Are you a homeowner in the Bay Area considering a move to a new location? If so, you’re probably grappling with the big question: Should you rent out your current home or sell it? This decision can have significant financial and lifestyle implications, so it’s important to weigh your options carefully.
Let’s break down the differences between renting and selling and explore the choices available to Bay Area homeowners like you.
Renting Your Home
Renting out your Bay Area home can be a smart option if you want to maintain ownership while generating rental income as well as the potential for appreciation down the road. Here’s a closer look at the pros and cons of becoming a landlord:
Pros:
- Steady Income – Renting your home can provide you with a consistent stream of rental income, helping you cover your mortgage and potentially make a profit.
- Property Appreciation – While you’re renting your home, it could continue to appreciate. This means that if you decide to sell it in the future, you might be able to sell and get a higher price later.
- Tax Benefits – Rental property owners often enjoy tax deductions, including mortgage interest, property taxes, and maintenance expenses.
- Flexibility – If your new location move is temporary, renting allows you to return to your Bay Area home if and when needed.
Cons:
- Landlord Responsibilities – Being a landlord involves property maintenance, finding and screening tenants, and addressing any issues that arise.
- Tenant Risks – There’s always a possibility of dealing with difficult tenants, late rent payments, eviction hassles, lost rent, or property damage.
- Vacancy Risks – your property may not be as easy to stay consistently rented, decreasing your rental income (sometimes substantially).
- Market Fluctuations – The rental market can be unpredictable, and you may get less income from the property than anticipated.
- Rent Control – even if you are in an area right now that doesn’t have rent control, the threat exists everywhere in California. This may limit your ability to raise rents and remove undesirable tenants from your property.
- Maintenance and Repair Costs – Your home may require unforeseen significant maintenance or repair costs, upending your calculations of profit.
- Tax Consequences – Potential for loss of $250K/$500K capital gains tax exclusion on primary residence. Also, income from renting your home is also taxable, a fact which many fail to consider in their calculations.
Everyone wants to know…
Selling Your Home
Selling your Bay Area home can provide you with a lump sum of money that you can use for your next home, pay down debts, or other investments. Here’s what you need to know about selling:
Pros:
- Immediate Funds – Selling your home can provide you with a significant amount of money upfront, which can be beneficial for purchasing a new home in your new location.
- Simplicity – Selling your home will be much simpler than being a landlord. You won’t have to worry about maintenance and repair costs, tenant issues, or property management.
- Financial Freedom – Once you sell your home, you’re free from mortgage payments, property taxes, and the myriad ongoing expenses related to homeownership.
- Diversification of your Portfolio – rather than have much of your wealth tied up in one significant asset, you can sell and and spread your investment into several smaller assets with lower overall risk.
Cons:
- Capital Gains Taxes – By selling your primary residence, especially one you’ve owned for a long time, you may incur significant capital gains taxes
- Market Timing – The real estate market can be volatile, and the value of your property might not align with your expectations when you want to sell.
- Potential Regret – If property values in the Bay Area continue to rise, you might regret selling if you believe you could have earned more by holding onto the property.
Selling or Renting Your Home: Which is Best for You?
Financial Goals
If you need a consistent income stream to cover your new living expenses, renting might be a suitable choice. Rental income can provide financial stability, especially if you plan to return to the Bay Area. By converting your primary residence into a rental property, you open up the possibility of doing a 1031 Exchange into a larger property that potentially will give you greater returns and income. If you already have a lot of capital gains in your home from years of ownership, this could be a great way to avoid capital gains tax while reinvesting into a property that gives you a much better rate of return.
Selling your home can provide you with a lump sum of money that you can use for various purposes, such as buying a new home, investing, or funding other ventures. Consider whether you prioritize immediate funds or long-term rental income.
Managing the Property
Are you comfortable taking on the responsibilities of a landlord? Being a landlord involves tasks like tenant screening, property maintenance, and addressing tenant concerns. Hiring a property management company will ease the burden if you’re not up for these responsibilities. However, many homeowners try to manage the property themselves, to save on the fees. This is a classic mistake that many people make which ends up costing them tens of thousands of dollars or more.
Market Trends
Research the rental market in your area. Consider factors like demand, occupancy rates, and rental prices. A strong rental market might make renting your home more lucrative.
The real estate market can be unpredictable. If property values are rising, selling might yield a good return. However, if market conditions are uncertain, renting could allow you to wait for a more favorable time to sell.
Over the long term, rental prices and sale prices have seemed to inexorably march up. However, the upward climb has not been uniform; there have been many years when the market dipped, sometimes considerably. Examples of these episodes include the Savings and Loan Crisis, the 1989 Loma Prieta Earthquake, the “dot com” crash, and the mortgage crisis of 2007/2008.
There is no way to forecast these periodic events, and if the market experiences a sudden downturn just when you need to exit the market, it could turn out that renting your home vs. selling now may be a costly mistake.
Take all your equity when you move
How to Know when Selling Makes the Most Sense vs. Renting it Out
I always tell my clients that real estate works best as a long term investment – that you should sell only when it makes clear financial good sense to do so. Every situation is unique so there is no one-size-fits-all answer to know when it makes sense to sell vs. continuing to hold onto the property. But I believe there are three key factors to consider:
- How much the market has increased lately
- How much taxable gain you have at current market price
- Your tolerance for risk of loss
If the real estate market has been experiencing sustained increase in prices, you might do well to consider that prices could return to the historical mean over time, also known as mean reversion. As market prices continue to increase, at some point it becomes more likely that home prices will decrease, rather than increase. If the market arrives at that point and then goes down – potentially for several years, and also by a significant amount – you could be left holding the short end of the stick when you sell. After all, in the Bay Area, a loss of 20% of your home’s value would typically result in the loss of hundreds of thousands of dollars.
Homeowners should also consider the amount of taxable gain they would have if they sold at today’s market price. Every homeowner who has owned their property and claimed it as their primary residence for at least two years can exclude $250,000 in capital gain from capital gain taxes. If there are two owners who can both claim it as their primary residence at the time of sale (or for two of the past five years), a total of $500,000 may be excluded from capital gains. If, after having run the numbers, you find you are close to the exclusion limit, this would naturally be a good time to consider selling, to maximize the benefit of that exclusion. After all, who doesn’t like tax free money? It’s much better than tax-deferred money, if you ask me.
For many, it will really come down to this simple question: what is your tolerance for risk of loss? Put another way: if you knew that by waiting, say, five years to sell your property, that you could end up losing $300,000 – would you still want to wait to sell?
For some people, the answer would be yes – they would still want to wait, because they believe they might want to move back to the Bay Area, or they want to leave the home to their heirs so they can inherit it tax-free. Those are indeed good reasons – really, the two best reasons – anyone would want to rent their home out instead of selling it today.
However, the majority of people will answer that question in the negative. They simply do not want to take the very real risk that they could end up losing money on their home any number of ways – through a significant drop in market resale or rental prices, unforeseen maintenance and repair costs, loss of the capital gains tax exclusion, and prolonged vacancy. I don’t have any statistics available, however given how many homes are sold each year, and the relative stability of home ownership rates, it is easy to conclude that the overwhelming majority of Bay Area homeowners decide to sell rather than rent their homes when they decide to move.
After all, while the wisdom of crowds is certainly refutable, if it’s a behavior exhibited by millions of diverse people over many decades, you have to believe there’s a reason why they act that way.
For Best Results
Finding a Great Property Manager for your Bay Area Home
If you do decide to keep your home in the Bay Area and rent it out, my advice is to get a property manager to handle all that for you. When selecting a property manager for your Bay Area home, it’s crucial to choose someone who is well-versed in the local real estate market and possesses a strong understanding of the area’s unique rental regulations and tenant demographics. Look for a manager with a robust track record of managing similar properties and who can demonstrate effective tenant communication, retention strategies, and timely maintenance responses.
They should offer transparent financial reporting and be proactive about suggesting improvements that maximize rental income while minimizing vacancies. Additionally, a good property manager should be well-organized, reliable, and have excellent references. Their ability to navigate the complexities of California’s rental laws and local ordinances—especially those specific to San Francisco, San Jose, or other Bay Area cities—is also essential. Ensure they hold the necessary licenses and are affiliated with reputable property management associations (such as the National Association of Residential Property Managers) which can provide an extra layer of credibility and assurance of their professional standards.
A great place to find a Bay Area property manager is through Yelp. The National Association of Residential Property Managers also has a website where you can search for qualified property managers as well. Here for example is a list of great property managers in San Jose.
Calculators to Aid Your Decision
Several online tools can help you crunch the numbers and make an informed decision between selling and renting. These include rent vs. sell calculators (such as the National Association of Property Managers Rent vs. Sell Calculator) and rental income and investment calculators (such as from Zillow and TurboTennant).
Conclusion
In conclusion, deciding between renting and selling your Bay Area home when moving to a new location is significant. It’s essential to consider your financial goals, your willingness to be a landlord, your tolerance for risk, and your plans.
Each option has its advantages and challenges, so take the time to evaluate what suits your circumstances best. Remember, seeking advice from professionals who understand the real estate market and financial matters can help you make an informed and confident decision.
Time to talk to a REALTOR?
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