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.