An increasing number of Southern California move up home buyers are contemplating the prospect of keeping their old home. So is it really wiser to become an average ‘accidental’ landlord, or shed the weight when taking advantage of the market to buy a better home in Southern California?
According to a new survey reported on by U-T San Diego, as many as 39% of current move up buyers say they plan to rent their current homes out after moving. A large number of these individuals where in San Diego County, and as many as 62% of those in the LA metro area said that they would hold old homes. Many more may end up as accidental landlords if they don’t sell their homes as hoped.
Debates surrounding this trend suggest that this may be partially responsible for a recent dip in available inventory of homes for sale, especially in SoCal. This, in turn, has helped drive up home prices in areas like San Diego County. Ultimately, this could help make it more attractive for Southern California home owners to keep old residences as rental properties, as well as enabling more to sell their old California homes for more money. Still, while it is an incredible time to invest in California real estate, and a highly profitable time for many to become rental property owners, it is only wise to carefully consider the pros and cons of each option before committing. The following illustrates why you should consider keeping your current home when moving up.
1. Underwater
Even though U.S. homes prices, especially those in San Diego, CA are rebounding fast, some are still underwater. Some may be able to benefit from short sales or are able to negotiate down other debt. Others may find it unattractive to sell unless they are pocketing more money, and may prefer to wait, even though this is an optimal time to buy and the opportunity to move up shouldn’t be missed.
2. Hold Out for More Money
With home values heading up, many might find that holding on to old homes a little longer could provide the best of both worlds by allowing them to pocket more of the sale of previous residences later.
3. Wealth Building
Holding on to two properties can mean double the wealth building, as property values continue to rise. Not everyone may want to be a full time real estate investor, but even on this scale, being a landlord and property owner can create significant wealth.
4. Extra Income
Renting out the old pad can produce extra passive income each month. This can provide more cushion now, facilitate a better retirement or can be reinvested.
5. Avoid Tax Penalties
Some home sellers may be hit by big capital gains taxes if they sell. This liability could potentially be reduced or eliminated by waiting.
On the other hand, many homeowners may not want to hold on to their old properties when the decide to move up. These individuals may consider the following reasons to not hold their current property:
1. Avoid Hassle
Becoming a landlord is a dream come true for many. For others, it is just a lot of bother. For those that don’t need the money and prefer simplicity, it could be better to cut a deal and sell.
2. Time
It can be a time consuming task to be a DIY landlord. Even more so for those with distance between old and new residences.
3. Reducing Liability
There can be unexpected legal and financial liabilities some don’t expect. There are landlord – tenant laws to learn, and juggling two mortgages can get tricky.
4. Lender Rules
In many cases, mortgage lenders require previous (current) residences to be sold before new purchase home loans are approved.
5. Profitability
While real estate investing can be hugely profitable, those becoming accidental landlords can find many expenses from marketing to screening tenants to repairs and home improvements to management take out more than they expected, resulting in negative cash flow.
Fortunately, there are some hybrid solutions. These include: selling to another investor that can make the deal work, enrolling the home in a property management program, or seller financing the sale.
