Got new job and need to move. Sell or Rent?

Question

I live in California, and just learned I'll be relocating out of state. I'm about $100k positive in equity on my home as of now.

My first instinct is to sell, but here are some other thoughts I have towards renting:

1) Great house. Low taxes, new roof just put on not long ago. Great privacy. Not too much emotionally attached but its a good area with good schools.

2) Cost of re-entry. I got this house at the low point. There is a chance we could come back to California, albeit I'm not sure if it would be to the same city. I'm afraid 5-10 years down the line that barrier to re-entry will be significantly high.

3) Most of the appreciation has happened in the last year and a half. It seems to have slowed and slightly stalled, but future looks positive for equity growth imo.

The biggest drawback is the property does NOT cash flow. I am negative about $100 each month after factoring in capex, maintenance, property management, vacancy, RE taxes, insurance, and mortgage. This property will also need to be refinanced with additional monies put in to get the lower $100 number.

So with that being said, are there other things that I should be considering that would offset this loss? Tax deductions? Potential rent increases in the years to come?

If you were in my shoes and you stood to loose about $1.2 to $2k a year on renting, would you still consider doing it given the points above?

Steve Vaughan · Answer

Speaking of taxes...you would be walking away from $100k in tax-free gain. If you rent it out, I would sell within 36 months to lock it in.

I wouldn't be a long distance landlord. I also wouldn't like seeing my yard die, my screens all tore up and junk all over the place, etc at my house.

At least you'll be making money each month + paying for a PM. Sure - do it!!

Jesse Hinaman · Answer

@Derek Fitzpatrick forgot to tag you.

Jesse Hinaman · Answer

Hey Derek,

I think you are forgetting a few key things that offset the loss. First off, the principal paydown. I don't know what your payment is, but I would guess each months mortgage payment is contributing at least $300-$400/month in principal payoff. That equates to anywhere from $3,600-$4,800/yr.

Also, the tax benefit is substantial. Even with a six figure W-2'd salary, my rentals have helped to keep my effective tax rate at 5% over the last few years. After writing off all your expenses and depreciation, you will have a nice "paper" loss. For example, if you bought the house for $300,000, deduct the land value (we'll say 20%) = Structure value of $240,000 / 27.5 yrs (the IRS allowed length of depreciation on residential property) = $8,727 in depreciation write-off + your calculated rent income loss after all expenses (including travel back to Sunny California to check up on the place ;) ) = about $10,000 tax deduction. If you're taxed at 35% between Fed & State, this equates to $3,500 cash back in your pocket.

So would you really be looking at a $1,200-$2,000 annual loss...NO, and the appreciation is your bonus for being patient (at a $300k value and with a low inflation equivalent appreciation of 3% that's another $9,000 the first year).

To be honest, I have never heard a California investor say they regretted turning their first primary into a rental. On the contrary, they are always kicking themselves for selling and not holding onto it as a rental.

It really comes down to whether or not you need that $100k in equity, now, but good things come to those who wait.

Got new job and need to move. Sell or Rent?

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