both selling and renting.
The main concern is often whether you’ll need to pay capital gains on the sale of your home. There are a number of criteria involved in determining how much you’ll need to pay taxes including how long you owned the property, whether it was your primary residence, whether you’ve previously claimed an exemption on another property, and your individual tax bracket and marital status.
If you’ve owned your home for less than two years, then it often makes sense to rent to lessen your tax obligations. Additionally, renting allows you to deduct the operating expenses from your income, which can save you money each year on your taxes.
Alternatives to the Traditional Sale and Renting
If neither the traditional home sale method nor renting sounds appealing to you, then selling to a cash buyer may be a good option. At Haven Homebuyers we’ll give you a fair offer on your home in 24 hours and can close the sale in as little as 5 days. This is a great option for many who don’t want to take on the responsibility of becoming of landlord, but also don’t want to go through marketing and selling their home. We buy houses all over Southern California.
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