Depending on your circumstances, plans and current market conditions, renting one’s home instead of selling it may certainly be an option worth seriously considering. If you don't need your sale proceeds to buy your next home, owning rental property may be a viable, long-term investment choice, especially if rental rates are high and interest rates are low (as they are in San Francisco, as of April 2015). However, there are additional factors to keep in mind as you make your decision.
Rental properties rarely show as well as owner-occupied properties and renters sometimes neglect basic upkeep and maintenance.
If your property is subject to SF rent control/eviction limitations – which most properties built before 1979 are – evicting tenants or paying them off to move without eviction in order to sell the home later may be prohibitively expensive, take long periods of time or simply be legally impossible. (You should consult a landlord-tenant attorney.)
SF tenants under the rent control ordinance are now owed significant relocation fees upon eviction – thousands of dollars per tenant. Buyers will want to be compensated for that cost.
If it’s impossible to evict the tenants, then you have to show it while tenant occupied, which can bring up multiple issues pertaining to appearance, showings, open houses, and tenant resentment and lack of cooperation. It also makes it virtually impossible to perform any staging of the home to make the property show in its best possible light.
Many home buyers simply don’t want to buy tenant occupied homes and those willing to deal with the issue usually expect a significant discount on the price.
1. In San Francisco, renters may reduce your home's property value for the following reasons:
2. Managing a rental property and tenants can be a hassle—the calls about broken plumbing on Thanksgiving Day may not be something you wish to deal with. And if you hire a professional property manager, there will be a major additional expense to deduct against the rental income.
3. If you are able to get the tenant to vacate the property prior to the listing period, a vacant house will have to be staged to show at its best. It costs money to stage an empty property and it costs money to keep the house vacant during the listing and sale period.
4. Renting for an extended period may affect the $250,000/$500,000 exclusion from capital gains tax for owner-occupied properties upon sale.
5. If you want to own rental property, you will typically
get a better return on investment from multiple-unit properties than from single family dwellings and condos.
Note: If you do decide you wish you rent out your home, Paragon has a very able rental department which specializes in this exact situation.
Anyone considering renting their home or evicting a tenant is strongly recommended
to consult with a qualified landlord-tenant attorney and the San Francisco Rent Board.
Speaking to an accountant about the financial ramifications is also recommended.
Paragon agents are not qualified to give advice on these issues.