Rental Market in Irvine

[RandomG]

Regarding the rental market in Irvine, from a future tenant's perspective: in the area where I've been looking in Irvine, there are lots of private single family rentals in different price ranges, the most expensive one being a 5 bedroom 3 car garage with good sized yard and upgrades at $4200, I had no problem finding a good rental for myself and even negotiated the move in date in my favor. Some of the homes I've considered have been on the market since July. So I'm not sure if the rental market is that hot.
One thing I've noticed is that if you go directly to the listing agent, they push everyone else aside and jump on you! (probably to get the full commission, what is it, one month's rent?)
I wonder if they tell that to the owner, it seems to me a little unethical, what if my offer is weaker than the others, but to the listing realtor it makes a big difference. I would assume, to have no conflict of interest, if there is no second agent involved, the listing agent should charge the owner only half of the commission, am I right? And the same goes for buying.
Another thing I've noticed is how insane the Irvine Company apartment rentals are in terms of rates. In my area of interest, a 2000 sf 4 bedroom house with a driveway and nice backyard is the same rent as a tiny Irvine Company 3 bedroom 1400 sf townhouse with carpet everywhere, I mean, who rents these things, is it just for the small deposit? I understand maybe if you want to live in the middle of the action at The Village or The Park at Spectrum, and have no kids, but even there, I see lots of families with many kids, how do they squeeze in a two bedroom is beyond me.
So to all the private landlords in Irvine, a big thank you, keep buying them, so I can keep renting! I could not afford to buy the type of house I can afford to rent! A $4000 rental costs $1.3 million!!

 

[panda]

There is no such thing as a dumb question. You gain knowledge by asking lots of questions. Yes, you will avoid the capital gains tax if you move back to investment property and later on decide to sell it, but unfortunately you will still be liable for the depreciate recapture tax for the 10 years of appreciation. If your gross household income is consistently greater than $150k, you will not be able to take your rental losses to off set your income. If you qualify as a real estate professional, there are no limits to the rental losses you can claim against your income which is one of the greatest tax loop holes that I know that favors the real estate professionals.  This starts to phase out from $100,000 and completely goes away at $150k for a non-real estate professional, and maximum rental you can deduct caps out at $25k. The depreciation that you take is sort of like a paper loss, that you will need to repay the IRS once you decide to sell your investment property.

Simple answer to your question. Yes, you will avoid the capital gains tax by moving back to rental property and living there for 2 years, however you will not be able to avoid the depreciation recapture tax when you sell. 1031 Exchange will allow you to defer both the capital gains and depreciate recapture tax. 

Almost everybody knows about the tax free gain when you sell.

Trojan, you are correct that you can be exempt from capital gains up to $250k/$500k by renting out your previous primary for up to 3 years. However, even if you move back to your back to rental property, you will not be able to escape the depreciation recapture tax, but only escape the capital gains tax. Please double check on this information.

I made an early rookie investor mistake of purchasing a $546k rental property ten years ago that give me a cash on cash return which is almost as bad as owning a Woodbury Condo Investment property in Irvine. The first tenants stayed 7 years which took me 4 months to lease and second tenants stayed 3 years so far on a 4 year lease contract which took me 3 month to lease. Any vacancy and pipe breaking in the home would be in red cash flow category. I have personally named this investment property "THE BEAST"

My depreciation on this home is around $160k with rough tax liability of $40k if I were to sell it. If what you are saying is true that I can escape the depreciation recapture tax, I would move back to this investment property in a heartbeat before selling. I plan to 1031 exchange THE BEAST for 3 newer and lower priced investment SFRs north of Johns Creek next year or 2018 to provide me with better cash flow and capital appreciation.

 
"unless you move back into the home and re-establish it as your primary residence down the line"
"Remember that you can rent your current home for up to 3 years and still be exempt from paying tax on the gain for up to $250k/$500k...that's tax avoidance, not deferral like you get with a 1031 exchange.  You will have to pay back the depreciation recapture tax (unless you move back into the home and re-establish it as your primary residence down the line).  Then what you can do is sell your primary and use the gains to buy 2 properties as rentals without the time constraints of a 1031 exchange.  It's a way to diversify and benefit from the favorable gain tax exemption." 

Hello....since you seem to run pretty conservative numbers, let me run a scenario by you and let me know what your model spits out.

Irvine Property: Built in 2000; 3 bedroom / 3 bath attached condo (1650 sqft)

Rent: I'm presuming $3K/month
Mortgage (including property taxes): $2400 (int rate of 3.4%)
HOA: $224
Insurance: $60/month

Just out of curiosity, what are your reasons for thinking my calculations are conservative? 


Just so I can run a clean calculation, what will be purchase price, % down payment, exact taxes, any initial rehab costs?

Originally purchase price was $525 w/25% down.  Property taxes are $6581 per year.  No rehab costs. It is the home I'll be moving from and intend on renting out (I've done my own runs and am not necessarily looking at cash flow, rather fact that the property should be relatively cash-flow neutral, but I'd get the benefit of someone else paying the property down and longer term it would be a nice revenue generator as part of a portfolio of properties I'd like to grow for when I'm retired...which I'm a long ways from) but figured why not let the TI'ers analyze this for me.  25% downpayment (at the time).  House is probably worth between $650-$700 today.  I would manage the property myself and my dad is an agent so have free services from his side of the equation. 

House has new appliances, older carpet, and new floors (well 2-3 years new since it was a few years ago that we moved).  I do presume at some point the original AC will go out and it will need carpet probably after the next tenant. 

Replace the carpet with laminate when it comes time.  Your AC should be good for 15-20 years if you service it once a year (many occasional relay or what not going out every 5-6 years).  It's not like we live in Texas or Florida where it'd be on 24/7 for half a year.

Wouldn't have thought of laminate. Is that because it holds up so well (water won't be a huge impact) vs. the dirt that is hard to get off of carpet?  I'm going to guess given the AC is already 16 years old, that it craps up sometime. If it goes another 15 to 20, sweet.  I am hoping that somehow I luck into better tenants in Irvine (vs. other areas where I have had rentals before; some tenants are just brutal as to what they can do to a property...it is the one aspect that makes me double take vs. just freaking selling the property and taking the tax free return today). 

By the way, in my analysis, I do factor in the fact that from a true ROE perspective, I am getting an embedded benefit in the sense that the portion that goes to principal reduction on my mortgage is obviously a direct return to myself (not a liquid return in its current state, but if rent continues to appreciate, cash flow becomes better with time and one day you have a property free and clear, which at that point in my life, where I'm looking at fixed income, that is a good problem to have (even if I'm not fully taking advantage of "leverage"). 

Yeah, laminate lasts a long time and can withstand just about anything where carpet gets dirty and worn fairly quickly.  Laminate floors is also considered an upgrade to tenants as well because they are easier to keep clean. 

Remember that you can rent your current home for up to 3 years and still be exempt from paying tax on the gain for up to $250k/$500k...that's tax avoidance, not deferral like you get with a 1031 exchange.  You will have to pay back the depreciation recapture tax (unless you move back into the home and re-establish it as your primary residence down the line).  Then what you can do is sell your primary and use the gains to buy 2 properties as rentals without the time constraints of a 1031 exchange.  It's a way to diversify and benefit from the favorable gain tax exemption. 

Most people do, not everyone does though.  Many don't know that you can rent your house for up to 3 years and sell it with the gain exemption (the 2 out of the last 5 year rule). 

Dumb question, but in the scenario I rent out the home for 10 years and I move back in the home after ten years.  As long as I live there for 2 years (rule is 2 out of the last 5) then I gain the exemption?

 

[RandomG]

Examples of homes that have been on the market since June/July:http://www.realtor.com/realestateandhomes-detail/37-Festivo_Irvine_CA_92606_M10700-46618http://www.realtor.com/realestateandhomes-detail/18-Santa-Eulalia_Irvine_CA_92606_M10562-20953http://www.realtor.com/realestateandhomes-detail/35-Calavera_Irvine_CA_92606_M10539-10465

I know they are around $4000, but is that considered high end in Irvine? They seem pretty nice, hard to believe they would stay on the market for almost 4 months? Does it mean one can  come and negotiate big time, or is it that they don't move, because the landlords are set on those prices?

 

[panda]

It is one thing if the landlord is filthy rich and owns these properties free and clear. Imagine if you have 70% debt to value ratio on these properties. 4 month of vacancy = $16,000 of lost revenue and counting. Wouldn't one be better off putting that capital in a 10 year CD that pays a 4% APY?

RandomG, Can you please give me some stats on the purchase price of Festivo, Santa-Eulaia, and Calavera?

Santa-Eulaia
Purchase Price (2015) for $1,150,000 + Asking Rent $4250 + 4 month Vacancy = FAIL

Examples of homes that have been on the market since June/July:http://www.realtor.com/realestateandhomes-detail/37-Festivo_Irvine_CA_92606_M10700-46618http://www.realtor.com/realestateandhomes-detail/18-Santa-Eulalia_Irvine_CA_92606_M10562-20953http://www.realtor.com/realestateandhomes-detail/35-Calavera_Irvine_CA_92606_M10539-10465

I know they are around $4000, but is that considered high end in Irvine? They seem pretty nice, hard to believe they would stay on the market for almost 4 months? Does it mean one can  come and negotiate big time, or is it that they don't move, because the landlords are set on those prices?

 

[RandomG]

According to Redfin:
for 35 Calavera:https://www.redfin.com/CA/Irvine/35-Calavera-92606/home/4628388
18 Santa Eulalia:https://www.redfin.com/CA/Irvine/18-Santa-Eulalia-92606/home/4628131
37 Festivo seems to have had the same owner since '96.

When you say "fail", do you mean it will never rent for $4250?

 

[RandomG]

Somehow I find it appealing that I can rent a million dollar house in Irvine for $3900 a month. If I were to buy, with a $200k down payment (that I would not be able to save in a hundred years, because I like to go shopping and eat organic as much as I can and enjoy life a little, and pay for ridiculous after school activities for the kids!!), my monthly payment would be around $5000 for a similar house in Westpark (where taxes are lower, right, no MR). Now that would not be that comfortable for my budget anymore; I could swing it, but it would be tight and frustrating. Yes, I know, I would have something to leave the kids later!! It still doesn't seem worth it to me, life is short.
Interesting, where I come from, Miami area, a nice upgraded million $ house in an area with good schools would rent for about $6k. Probably because of higher property tax and insurance.

 

[panda]

No, what i mean is that Santa-Eulaia is a terrible investment property to buy and hold, unless it is not an investment and a lifestyle for one to enjoy.

This home has an adjusted gross yield (Gross CAP) of 4.4% which in my book is a grade of an "F". Think of Santa Eulaia as a retail store that owner had bought in 2015 that is bleeding red in terms of cash flow, while not generating any revenue for four months. Even when the retail store starts to generate revenue, it is not enough to cover its operating costs. Just a bad business to be in.

According to Redfin:
for 35 Calavera:https://www.redfin.com/CA/Irvine/35-Calavera-92606/home/4628388
18 Santa Eulalia:https://www.redfin.com/CA/Irvine/18-Santa-Eulalia-92606/home/4628131
37 Festivo seems to have had the same owner since '96.

When you say "fail", do you mean it will never rent for $4250?

 

[usctrojancpa]

Regarding the rental market in Irvine, from a future tenant's perspective: in the area where I've been looking in Irvine, there are lots of private single family rentals in different price ranges, the most expensive one being a 5 bedroom 3 car garage with good sized yard and upgrades at $4200, I had no problem finding a good rental for myself and even negotiated the move in date in my favor. Some of the homes I've considered have been on the market since July. So I'm not sure if the rental market is that hot.
One thing I've noticed is that if you go directly to the listing agent, they push everyone else aside and jump on you! (probably to get the full commission, what is it, one month's rent?)
I wonder if they tell that to the owner, it seems to me a little unethical, what if my offer is weaker than the others, but to the listing realtor it makes a big difference. I would assume, to have no conflict of interest, if there is no second agent involved, the listing agent should charge the owner only half of the commission, am I right? And the same goes for buying.
Another thing I've noticed is how insane the Irvine Company apartment rentals are in terms of rates. In my area of interest, a 2000 sf 4 bedroom house with a driveway and nice backyard is the same rent as a tiny Irvine Company 3 bedroom 1400 sf townhouse with carpet everywhere, I mean, who rents these things, is it just for the small deposit? I understand maybe if you want to live in the middle of the action at The Village or The Park at Spectrum, and have no kids, but even there, I see lots of families with many kids, how do they squeeze in a two bedroom is beyond me.
So to all the private landlords in Irvine, a big thank you, keep buying them, so I can keep renting! I could not afford to buy the type of house I can afford to rent! A $4000 rental costs $1.3 million!!

Depends on the commission agreement that the listing agent has with the landlord.  If I represent both sides, the landlord pays a much reduced tenant agent commission to me.  Typical commission for rentals is 5% of the first year's rent amount split between the listing and tenant agent so it works out to be a little more than 1/2 of the first month's rent. 

I've mentioned this before, but the sweet spot for Irvine/Tustin Ranch rentals are $2,500 to $3,500/mo....those rent out fast and with multiple applications (I've seen this first hand with my rental listings).  Once you start getting over $4,000/mo there aren't as many renters as those homes may sit on the market longer and the landlord may be more willing to negotiate price/terms.

 

[panda]

RandomG,
If was in your shoes living in Irvine, I would definitely rent vs buying as the current environment is cheaper to rent than to own in Irvine. If I were you that I would put in offers for $3000/month rent for Calavera, Santa Eulalia, and Festivo. If the landlord laughs at you and tells you to go take a hike, you can argue that the home has been vacant for 4 months which equals $2833.34 / month factoring in 4 month vacancy and I am willing to offer you more at $3000.00 and stop the bleeding. That is exactly what i would do if lived in Irvine, rent a million dollar home and negotiate a deal with a desperate landlord for $3000/month rent.

 

[RandomG]

Got you, Panda. Very educational.
Interestingly enough, both Santa Eulalia and Calavera rentals are listed with the same realtor.Maybe she is the bad juju?!

 

[RandomG]

Are you serious Panda about the $3000 offer for Santa Eulalia?! I may just do that!!
But the whole premise of this thread is how the Irvine rental market is so hot, I thought there would be multiple offers on all these properties in like a day!!
Well, the landlords should also keep in mind that I am such a nice tenant!! I pass all the interviews with flying colors! jk!

 

[RandomG]

Regarding commission, I understand, so on a $4000 rental, 5% is $2400 commission, which is $1200 per agent, so if there is only one agent involved, is the commission more like 3%? That would be $1400. Still a $200 incentive for that dual agent to make all those other applications disappear.
I'm just trying to understand, because I think that especially when purchasing, not involving a second agent makes such a big difference.
What I don't understand is, and no offense to anyone in the field, why do buyers still use a buyer's agent? With today's technology, my middle schooler can figure out how to get in touch with the seller's agent, or how to locate homes for sale, do comps etc. Besides, doesn't the seller's agent have first-hand info on a house, that you wouldn't want to get diluted by passing through a second agent?

 

[usctrojancpa]

Regarding commission, I understand, so on a $4000 rental, 5% is $2400 commission, which is $1200 per agent, so if there is only one agent involved, is the commission more like 3%? That would be $1400. Still a $200 incentive for that dual agent to make all those other applications disappear.
I'm just trying to understand, because I think that especially when purchasing, not involving a second agent makes such a big difference.
What I don't understand is, and no offense to anyone in the field, why do buyers still use a buyer's agent? With today's technology, my middle schooler can figure out how to get in touch with the seller's agent, or how to locate homes for sale, do comps etc. Besides, doesn't the seller's agent have first-hand info on a house, that you wouldn't want to get diluted by passing through a second agent?

I think that some buyers feel more comfortable being represented by their own agent because they worry that the listing agent will only look out for the seller and not their interest (I'm sure this is true in certain cases with some agents).  That being said, I've had buyers call me direct or speak with me at the open house wanting me to represent because they believed that they'd have a better chance of getting the home if they put an offer through me because the seller would pay a lower commission.  Once I tell them about my buyer commission rebate they really want me to represent them.  haha  I show all offers (for rent or for sale) to my sellers and let them decide which tenant/buyer that they would like to move forward with.  Those agents that have agendas to gain the system to double end the commission don't realize that they are only hurting themselves in the long run....realtors make their money on repeat and referral business so you have to take care of your clients (at least I do).  You take care of them, they'll take care of you...simple as that. 

 

[RandomG]

You're absolutely right, USC, that's why there are good agents and bad agents.
Their clients should be educated and aware.

 

[usctrojancpa]

You're absolutely right, USC, that's why there are good agents and bad agents.
Their clients should be educated and aware.

Amen, I just wish there were more good agents out there.  When dealing with a bad agent on the other side, it makes the transaction a lot more bumpy but you gotta battle throw it and make it work.  I think that most agents don't do a good job and educating their clients...I like being very transparent and giving my clients all the information that is available to me that they may not be aware of because that will help them to make more informed decisions. 

 

[SoclosetoIrvine]

Another thing I've noticed is how insane the Irvine Company apartment rentals are in terms of rates. In my area of interest, a 2000 sf 4 bedroom house with a driveway and nice backyard is the same rent as a tiny Irvine Company 3 bedroom 1400 sf townhouse with carpet everywhere, I mean, who rents these things, is it just for the small deposit? I understand maybe if you want to live in the middle of the action at The Village or The Park at Spectrum, and have no kids, but even there, I see lots of families with many kids, how do they squeeze in a two bedroom is beyond me.
So to all the private landlords in Irvine, a big thank you, keep buying them, so I can keep renting! I could not afford to buy the type of house I can afford to rent! A $4000 rental costs $1.3 million!!

I think thread went in many directions, but this right here may be the silver lining for those complaining about not being to break even in Irvine rental.  For a 3 bedroom, Irvine company has those 1000-1300 sq foot small apartments for 3200-3400 range right now, mostly in older neighborhoods with no attached garage with old carpet.  Assuming a conservative 2%-3% rate increase a year or around $100/year increase in rent, in about 3-5 years those same apartments will probably rent for 3600-3900/month at which point many of you with Irvine rentals may be able to get close to breaking even or even break even, especially since you can sell the newer communities/better amenities/larger sq foot/more privacy with attached garage at similar pricing as those apartments.  Who knows?  8)  #foreveroptimist

https://www.irvinecompanyapartments.com/search?type=adv&regionId=1&subRegionId=5&zipRadius=5&bedrooms=3&bathrooms=&

 

[irvinebullhousing]

The Irvine Company knows their market and audiences. If you have to pay a few more hundreds extra a month compare to places outside of Irvine, renters still prefer Irvine overall. My former co-worker, rented a house in Garden Grove, old and shaby 4 br and 3 bath and still pay 2900 dollars a month. Just do the math and Irvine rental wins.

 

[usctrojancpa]

Another thing I've noticed is how insane the Irvine Company apartment rentals are in terms of rates. In my area of interest, a 2000 sf 4 bedroom house with a driveway and nice backyard is the same rent as a tiny Irvine Company 3 bedroom 1400 sf townhouse with carpet everywhere, I mean, who rents these things, is it just for the small deposit? I understand maybe if you want to live in the middle of the action at The Village or The Park at Spectrum, and have no kids, but even there, I see lots of families with many kids, how do they squeeze in a two bedroom is beyond me.
So to all the private landlords in Irvine, a big thank you, keep buying them, so I can keep renting! I could not afford to buy the type of house I can afford to rent! A $4000 rental costs $1.3 million!!

I think thread went in many directions, but this right here may be the silver lining for those complaining about not being to break even in Irvine rental.  For a 3 bedroom, Irvine company has those 1000-1300 sq foot small apartments for 3200-3400 range right now, mostly in older neighborhoods with no attached garage with old carpet.  Assuming a conservative 2%-3% rate increase a year or around $100/year increase in rent, in about 3-5 years those same apartments will probably rent for 3600-3900/month at which point many of you with Irvine rentals may be able to get close to breaking even or even break even, especially since you can sell the newer communities/better amenities/larger sq foot/more privacy with attached garage at similar pricing as those apartments.  Who knows?  8)  #foreveroptimist

https://www.irvinecompanyapartments.com/search?type=adv&regionId=1&subRegionId=5&zipRadius=5&bedrooms=3&bathrooms=&

That's why I recommend for my clients to focus on 3-bedroom properties, whether they be in Irvine or not.  That is mainly because there are so few 3-bedroom apartments that will compete against your rental and opens you up to a bigger renter pool and buyer pool (down the line when you are looking to sell).

 

[dream16]

Examples of homes that have been on the market since June/July:http://www.realtor.com/realestateandhomes-detail/37-Festivo_Irvine_CA_92606_M10700-46618http://www.realtor.com/realestateandhomes-detail/18-Santa-Eulalia_Irvine_CA_92606_M10562-20953http://www.realtor.com/realestateandhomes-detail/35-Calavera_Irvine_CA_92606_M10539-10465

I know they are around $4000, but is that considered high end in Irvine? They seem pretty nice, hard to believe they would stay on the market for almost 4 months? Does it mean one can  come and negotiate big time, or is it that they don't move, because the landlords are set on those prices?

Common Sense tells me that the potential renter pool for $2500-$3000 condo's is much larger than to rent a SFR for $4000+ ==> hence the condo investments becomes a win BUT ONLY to those who bought it in 2011-2012 & have positive cash flow. For owners like me who bought last year, are under NEGATIVE cash flow and only hope as people have pointed out is " Appreciation " in the longer run and increasing rents every year & eventually sell. My big lessons learnt is NEVER to buy an investment property with HOA/Mello, this was my dual intent purchase (where i intent to occupy it as primary residence in future). If i don't live in it & keep it and still want to have my future kids study in Irvine w/o living in Irvine, then i can use my rental property of Irvine as an address proof for my kids to study there.

 

[dream16]

Regarding commission, I understand, so on a $4000 rental, 5% is $2400 commission, which is $1200 per agent, so if there is only one agent involved, is the commission more like 3%? That would be $1400. Still a $200 incentive for that dual agent to make all those other applications disappear.
I'm just trying to understand, because I think that especially when purchasing, not involving a second agent makes such a big difference.
What I don't understand is, and no offense to anyone in the field, why do buyers still use a buyer's agent? With today's technology, my middle schooler can figure out how to get in touch with the seller's agent, or how to locate homes for sale, do comps etc. Besides, doesn't the seller's agent have first-hand info on a house, that you wouldn't want to get diluted by passing through a second agent?

Well, its always easy to second-guess someone elses job to be easy and i did try to RENT my rental by myself in the dreams of saving $1600 something in commission, i did find tenants but got BURNT OUT by them as they ran away at the last minute (after providing SSN etc.) and i lost 30 days of rent, lessons learnt: if you are NOT local, there's no point in making your life hell by trying to save agents commission on rentals. I learnt it the hard way