Sell or rent? Homeowners often face this question. If you own a home in San Diego, that you no longer use as your primary residence, or if it is an investment property, what should you do? Unfortunately, there’s no objectively right answer to this question. When it comes to selling vs renting, the final decision lies in where your financial situation is at that time, and how you wish to prepare for the future.
Today we will talk you through the question of sell vs rent and suggest the best option for your San Diego property. Please keep in the mind the discussion points below are broad and generalized guidelines. Speaking with a real estate broker is always the best idea to know what you should do to your particular property. Nick Foster, Founder of Haustay, is a licensed real estate broker in the State of California (License # 01913436) who can assist you. That being said, let’s move on to our suggestions on whether you should sell vs rent.
The invisible costs of owning a house
There are various costs associated with owning a house and some of them are less apparent than others. For example, we all know about property taxes and other taxes that are payable against owning a property. We also know about water, electricity, etc. bills that we must pay if we are living in a house. What we don’t account for is the hidden cost of wear-and-tear.
If you do not protect your house from wear-and-tear, its market value will deteriorate over time. Not only that, maintenance and repair are recurring costs. You have to put in some money year after year to maintain the value of your house.
On top of that, adding fixtures and features to a house (landscaping, pool, etc.) can further increase the market value of your property, but the ongoing maintenance costs can cost you more as well.
To put it in simple words, owning a house is expensive. The more value you want your property to have when you sell it, the more money you’d have to invest into it.
The risk of selling a house
Suppose you decide to sell your house one day and go to a real estate agent to list the home. Then you assess how much you will get from the sale and deduct the necessary expenses. Now, the figure that stands in front of you may seem good to you. However, if you realize that only waiting for a year would have given you 15% to 20% more than that, you will regret your earlier sale.
On the other hand, you may decide to not sell your property until the market price is higher than its ever been. You decide to wait it out for a couple of years. But after a few years, you have a sudden requirement for money. The housing market, on the other end, is worse than it was a few years ago. You’d have to settle for a price that you know is not justified simply because the market is down. Adjusting it for inflation will further diminish the property’s value.
As you can see, selling (or not selling) a house comes with an inherent risk. You do not know what to do and when to do it. More importantly, it can be impossible, if not extremely difficult, to predict the ups and downs of the housing market. When you are thinking about selling a house vs renting it, keep this dichotomy in mind. Timing the market is almost impossible.
Will renting be (more) profitable for you?
The debate of sell vs rent is to determine which would be more profitable, from a strictly monetary perspective. While there are other factors in real estate buying and selling that do not pertain to money alone, here we’ll tackle the money question alone.
You need to calculate your profits down to single digits to know whether renting or selling would be better for you from a financial perspective. When renting, you have to first bargain for the best rent you can get. Now, you have to deduct the monthly maintenance amount from the rent. The remaining amount is what you’d earn from your property rental every month. You can do the same calculations for yearly or quarterly earnings. If you know how to rent out your house as a vacation rental, you can earn additional income from it.
When it comes to selling your property, you need to deduct at least 10% from the net amount you’ll get from the sale. The 10% would go to agent fees and other obligatory payments. The remaining 90% is your net earnings from selling your house.
It can be quite difficult to deduce which would be more profitable for you in the long run. While real estate price tends to fluctuate wildly with time, the rental market is comparatively stable. On the other hand, if you time your home sale perfectly, you’ll get much more than what you’d get from rental payments.
Are you going to buy another home?
If you are going to buy a home, selling can be often seen as a better decision than renting. However, that may not always be true. If your rental amount covers your installment payments comfortably, selling may not be a good option. If you sell the property, you cannot retain it once your new house has been paid for. But renting out your property will retain ownership while paying your installments.
However, this strategy would not work if your rental payment does not cover your new home’s installments. In that case, you’d be bearing more than what you would for one house only. It’s a complicated question, and you’ll get the answers only through precise calculations and predictions. That’s why it is often a wiser choice to sit down with a market expert and do the maths together.
The biggest dilemma facing someone who wants to sell their house is whether it’d be profitable in the long run. If you invest your monthly earnings from the rental for a 10-20 year window, will it be more profitable than selling your house? Will it be more profitable to sell your house and invest the lump sum amount for a similar time horizon? Choose between sell vs rent only after you have answers to these questions.
Nesting a steady source of passive income
Neither would you want to work for the rest of your life nor would you be physically & mentally capable of it. That’s why investing gurus and pundits always stress the purchase of appreciating assets. A house is both an appreciating and depreciating asset. While the value of the property increases with time, you are also actively spending money on the house if you stay in it. As long as you are not thinking about selling or renting your house, it is not an appreciating asset.
Property is one of the best sources of passive income. Unlike businesses and side hustles, you do not have to devote time and effort to making your rental profitable. At most, you would have to pay for regular maintenance and bills. In the case of a side gig, a lot of time will go towards making it profitable.
Are you actively seeking a steady source of passive income? If yes, renting the house is a good idea. You will get some money every month and would not have to worry about the real estate market. It’s truly one of the best sources of a side income, no matter what your financial health looks like.
But if you already have sources of side income and are looking for an entrepreneurial endeavor, the capital you get from selling a house can give you momentum. To put it in simple words, renting your property guarantees a steady monthly income that selling your property doesn’t.
Renting your property can save taxes
Nobody likes to pay taxes, and renting your property can help you pay fewer taxes. On the other hand, if you sell a property, you will have to pay taxes on capital gains. If taxes are a particularly big concern for you, renting your property is often the best option.
There are several caveats in tax rules that allow you to not pay taxes on the money you spend for capital improvement. Capital improvement, in the context of your property, refers to expenditures you make to increase the market value of your property. It also includes the cost of general maintenance and protection against wear and tear. When you sit down with a real estate expert, you’ll discover various ways to legally save taxes. That’s one of the biggest advantages of renting over selling a house.
Small expenditures can add up to a significant amount. When you own and maintain a house, there are many expenses attached to it. While you can save money on that through tax deductions, understand that those costs would vanish if you sell your property. Here again, you’d need to calculate precisely which option would reap more profits in the long. If you are taking into account only the next 3-4 years and not more, the calculations would be skewered. All costs must also be adjusted for inflation in order to get a realistic picture. There’s no clear winner here since both options come with their own set of benefits.
Do you need quick cash for a venture?
Do you need quick cash for a new business plan? Are you trying to pay off a big loan against your home sale? If your motivation to sell your property revolves around similar issues, the natural response is to sell your house. It gives you access to all the money at once and you do not have to depend on periodic earnings. That’s an obvious advantage of selling a house when you look at it from the surface.
However, there’s another approach to tackle these circumstances. Assume that you take a loan for your business venture and pay it off with your rental payment. Here again, you have to do the math. Will you end up paying more in interest if you decide to rent out your apartment? Will the real estate marker grow at a steady rate to make your future property sale profitable? It’s only after answering these questions that you can conclusively decide whether to sell vs rent.
Do not always rush to sell your house if you need immediate funds. Consider all the possible options and then decide accordingly.
What do market predictions look like?
The real estate market, for a long time, was one of the safest markets to invest in. With time, that notion has changed drastically. Much like stocks or gold, the real estate market is now volatile. It’s not as volatile as the stock market, but even small changes in market price can mean a loss of hundreds and thousands of dollars for homeowners.
Timing the market is an impossible concept. It requires a degree of foresight that no one can claim to have with certainty. However, experts who are in the real estate market for a long time do have an idea about what will happen at least in the 5 to 10 year time horizon.
While 10 years may seem like a long time, it’s not so much in the context of market fluctuations. If you see the real estate market booming 5 or 10 years down the line, waiting out is often the best option. It ensures that you get a much higher value for the same property (adjusted for inflation) and meanwhile, earn monthly rental payments.
At the same time, don’t let market panic force you to sell your house. Wait until you have all the necessary information at hand and only then decide.
Get In Touch With Haustay Today!
We hope this guide will help you decide whether you should sell vs rent your San Diego property. As we have said so many times already, consulting with an expert is your best bet. Only a professional can tell you things that pertain to your specific property. Getting in touch with a vacation rental property manager is the first thing you need to do when the conflict of sell vs rent comes to your mind. For broader guidelines, this guide can help you with important pointers.