Hi Mario & Elvia,
Here’s a few thoughts on analyzing which way would benefit you.
Points to consider:
1. In our experience, the best value for rental properties around Chino Hills (or frankly anywhere) would be a home no more than 2000 sf, 4 bedrooms, NO downstairs shower, NO pool, small yard, on the NORTH side of the city. This is the most undervalued property profile because most buyers, especially the 75% Asian buyer almost always require a downstairs bedroom with a SHOWER, for aging parents. (Case in point – in my old neighborhood by Eagle Canyon, 1900 sf vs 2100 sf home, both 4 bedrooms, only difference is 1900 is ALL 4 upstairs, 2100 is 3 up 1 down. The 1900 sf is 75k-100k LESS than the 2100.)
2. The desirability & relative ease of leasing out a property on the north side is significant versus a property on the south side of the city (south of Chino Hills Pkwy).
3. The wear & tear on a 2000 sf home vs a 3400 sf home will impact your maintenance & upkeep costs. From what we have seen, especially in California, the laws favor tenants, and the days of tenants really taking care of rentals decently just aren’t there anymore. We have recent examples, not to mention “professionals” who know how to play the game.
4. Here are 6 factors that have been helpful to many of our clients as to which way they should go:
a. CURRENT CONDITION: If it’s on the beat up side, lease it. If it’s really nice, sell.
b. UPGRADE LEVEL: If it’s closer to original, lease it. If it’s been renovated, sell.
c. POOL: Without a pool, lease it. With a pool, sell.
d. CURRENT MARKET: If market is weak, near the bottom, or the sale would produce a loss that serves no financial purpose, lease it. If market is closer to highs, sell it, ESPECIALLY IF IT’S THE PRIMARY RESIDENCE TO TAKE ADVANTAGE OF THE 500K CAPITAL GAINS TAX EXEMPTION FOR COUPLES (250K FOR SINGLES). While we are not tax professionals, they have often reminded our clients that the old rules of required reinvesting to escape the taxation no longer apply if the property sold is considered their primary residence at least 24 months out of the last 5 years.
e. PRICE RANGE: If the property is at or below the median value of the city (currently about 674k), lease it. The higher the price, sell. In the last market decline from 2007 through the end of 2012, the drop was an average of 35%. 35% of an 825K home vs 35% of a 600k home is a loss of 288k vs 210K. AN even more important observation is the higher the price point, the drop is actually HIGHER than the average compared to the lower priced home. So in actuality, the 825k home lost closer to 40%, while the 600k lost closer to 30%, or 330k vs 180k.
f. PROPERTY TYPE: If an existing rental, see questions a to e. If currently a PRINCIPAL residence, sell. The capital gains tax exemption of 500k WILL ONLY APPLY AS LONG AS THE DEFINITION OF THE 24 MONTHS OVER THE LAST 5 YEARS HOLDS. To simplify, once a former principal residence becomes a rental property past 3 years, that exemption is gone, and a subsequent sale will result in full taxation of BOTH THE CAPITAL GAINS, AND THE YEARLY DEPRECIATION TAKEN. (Again, always consult with your tax professional, as we are NOT.)
Now let’s compare to your current loan: Balance around 400K, 3.2% (awesome, by the way), 3000/month, 13 years to go. Assuming a very conservative value of 825K, net proceeds from sale would be around 380K.
Something I learned a long time ago – as important as the interest rate is, the price or loan amount is more critical. (It even applies to cars! 0% on full price is never better than 4% on invoice pricing!) In the current loan, while the 3.2% is fantastic, it was based on the much higher original loan balance.
Say we wait it out and pick something up in 3 years. On the north side, by the most desirable 9 point elementary schools close to the 99 Ranch & Costco & Shoppes, these homes are about 675k to 700k right now. The last market saw a 35% drop. I’ll be nice and just aim for a smaller drop of 15%. The 700k home would about 600k. Putting the 380k down, at 5%, PITI comes to about 1800/monthly. If we got you a home at 550k (market down just 20%), PITI is at 1500/monthly. These rentals aren’t difficult to get 2500 to 2700 a month. Now that I’ve worked the numbers out, if you want to play landlord to the max, how about picking up TWO condos or townhomes when the market is down? 300k-350k each, 2000/mo EACH! That would be the way to go!
A note about current market conditions: You mention trying to rent it out the next 3 months. Where we are right now is the market is beginning to weaken. The biggest enemy we have is – inventory. In 3 months, it’ll be the start when people start listing more homes just because it’s what they’ve been told for years. With a weaker market, higher inventory will drag prices down, especially higher priced homes, anything over 700k on the south side. Ironically, your best time to get the best price will be the next 3 months. You have very little competition right now.
Wrapping it up: John & I appreciate you having us to serve you. We’re happy whether you decide to lease or sell. The many times we have put these thoughts on paper, it allows us the objectivity to share what we think. Based on all the factors outlined above – our honest & professional opinion is selling Park Crest will benefit you the most, both short term & long term. 🙂
John & I will be glad to answer any other questions you may have.
Again, HAPPY NEW YEAR!