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Whether to Sell or Rent Your Phoenix Home

May 21, 2008 · 2 comments

The above Dilbert Cartoon has been amusing me constantly since I saw it over a week ago. It also seems like a great lead-in to the question, “Should you rent or sell your Phoenix home today?’ To talk about that question, I’m going to have to make up some numbers. These numbers will be SWAGS or Guesstimates, but not Zestimates. To be honest, and no offense to Zillow, I hope my guesses are better.

Last November I wrote about renting or selling your Phoenix home. Since November I’ve revised my thinking enough that’s it’s well worth touching on again. One thing that’s added to my revisionist thinking is that since the start of 2008 I’ve been taking on about 1 new client under property management each week. That’s ~25 new landlords over the last 5 months where we almost always begin our relationship with the same level setting discussion of whether to rent or sell.

To start the discussion, we first consider whether they can sell today and at least pay off the mortgage on the property, or is it currently worth less than it is mortgaged too? If you cannot pay off the mortgage, and you don’t have enough personal wealth to make up that shortfall, the only way to sell the property would be via a short sale process. This is the #1 reason landlords tell me they need to rent. They cannot afford to sell, are unwilling to ruin their credit in a short sale, and/or feel morally or ethically bound to becoming a landlord, rather than telling the bank to pay for their problem.

I have a couple of clients with equity…but only a couple. For them, the second part of the consideration for whether to sell or rent today, is how long would they be willing to hold the property as a landlord if they choose to rent today? Some tell me, “I’ll rent it for a year, and then sell it next year, when the market bounces back.” If so, I begin a direct, sobering discussion about what I believe the true timeline will actually be.

Lets dive a bit deeper into the timeline consideration

Most of the rental properties I manage are currently valued between $200k-$300k. While market conditions are improving, it’s still fairly obvious to me that home values are still declining. How much lower will they go, and when will the decline end are the two questions I am asked most often. Right now, my answer is, “At least until November 2009 and about 10% lower than today”. If your home is worth $250K today, at the bottom of the market, I predict it will be worth $225K, and that bottom will be no sooner than November, 2009. As the owner of 9 rental homes, my personal residence, and a vacation home in Arizona…that’s painful to write.

Ok, another 10% in 18 months – that’s not pleasant, but then we’ll start to see some increases, right? Sure. Historically, Phoenix housing prices rise by 6% annually. In November, 2010 your $250K home will be worth $238.5K. In November, 2011 your $250K home will be worth $253K. Over 3 years from now, it will be worth essentially the same as it is today. That’s a long time to wait, to be at the same point you are today.

But you really won’t be at the same point you are today. To rent the home, you’ll have to continue to pay your mortgage, continue to pay for my property management fees (I’m cheap, but I’m not free), continue to pay property taxes and insurance, and continue to pay for any repairs/damages to the property. For most of my clients, they are in a negative cash flow situation of at least $5,000/year…and some of my clients are far worse off.

So 3 years from now, the break even point to today isn’t really $250K, it’s really $265K. That means the true break even point from today will be 4 years from now, if the losses on the property are kept to $5,000/year.

Like I said above, I’m creating a timeline based on two fundamental guesses: There is still a 10% price decline and prices will start to go up from that decline in November of 2009.

Getting back to the question at hand

Based on this, should you rent or sell today? As Steve Berg commented on my post from November, if you have a 10 year horizon, renting now could make a lot of sense. The pace of population growth in Phoenix has slowed, but it is still growing. A growing population will always create demand, which will eventually offset the current over-supply problem, resulting in prices in Phoenix rising at a higher rate than the national average. Historically, real estate investors are some of the world’s wealthiest people. If you can afford to hold, although you didn’t get into real estate by choice, it may not be a bad thing.

Personally, I’m still bullish on the Phoenix real estate as an investment. I currently see buying opportunities I honestly wish I were better equipped to act upon. Most of the best opportunities are in the far outlying areas of Phoenix, beyond the scope of my property management business, but good deals can be found in almost every part of the city, they just aren’t as frequent.

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Arizona Mortgage Guru » Changes to Declining Markets Policy
June 4, 2008 at 8:42 am

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1 Kris Berg May 22, 2008 at 7:31 am

Not the point of your post (exactly), but thank you for the Dilbert cartoon. It made my week. :)

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