Choosing the best type of real estate investment will depend on your individual circumstances, goals, market area, and preferred level of involvement.
As an investor, there are a few types of real estate properties you should be familiar with: Residential, Commercial, and Raw Land Investing/New Construction. Each comes with unique advantages and disadvantages which require thorough analysis.
Residential Real Estate
This category includes both new construction and resale homes. The most common subjects are single-family homes, but the scope may also include condominiums, townhouses, multiplex units, and vacation homes.
In general, the best investment property for beginners is a single-family dwelling or a duplex which tend to attract long-term renters. According to Investopedia.com, the main things to consider when searching for the right residential income property are:
The neighborhood will determine the types of tenants you attract and your vacancy rate. If you buy near a university, for example, chances are that students will dominate your pool of potential tenants and you will struggle to fill vacancies every summer.
If you’re dealing with family-sized homes, consider the quality of the local schools. According to a recent survey by the National Association of Realtors, 25% of homebuyers listed school quality and 20% listed proximity to schools as deciding factors in their home purchases. Although you will be mostly concerned about the monthly cash flow, the overall value of your rental property comes into play when you eventually sell it. Homes in good school districts sell more quickly and command higher selling prices than those in lower-quality ones. If no good schools are nearby, the value of your investment may be affected.
Check the rates for vandalism, serious crimes, and petty crimes, and note if local criminal activity is moving up or down. You might also want to ask about the frequency of police presence in your target neighborhood.
Locations with growing employment opportunities attract more tenants. Click here for a snapshot of job and wage data specific to the San Francisco Bay Area.
The presence of parks, restaurants, gyms, movie theaters, public transportation, open spaces, bike paths, and other perks will help attract renters.
The municipal planning department will have information on upcoming development or one that’s already been zoned into the area. If a lot of construction is going on, it’s probably a good growth area. However, new housing development could also hurt the price of surrounding properties by increasing supply (see: Regional Transportation Plan and Sustainable Communities Strategy for the San Francisco Bay area 2013-2040).
If a neighborhood has an unusually high number of listings, it can either signal a seasonal cycle or a neighborhood in decline.
Rental income will be your bread-and-butter, so you need to know what the average rent in the area is. Zillow offers a searchable database for estimated median market rate rents by housing type across a given region.
Insurance is another expense you will have to subtract from your returns, so you need to know just how much it’s going to cost. If an area is prone to earthquakes, fires, or flooding, coverage costs can erode your rental income.
Commercial Real Estate
Commercial real estate is property leased for business and retail purposes. Multifamily apartment buildings are also considered commercial, even though they are used for residences. Commercial properties are generally grouped into the following types:
Raw Land Investing & New Construction
Raw land refers to any vacant land available for purchase. It is most attractive in markets with high projected growth. New construction is not much different, with the exception that properties have recently been built on the land.
Where To Find Real Estate Investment Properties
Multiple Listing Service (MLS) & For Sale By Owner (FSBOs)
Through more than 800 MLS networks, brokers share information on properties they have listed and invite other brokers to cooperate in their sale in exchange for compensation if they produce the buyer. Sellers benefit by increased exposure to their properties. Buyers benefit because they can obtain information about all MLS-listed properties while working with only one broker. In order to access the MLS, you need to work with a real estate agent like Julie who can help you find and navigate the results.
If you’re looking for FSBOs, you could drive through your target area looking for signs to find these properties—but most investors find it more beneficial to work with a real estate agent. Real estate agents are often aware of FSBO properties in a given area and will pass that information along to their clients.
Off-market properties can represent an opportunity to get ahead of the competition. Though they are not listed on the MLS, off-market properties are not impossible to find. When it comes to looking for them, there are a few resources investors should check first. These include public records, real estate auctions, wholesalers, networking events, and contractors.
Julie and her team of experts are ready to help you achieve your investment goals, and we look forward to helping you with any real estate investment questions you may have.
Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.
Silicon Valley is filled with a range of exciting communities that appeal to homebuyers from all over the world. So which one should you consider buying your home in?
Narrowing the list of communities in which you would like to make your home is a process of elimination. The first factor to consider? Affordability. Click here for a guide to determine how much house you can afford.
Now that you have that number in hand, find the communities that make this first cut. The fastest way to do this is to work closely with a real estate agent like Julie, who has access to hundreds of properties through the MLS, as well as in-depth knowledge of the pricing in respect to each community. By giving your agent the price range you can afford, you may be able to immediately identify the communities where your budget will best be applied.
Once your agent provides you with a list of communities that match your price range, it’s time to narrow your choices according to your priorities, values, and overall lifestyle. Current needs and future expectations for your family all come into play at this point. To effectively make these decisions, click here (link to First-Time Homebuyers: Finding The Perfect Neighborhood For Your First Home).
Let’s say you end up with a list of five communities that meet your criteria. What then?
Research further to determine which of these areas are likely to experience the greatest appreciation in value. Again, working alongside Julie or another experienced agent will provide you with a wealth of information in terms of real estate appreciation. Click here for pointers.
Any experienced agent will urge you to keep an eye on growing trends which could turn a second-tier city into a first-tier city. High prices in the latter category are forcing many homebuyers and investors to consider second-tier cities in search for better value, as reported by Forbes.
This is especially the case for millennials, who, according to the Wall Street Journal, are fleeing first-tier cities and heading to the suburbs in high-density areas like the Bay Area in search of more affordable housing.
Here’s a suggested chart to help your search:
|Affordable||Good Schools||Safety||Convenient||Amenities||Promising Development Plans||Appreciation Expectations|
Once you’ve narrowed your list further, it’s time for a second, third, even fourth date with your final candidates. Some people go to the length of renting a house (short-term) in their chosen area to get a deeper feel for the community. Your agent will be able to assist you in weighing all pros and cons, allowing you to finally determine where your next home should be.
DOWNSIZERS: TRADE YOUR SPACE FOR BETTER LIVING
In a previous article (Downsizers: How And Why You Should Think About Downsizing), we talked about the subjective benefits of downsizing.
The advantages are many, and include the freedom and serenity afforded by an uncluttered life, the opportunity to create deeper meaning through simplification, and the time gained by stripping away the nonessentials to focus on the things that matter.
Plus, the many health benefits a less encumbered and more connected way of life offers us, and the chance to finally pay attention and fulfill the personal dreams we’ve had to postpone while raising a family, provide an immeasurable degree of quality of life that could not be fully enjoyed before.
But downsizing has many financial benefits, too—perhaps none richer and more rewarding than to finally cash out on the enormous appreciation in value experienced by the Bay Area housing market for just the past ten years. With annual percentage gains in the double digits, it has been a fabulous decade for homeowners.
When Is The Right Time To Downsize?
“Is now the right time to make a move?” clients are asking us with greater frequency.
Savvy and successful investors question this every day and share a common secret: they know when to cash out.
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
– Warren Buffet, CEO of Berkshire Hathaway and fourth wealthiest person in the world
While we are not suggesting a dip in home prices is in the near horizon, if you are approaching retirement or are already an empty-nester, we believe the moment is ripe to consider a smart move. Appreciation in many of communities of the Bay Area is at record highs. Julie and her team can run a comparable market analysis on properties around your home and let you know what kind of return you can expect if you listed your home on the market.
How Can Downsizing Help You Financially?
Downsizing will not only allow you to reap significant gains in home equity, but will free up cash thanks to lower mortgage payments, property taxes, and maintenance and insurance costs. With your treasure chest thus filled, the possibilities are endless.
Some homeowners have turned the tables on downsizing by utilizing the extraordinary profits made possible by rising Bay Area home prices. In turn, they can purchase larger and more luxurious homes in more inexpensive areas out of state, or afford a grander lifestyle—on a reduced scale—in their own community or in more affordable neighborhoods nearby.
Does Downsizing Mean You Should Give Up Homeownership?
Just because you’re downsizing doesn’t mean you have to surrender homeownership forever. Many downsizing sellers have reinvested their proceeds into other homes. Some have downsized to purchase a second home overseas, or back home, as in the case of immigrants who long to renew their connection with their places of birth and with the family members and friends who stayed behind. Helping children with a down payment for their own home has been another factor motivating families to downsize.
In previous cycles, savvy investors have also cashed out near the peak, then downsized (or moved temporarily into a rental) to wait for a price correction. They entered the housing market a second time once certain a new upswing was underway.
Can We Help?
Whatever your circumstances, investment strategies, or long-term goals, let our experienced team help you capture the many upsides of downsizing and to guide your next move toward a richer and brighter future.
For more information on how we can help with your downsizing needs, please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.
Much like investing in a particular stock, or buying or starting a business, investing in real estate requires a comprehensive due-diligence process to not only identify the best opportunities for value appreciation, but also understand the inherent risk factors.
The main factors which drive real estate values are:
Most relevant to the housing market are interest rates which establish the cost of borrowing money. When interest rates rise, homes become less affordable pushing prices lower.
Interest rates are set by the US Federal Reserve in response to market forces and in fulfillment of its statutory objectives established by Congress: maximum employment, stable prices, and moderate long-term interest rates.
For a closer look at short-term trends in interest rates, click here.
Many first-time homebuyers believe the physical characteristics of a house will lead to increased property value, says Robert Stammers, director of investor engagement at CFA Institute. But in reality, a property’s physical structure tends to depreciate over time, while the land it sits on typically appreciates in value. Although this distinction may seem trivial, understanding how prospective land values influence property returns lets investors make better choices.
Land appreciates because it’s in limited supply. Consequently, as the population increases, so does the demand for land, driving its price up over time.
If you have the option of buying a larger, nicer house on a smaller piece of land, or a smaller, less luxurious building on a larger piece of land for the same amount of money, go for the latter. This will bring you more real estate appreciation in the long run.
Supply & Demand
Like any product or service, home prices are subject to the law of supply and demand.
For the past 10 years, California new home construction has lagged far behind the growth of the state’s population. Averaging less than 80,000 new homes annually, it is well below the projected housing needs of 180,000 per year. Through 2025, one of the highest percentages of household growth is expected to occur here in the Bay Area (22%).
According to the U.S. Census Bureau’s 2017 population growth estimates, the 10 fastest-growing cities and towns in the Bay Area between 2016 and 2017 were:
An August 2017 report by the San Francisco Business Times shows that the 10 Bay Area cities with the fastest housing appreciation over the past five years aren’t traditionally the most sought-after communities and have seen housing prices grow by more than 15% over the time period. Cities like Richmond, Pittsburg, and Antioch have seen some of the highest increases regionally, yet still have median home prices under $500,000.
Trulia Chief Economist Ralph McLaughlin said the recent housing appreciation in these communities makes sense when considering some of these areas are still shaking off the aftershocks of the Great Recession.
“The big picture here is that the more affordable areas are the ones that have seen the most price appreciation,” McLaughlin said. “Those areas were the ones that were hit the hardest by the housing crash, and working-class homeowners were the ones most disproportionately affected by the housing foreclosure crisis.”
A vast majority of the cities with the greatest housing appreciation are in the East Bay, but two of the markets that have led the charge are working-class enclaves adjacent to wealthy communities on the Peninsula. East Palo Alto and North Fair Oaks (next to Redwood City) are adjacent to cities like Palo Alto, Menlo Park, and Atherton, where median home values are well over $1 million. Both have seen home value appreciation in excess of 18 percent over the past five years but have demographics and histories that more closely mirror other high-appreciation cities rather than their neighboring communities.
Determining which areas are likely to have the greatest appreciation in the future requires an ongoing analysis that contrasts annual building permits (supply) with household growth projections (demand).
Future Development Plans
While supply and demand are key forces driving real estate prices, future government and commercial development plans can also have a significant impact.
Buying a house in a not very lively suburb which is scheduled to undergo major infrastructural and commercial developments (connection to a city hub, new schools, hospitals, banks, restaurants, etc.) in the next 5-10 years, will likely experience greater appreciation in value (See: Regional Transportation Plan and Sustainable Communities Strategy for the San Francisco Bay area 2013-2040)
A close eye should also be kept on initiatives by major Bay Area corporations to alleviate housing shortages, such as Google’s announced plans to invest $1 billion dollars in land and money to construct housing in the Bay Area over the next decade.
Building Restrictions & Legislation
With the exception of one irregularly enforced state law, land use planning in California is a local process—and one that affords opponents of change ample opportunity to stall, stymie, or scale down, report Matt Levin and Ben Christopher for Calmatters.org. The toolkit of local obstruction includes zoning restrictions, lengthy project design reviews, the California Environmental Quality Act, parking and other amenity requirements, and multi-hurdled approval processes.
Areas with more restrictive development regulations and/or well-organized opposition to future housing development will continue experiencing supply shortages and appreciation in real estate values.
However, with pressure mounting on the California Legislature to alleviate the state’s affordable housing shortage, real estate investors must keep a close watch on legislation initiatives which would increase supply and keep a lid on future price appreciation.
Proposition 13, the landmark 1978 ballot initiative that caps how much local governments collect from property taxes, dilutes a city’s incentive to build new housing. Because property taxes are capped, local governments have become increasingly reliant on other revenue sources. Vacant land, for example, is much more valuable to the city’s coffers if a big box retailer gets built on it, as opposed to a multifamily apartment building.
This could change.
In August 2018, a coalition of social justice organizations, affordable housing advocates, and teachers unions, announced they had submitted signatures for a measure that would change a key provision in Proposition 13 that would significantly increase property taxes on California businesses and generate tens of billions in revenue for local and state governments.
The initiative is likely to qualify for the 2020 ballot.
Now that you’ve determined how much house you can afford (link to “Figuring Out How Much House You Can Afford”), it’s time to shop for a mortgage loan and get prequalified. Prequalification is a non binding promise from a lender about how much money you may borrow. Prequalification can lead to preapproval, which is a binding contract between you and a lender.
However, before you begin, it is essential you familiarize yourself with the marketplace and its terminology.
“What always astounds us,” says Hugh Frater, CEO of Fannie Mae, “is that more than 90% of homebuyer education is accessed AFTER the buyer has an accepted offer. There is inadequate consumer education around what it means to buy a home, and what it means to get a mortgage.”
“Many homebuyers get intimidated by the mortgage process and just go with whatever is easiest—usually what their local bank is offering,” says Greg McBride, chief financial analyst for Bankrate.com. “Smart buyers shop around to uncover the lowest offers.”
Julie and her team will help you shop wisely, arming you with the knowledge to negotiate the best deal possible.
Basic Mortgage Loans
Known as a plain-vanilla mortgage, a conventional fixed rate loan offers an unchanging monthly payment, with 15 and 30 years being the most common terms. With a locked-in rate, you’ll always know what your payment will be. This is the best route for those who prefer constancy and predictability. If you’re planning to stay in your home for at least a decade, a 30-year fixed-rate loan is your best bet. If you can afford higher payments, consider a 15-year fixed-rate loan which features a lower interest rate and could save you thousands over the life of the loan.
ARMs begin with a fixed interest rate for a specified period of time, then the rate is adjusted periodically—usually once a year—based on the cost of borrowing money. A common ARM is the 5/1 loan in which the interest is fixed for the first 5 years and adjusted thereafter. Because ARM interest rates start lower than fixed-rate loans, they are most often chosen by first-time homebuyers to boost their buying power.
Interest-only mortgages allow the borrower to pay only the interest portion of the loan during the first 5 or 10 years. The monthly loan payments are subsequently increased to pay both interest and principal.
Designed for low-to-moderate income borrowers, FHA loans require lower down payments (3.5% and 10%) and lower credit scores than conventional loans. Currently, a credit score of at least 580 will allow you borrow up to 96.5% of the value of a home. A credit score between 500 and 579 will require a 10% down payment.
Finding The Best Mortgage
Once you’ve run your numbers and decided on the type of loan that best suits your needs, it’s time to shop around.
When doing this, leave no stone unturned.
1. Start by comparing current mortgage rates and best deals at Bankrate.com.
3. Call or visit your local credit unions and community banks. Smaller lenders typically have better rates for ARMs and offer better terms and rates to people with variable income streams, like the self-employed.
4. Once you’ve found the best deal, it’s time to gather your information and complete the necessary paperwork. While information requirements vary by lender, refer to this basic checklist.
5. After you’re prequalified, your next step is to get pre-approved. Getting pre-approved is almost like applying for a real loan, but it happens before you select a home. This is an in-depth process, and you’ll need to submit paperwork about your income, assets, employment history, and residency status. Refer to Zillow’s checklist of what’s usually required.
Unless you are an investor, purchasing a home is much more than a financial transaction. It evokes the same exhilarating emotions of when proclaiming “I do” in marriage—after all, it is a committed response to our desire for stability, belonging, and communion.
More than simply a “house,” our home is a refuge from the world. A storehouse for future memories. The cradle and launchpad for our children’s dreams. Our sunny patch in the world in which to sink roots. The cozy, nurturing womb of friendship and camaraderie. A sacred space of arrival. A safe harbor.
Like marriage, the timing for buying a house is when we are ready to entwine our roots in a community and landscape which resonate with our unique lifestyle and innermost needs and values. It is a decision with an expanded horizon.
Charged with such profound human emotions, it is imperative to approach this decision with a clear head, wide-open eyes, and the guidance of a real estate professional familiar with the many pitfalls into which far too many buyers—especially first-timers—usually fall into. You need a trusted ally who will place your interests and desires ahead of the sale.
Based on our vast experience developed over decades in this industry, we have devised a roadmap that has come in handy while helping scores of families acquire their first homes. Below are the essential pieces that must be in place before you are ready to say “I do” to your first home:
Familiarity & Long-Term Commitment
You’ve taken the time to become intimately acquainted with the community, neighborhood, schools, open spaces, amenities, etc. of your chosen location, and are ready to make a long-term commitment. Your time-horizon should be no less than five years. Don’t buy for the life you have today. Reflect on your long-term plans. If you’re not yet certain, consider renting for a while to further your exploration.
Your source of income must be stable and with solid future prospects. Not having steady work for the last two years could potentially impact your eligibility for a mortgage loan.
Financial House In Order
Whatever you do, don’t buy a house simply because:
Choosing a home is one of the most important choices you can make in life. As much as it is part of the American Dream, it can also turn into a nightmare.
HELPING AGING PARENTS DOWNSIZE WHILE BUILDING WEALTH
America is getting older.
By 2040, about one in five Americans—or eighty million people—will be 65 or older, up from about one in eight in 2000. The number of adults age 85 and older (the group most often needing help with basic personal care) will have quadrupled by 2040. And while overall longevity rates are declining, affluent and well-educated individuals are still expected to live past their eighties.
An aging population is expected to strain government budgets because younger people are much more likely than older people to work and pay taxes that fund Social Security, Medicare, Medicaid, and other public-sector services. The latest Social Security Administration projections indicate that, by 2040, there will be 2.1 workers per Social Security beneficiary, down from 3.7 in 1970.
Meanwhile, the cost of long-term care keeps going up and most Americans keep believing—incorrectly—that the government will cover most, or all of it.
“Our population is aging, living longer, and not prepared.”
– David O’Leary, president and CEO of Genworth’s US Life division
Preparing A Place For Your Aging Parents
Caring for our aging loved ones in their later years is becoming a costly challenge.
Nationwide, a private room in a nursing home now costs more than $8,000 per month, or $97,455 per year, according to a report by Genworth Financial. That’s an increase of nearly 50% since 2004. A semi-private room is less expensive, but still carries a hefty price tag: $85,775 per year. As it is, 87% of adults over the age of 65 want to age in place, according to an AARP survey, and nearly three-quarters of those will eventually need some kind of long-term care, reports Genworth.
Given the staggering rise in nursing home costs and the uncertain long-term financial viability of Medicare and Medicaid, a growing number of families are seeking to add a “senior-friendly flat” to their aging relatives’ properties. This can be rented out until the time comes when Mom and Dad are ready to move-in. In the meantime, the rental income is held in escrow to help cover future in-home healthcare costs. Once the seniors move into the smaller flat, the main residence is rented out to outsiders, or used by the younger generation who wish to stay close to their parents and save money on in-home healthcare services (which can run as high as $47,000 per year, for homemaker services, and $49,000 annually for an in-home health aide).
How An ADU Can Help
Adding a “granny flat” or auxiliary dwelling unit (ADU) to an existing property is not only a creative solution to allow seniors to age in place and save money. It also boosts the property’s resale value. According to Remodeling Magazine, real estate professionals in high-tech areas of the West Coast (Silicon Valley, San Francisco, North Bay, etc.) report that most of the homes sold in recent years that included a recently constructed ADU more than recouped the ADU project cost in the resale—well beyond, in most cases.
To help alleviate the housing crisis, the California legislature recently passed a series of bills ( “Homesellers, New ADU Housing Bills Could Add Significant Value To Your Home) aimed at facilitating the addition, or new construction, of auxiliary dwelling units. This easing of restrictions, coupled with the potential for rental income and higher property values gained by the addition of an ADU, are allowing families to build wealth. But more importantly, it gives loved ones the chance to age in place and save money on senior care in the process.
Rental income, higher property resale values, costs savings—what’s not to like?
Can We Help?
For more information on how we can help with your downsizing and life adjustments needs, please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.
Does your next investment property need just a little love, or does it demand a wrecking ball? Well, it all boils down to the numbers.
The first step in planning a rebuild is determining scope, timing, and budget. In addition to providing enough time for the approval and permitting processes (which vary by city), you will need to plan for “hard” and “soft” costs. Hard costs refer to costs like excavation, construction, landscaping, etc., while soft costs refer to design, engineering, permitting, etc.
The following estimates, provided by Peters Design-Build, will give you a general understanding of current architecture and construction costs in the San Francisco Bay Area.
The costs below are based on whole-house rebuilds or new construction, and generally assume 1 kitchen and 1.5 bathrooms per 1000 square feet of living space.
Entry-level custom projects are typically in the range of $600 to $700 per square foot. Entry-level custom projects have good quality but include value-conscious finishes and fixtures. These projects are, in general, structurally straightforward with simple detailing.
Mid-range custom projects typically range between $700 to $800 per square foot. The majority of projects fall into this category. Mid-range custom projects have unique design features and custom details, and the client is able to choose from a broad range of high-quality finishes and fixtures. These projects are generally more structurally complex.
More distinctive projects can range upwards of $800 per square foot. These unique designs are structurally complex and often include large expanses of glass, structural steel, architectural concrete, or other technically advanced systems. These luxury projects often have artisan or boutique finishes, custom details throughout, and the highest quality fixtures.
Soft costs include architectural design, engineering, surveying, permit applications, Title 24 compliance documents, insurance, and elective certifications such as LEED certification.
Architecture, engineering, and other design-related professional services are typically around 15% of the project’s hard cost. Setting aside an additional 5% for permits and other regulatory compliance costs is highly recommended.
While a teardown and complete rebuild may be an easier and more straightforward process, if your house is structurally sound then a well-planned, tightly controlled renovation might make better financial sense.
Cost control is key. Anyone who has ever done an expansive renovation project will tell you that the final cost is always higher than anticipated. In addition, you’ll want to consider adding the right value to the future sales price of your home by keeping these two things in mind when planning a remodel:
Upgrades That Pay Off
According to a cost vs. value analysis conducted in 2019 by remodeling.hw.net, the five home updates with the highest payoffs in the San Francisco Bay Area are:
|Project Type||Job Cost||Resale Value||Cost Recouped|
|Manufactured Stone Veneer||10,890||16,731||153.6%|
|Garage Door Replacement||4,199||5,784||137.8%|
|Minor Kitchen Remodel (Midrange)||29,569||33,341||112.8%|
|Deck Addition (Wood)||19,062||19,477||102.2%|
Click here to generate the complete list.
Changing Buyer Preferences
Millennials are expected to account for about two-thirds of new households, increasing to 21.6 million households last year. Three-quarters want a single-family home.
When asked about home size, an average of 2,475 square feet is preferred. Two-story homes (52%) and open-concept floor plans (78%) were also preferences in research conducted by the National Association of Home Builders. Eighty-one percent said they wanted either three or four bedrooms, and two or two-and-a-half baths.
“Home design is also one of the top motivating factors,” says Mollie Carmichael, a principal in John Burns Consulting. Design emerged as the No. 1 trend for millennials in Burns’ study. When asked to choose a preferred style from photos reflecting a range of popular designs in Burns’ research, millennials selected Modern Traditional as the most preferred style.
When it comes to features, the most desired by millennials is a laundry room, with 55% saying they just wouldn’t buy a new home without one. Exterior lighting came in second, with 88% saying it was essential or desirable. Storage is also important, with linen closets, a walk-in pantry, and garage storage making the top 10 most desired features.
Jill Waage, editorial director for home content at Better Homes & Gardens, says that the next generation of homeowners wants smart, stylish homes that enable them to connect with friends and family.
Outdoor living comes out on the top in BHG’s survey “You and Your Home,” with three out of four of those under 35 saying outdoor space is important for entertaining, and 51% dreaming of having an outdoor sink, cooktop, refrigerator, and grill. In comparison, only 25% of those over age 55 and 37% of those between 35 and 55 desired those features.
DOWNSIZERS: USE YOUR EXISTING HOME TO FINANCE YOUR NEXT MOVE
With some of the highest rental rates in the country, many Bay Area homeowners who are near retirement or are recent empty-nesters are using their existing homes as a creative source of income. This option allows them to downsize and relocate in-state, out-of-state, abroad—or even stay right on their properties.
Opportunity In Disparity
It’s no secret that high local housing costs have been part of a recent exodus from California to places with much lower housing costs. For example, close to 700,000 people left California in 2018. Texas was their first choice, followed by Arizona, Washington, Nevada, and Oregon. No doubt many were lured by the relative affordability of single-family homes in those areas: Texas at $209,000, Arizona at $272,000, Washington at $419,000, Nevada at $303,000, and Oregon at $366,000 (according to data provided by Zillow through January 2020).
With an average cost of $313,000 across these five states, the monthly mortgage payment for a new home would amount to roughly $1,400, if financed at 100% loan-to-value at current interest rates.
Conversely, with rental rates in San Jose, for example, at $3,200 per month for a two-bedroom unit, or San Francisco at $4,520 (according to Rent Jungle), Bay Area homeowners are uniquely positioned to convert their primary home into a rental property to finance a move to a smaller home.
Even if you’re thinking of downsizing but not planning to vacate entirely, you may even consider consolidating your belongings and living arrangements and renting out a bedroom or portion of your home to create supplemental income.
Ease Of Property Management
In the past, homeowners were reluctant to rent out their properties because of the hassles involved in being a landlord. However, a growing number of professional property management companies is now making it possible to outsource the hassle at a very competitive price, usually averaging 8% of the monthly rent. If you’re considering renting out your property, Julie and our team can help you find the property management team that best suits the intentions for your property.
Recent rental legislation in California allows landlords to raise rents by 5% annually. This is in addition to the regional cost-of-living increase, or a maximum of 10%. Based on current inflation rates, Bay Area landlords could raise rents by an estimated 7.7% per year, which could translate to a healthy, regular profit that downsizers can put towards a smaller, less expensive home.
Accessory Dwelling Units
Another option being considered by a growing number of aging couples is building an accessory dwelling unit (ADU) on their existing property. When ready, they can move into this ADU while concurrently renting out their primary residence to outsiders or younger family members. Recent housing legislation now gives homeowners greater flexibility to consider this option. Click here (“Homesellers, New ADU Housing Bills Could Add Value To Your Home”) for more information.
Can We Help?
Of course, the viability of pursuing a strategy like this will obviously depend on your current monthly mortgage payment, property insurance, and ongoing maintenance costs, as well as the carrying costs of the new house. As with any key financial decision, considering turning your primary home into an income property to finance your next move should be done under professional counsel from your financial, tax, and real estate advisors.
For more information on how we can help with your downsizing needs, please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.