USCTrojanCPA said:
I have a 2.375% 30-fixed rate on my Tustin Ranch home and I'll be about $1,500 cash flow positive when I rent it out so that home is not hitting the market anytime soon. There are a lot of owners out there who have fixed rates in the 2% to 3% range and those people are not going to be selling until they absolutely have to. That's going to keep a lot of inventory off the market. And where are all those people who have gotten priced out due to the high prices and high rates going to live? That's right, rental properties and that's why the rental market is still hot.
I'm probably in the minority here, but offering up a counter point as this is something I contemplated before ultimately deciding to sell our place. We're looking to upsize and move about 10 miles SW from current location. Our oldest kid started at a K-8 charter school (free) that is a great fit and so we're committed to that school for 10+ years (for her and our younger son when he's older). Currently wife and I have been doing a 30-minute morning drive for drop-off before heading to office. That worked in the covid / hybrid work world, but wife is going to have to start going back to office. So here's what I debated.
1) Buy new house (was pre-approved without sale contingency) in area we have been eyeing close to school, then sell/rent current home
2) Sell/rent current home, then rent while we look for new house.
I went with option 2 as I was very worried about buying high and selling after housing market softened. We closed on our sale a few weeks ago. Agent said we couldn't have timed it better as activity has drastically sold.
Now why did I sell vs rent it out, especially with a 2.375% 30-year and a pre-approval to buy without a sale contingency? A few things.
1) Cap gains avoidance. We were well over the $500k capital gain exclusion on the sale. So pocketing $500k worth of gains tax-free felt like a big win.
2) Fear of tenants trashing the house. We sold for a bit under $2M. We treated the place well because it was our home. While I know there are great tenants out there, many don't have the same pride of ownership I do. Too big a risk at that property value.
3) Return on equity. This was probably the biggest driver as I'm a numbers guy. The equity in the place was over $1M. My overall cost of ownership (PITIA) was about $4,500/month. My guess is we could have rented it for $5,500-$6,500/month, so cleared $1-2K a month. But that assumes no vacancy, repairs, management fee/my time, etc., which we all know will happen from time to time. So clearing $12-$24k per year (excluding those extra costs) on $1M in equity is a paltry 1.2% to 2.4% return. Yes there is mortgage paydown happening which increases the equity, but there is also risk of housing price decline.
In the end, selling and pocketing the cash, while avoiding $500k in cap gains won out. Plan is to much of it as a down payment on the bigger house, maybe even get lucky and it's after prices have come down a bit. With the way mortgage rates are trending, lowering a 4.5% mortgage when we buy makes more sense than the 1.2% return on a rental. My bank also has more attractive jumbo pricing if you put 40% down. Currently that cash is getting 3% at HM Bradley (capped at $100k), 1.35% at GS Marcus (includes referral bonus), and 1.4% in 8-week treasuries (state tax free). I also put some in the market this week as we had excess on top of what we need for a down payment.
Just thought I would share the counter point to sell vs rent decision and how I looked at it.
