Depreciation, inflation among important considerations
by Bernice Ross, Inman News DEAR BERNICE: We recently bought a property in the area of Yakima, Wash., with a lot of equity in it. After the renovation, we still have an equity position of approximately $35,000.
Initially, the plan was to renovate and flip the property, but we’re now having second thoughts about selling and are thinking about renting the property out instead. We are retired and any additional monthly income would be very good, but it would also tie up the cash that we paid to buy the property.
With certificate of deposit rates down and the fear of the dollar falling due to inflation, is it wise to just rent out the property? Property values seem to be appreciating. –Joyce T.
DEAR JOYCE: While no one has a crystal ball, there are several indicators to watch that can help you predict what will happen in your market and whether you should keep this house.
1. Median prices Median prices are no longer a good indicator of what is happening in the market. As more jumbo loans become available, more higher-priced properties will sell. The result will be that the median prices will appear to increase when in fact actual values could still be declining. In your area, however, median prices have held steady since 2007 despite the U.S. recession.
The National Association of Realtors’ latest metro-area price report found that the median price of single-family resale homes in the Yakima metro area rose 2.7 percent in the third quarter compared to the same quarter last year, to $158,400. That compares to a median price of $136,500 in 2006, $156,500 in 2007 and $153,300 in 2008.
2. Total homes sold An increased number of transactions usually indicate an improving market. In your area there tends to be a pattern of increased summer sales and fewer sales around the holidays.
3. Percentage of homes sold for loss or gain Check your area for statistics on the share of homes that sold for a loss vs. a gain, which can help you gauge whether it’s advantageous to hold onto your property and rent it, or to sell it.
4. Percentage of homes where values are increasing vs. where values are declining If a large majority of homes are still decreasing in value — do you feel comfortable holding a property that could face continuing declines in value?
5. Price per square footFrom my perspective, this is the most important statistic to watch in gauging home values in a given area.
Should you sell the house or keep it as a rental? In terms of keeping the property, your location seems to have done very well as compared to most other places in the country. I agree with your assessment that the falling dollar will probably result in significant inflation.
The government may have to print more money. When this happens, money flocks to hard assets such as gold and real estate. This, in turn, causes these assets to appreciate. If this happens, an additional reason for holding the property is that you will probably be paying off your mortgage with an inflated dollar.
In terms of selling, there are hundreds of thousands of properties that are bank-owned and have yet to come on the market. This additional inventory could drive values down if it comes on the market all at once. Furthermore, most experts are predicting an interest-rate increase sometime in the next 12 to 24 months.
Unless the economy is much stronger than it is currently, an interest-rate increase means fewer buyers qualify to purchase your property. Fewer buyers could translate into price depreciation. Furthermore, the Bush tax cuts sunset in 2010. Selling now, when the capital gains tax is at a lower rate, may be a good idea.
Before you make a final decision, see your certified public accountant (CPA) or other tax professional. Ask him or her to calculate how much it would cost you to hold the property after taxes as well as the financial ramifications of selling the property. Once you have that data, youll be in the best possible place to make the right decision for you. Good luck!
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of “Real Estate Dough: Your Recipe for Real Estate Success” and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.Copyright 2009 RealEstateCoach.com
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