Thursday, September 10, 2009

Charlottesville Area Vacancy Rates in Properties For Sale, and Accidental Landlords

 If you can't sell your house, should you rent it out? 

The number of vacant properties is holding pretty steady at give or take 1/3 of all available properties for sale.  Realtor Jim Duncan, who blogs at REALCentralVA, keeps track of the data and periodically updates the distribution.  His graph and chart appear, below.

How many of these vacancies have been converted to rentals?  Last year, this blog featured some of the "Accidental Landlords" (links still on sidebar; scroll down).  But this year, it seemed (anecdotally, via Craigslist) there were many more: in the City, it seemed the rentals were clustered in the neighborhoods of Belmont, Fifeville, and 10th & Page; while in Albemarle County, they were "everywhere."

Sellers become "accidental landlords" for basically two reasons:

1.  They can't lower their price: they bought during the bubble and/or have taken out a HELOC and now still hoping to make back the same $.

OR

2.  Seller believes, evidence to the contrary, that the market will "turn" and they will be able to make the profit that others made during the bubble years. 

How many vacant properties are now rentals?  Data is hard to come by and typically anecdotal. But at least one local Realtor, Julie Gee, recently featured in a Hook cover story, has built a business around property management of unsold houses. 

But the pitfalls of renting when the intent is to sell are numerous.  A recent WSJ article highlighted this nationwide trend, and the issues surrounding it.  Experts generally advise against becoming a landlord in order to recoup lost value.

Consider the example of a house from the WSJ article:

[A homeowner] rented out his 4,700-square-foot house after failing to sell his home, which he listed for $790,000. Now a tenant pays $2,995 per month—a shortfall of $2,000 from the $4,995 mortgage payment. The homeowner "feels that two years from now, the market will improve to the point where he can recapture that." 

Really?  In two years, that's $48,000 down the proverbial drain.  As one commenter pointed out, "Factor in hassle, maintenance, tied up equity, leasing agents etc and the overall cost will be upwards of 60k, IF and only if, they sell it for their current asking price in 2 years. If they are able, the best thing to do is cut their asking price by 50k and get rid of it."

Another commenter opined, "Unless you’re doing this professionally, the only gain you have a chance of making is the appreciation in the property minus selling commission, takes 3 years ownership just to cover that 6% alone. Including adjustments for money paid to principle, most people will barely cover cash flow. "

Then there's the Capital Gains issue: "Renting for an extended period can eliminate or diminish the value of capital-gains tax exclusions. Federal tax law requires you to live in the house at least two years of the previous five in order to qualify for the full capital-gains tax exclusion upon sale of $250,000 for a single person or $500,000 for a couple, with some exceptions."

The exceptions to this example? A home whose mortgage has been paid off, or a home in an area where prices are not still falling.

See the WSJ article here.

Via REALCentralVA, the following vacancy rate visuals:

Click on image for larger pic in new window.

And a breakdown of the numbers:
Click on image for larger pic in new window.

No comments: