It’s been a heart-wrenching decision, you’ve talked yourself in and out of leaving, and the lack of affordability is breaking you! Now you’re off to greener pastures out of state as the weight of the burden of the California Dream is just too much to bare!
California is experiencing a mass exodus of residents; and states like Arizona, Idaho, Colorado, and Texas have become a sanctuary for those fleeing the high cost of living in California.
Is the California Dream dead?
I don’t know, but it sure has gotten expensive. A huge contributing factor affecting this mass migration is housing: precisely, the cost and lack of supply. In San Diego (like many large cities in California) we have a severe affordable housing shortage, and this coupled with limited growth in household incomes has created a crisis. This isn’t the only factor leading to this exit migration, we have higher state income taxes and an all-around higher cost of living; just compare gasoline prices in San Diego with those in say Phoenix. Thus, residents have gotten fed up and have opted to leave.
Many who are leaving San Diego (and California in general) had been able to purchase their home over the years they’ve lived here and are uncertain as to what they should do with their home: Should they rent it to cash flow it or should they sell it and take their equity to their new home state? The answer is: IT DEPENDS! Every situation is different as individuals have varying goals, aspirations, and timelines.
What Should You Do First?
If you find yourself in this situation and don’t know what to do, you should start with this question: Are you planning to return? Asking this may seem senseless when looking at it at face value, but you should dig deep in your gut and determine what the probability of returning to the Golden State is. If you believe or know in your heart-of-hearts that you will most definitely return, then you should lean toward keeping your California property! Why? Well, what’s happened to many migrants is that they relocate to Texas for instance and they are pleasantly surprised at the lower cost of living and price of acquiring housing (it’s night and day compared to San Diego). If and when they return to California, they experience massive sticker shock and find themselves on the sidelines not being able to afford to purchase a property. And, let’s be honest, though we may experience some down cycles in California, pricing typically trends upward (for many of the reasons stated above). So, if in fact, you do plan to return, you should seriously consider keeping your home.
What if you plan never to return? Y
ouhave a “Take this state and shove it!” mindset?
Should you automatically place a for sale sign on the front lawn? Not before considering some basic math. You should first determine what you may be able to rent the property for and how much profit you have left after debt service (mortgage payments), property taxes, insurance, maintenance, HOA fees (if any), assessments and property management fees (if you choose not to self-manage). Then take that number and annualize it to determine your annual cash flow. Is this figure an amount that you are comfortable with and will it create a positive impact on our lifestyle and your investment/retirement strategy? Now, let’s compare that figure with the amount of equity you have in the property to determine which number makes a more significant impact on your life. Be mindful that when you sell your primary residence, you are exempt from capital gains taxes on up to $250,000 of profit/equity growth for individuals and $500,000 for married couples (with some restrictions) – So you’d essentially be taking capital gains tax-free money to your new state! Definitely consider this.
Every Scenario Is Unique
I recently did this exercise with a client who is moving to the South. He was not planning on returning to California, and we determined that if he rented his property, he’d be cash-flowing the property at approximately $210 per month or $2,520 per year. However, when we analyzed the value of his home, we determined that he’d walk away with a little over $200,000 in equity! This would be a game changer for him, especially in the market area he was moving to. Additionally, it would allow him to pay off some consumer debt and student loans, invest in his child’s college fund, have a nice nest egg, and buy a property nearly all-cash in his new market. The wise decision was to sell in this scenario, but not all situations are this clear cut! So, do the math, try your hardest to take the emotion and attachment out of the equation (very tough to do), and make it strictly a business decision. If you find this too difficult to do, reach out to a friend or family member who is seasoned in real estate. Or reach out to a real estate professional who’s NOT just going to push you to sell, but who will give you a solid strategy based on your goals, lifestyle, and investment strategy….