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Financial Advice: How can I rent out my house and move into a smaller place?


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2018 May 26, 11:11am   9,260 views  46 comments

by alpo   ➕follow (0)   💰tip   ignore  

I own and live alone in a $2M house (the "shack") in sf bay area with 80% equity. I want to rent out the shack and buy and move into a smaller townhouse. Renting out the shack will generate a rental income of $2000 per month (current mortgage payment is $2000 and prop tax is around 12000 per year). Besides the house i have $50K in 401K and $100K cash in bank. I make $220K an year total. I am trying to find ways in which I would rent out the shack and buy and move into a smaller town house.

The main issue I am dealing with is whether I should pay down the remaining mortgage ($400K) on the current house, save for a downpayment for new townhouse and move into the new townhouse, etc. Trying to figure out what to do?

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1   Strategist   2018 May 26, 11:37am  

1. Rent out the bedrooms, and keep living there.
2. $5,000 per month rent for a $2 million home is too low. Im sure you can get $7,000 or $8,000.
3. Get an equity line and pay cash for the townhome you want. As your old home will be an investment, all the interest will be deductible.
4. Retire, and travel the world with a hot girlfriend.
2   BayArea   2018 May 26, 12:00pm  

Renting out $2M homes generally doesn’t result in good roi.

I understand you bought for much less
3   BayArea   2018 May 26, 12:03pm  

Strategist says
2. $5,000 per month rent for a $2 million home is too low. Im sure you can get $7,000 or $8,000.


Not very many people rent houses for $8k. See my post above.

People generally buy excess, but rarely rent excess. That’s why rent:buy ratios in affluent areas are 3-4% while 7-10% in low class areas.
4   mell   2018 May 26, 12:08pm  

Agree with bay area. 5k per month is prob what you'll get. Renting out luxury homes is not good roi unless you run a nightly air bnb at a hot tourist spot. I'd consider selling here, you're likely close to or at the top.
5   alpo   2018 May 26, 12:08pm  

Yeah, I bought for $1M. It will rent for a max of $5500 (based on stats in my area for similar rentals). Retiring and travel the world is not an option due to other personal commitment. Selling is also not an option.

I think the main issue in my mind is whether: 1) I should pay down the remaining mortgage on the house (400K) completely and then start saving for a downpayment for a townhouse, 2) rent out the current house (and this will bring income of 2K a month) and move into a smaller apartment to save for downpayment on a townhome, or 3) stop paying down mortgage and start saving for a downpayment for the townhouse etc?

Strategist says
Get an equity line and pay cash for the townhome you want. As your old home will be an investment, all the interest will be deductible.


I have 250K home equity line of credit (qualified for 500K) which I haven't used. Plus I am not sure how comfortable I would be with 1.4M of loan (townhome: $1M + my current mortage: $400K).
6   Tenpoundbass   2018 May 26, 12:54pm  

I would throw an extra $80K a year at it and pay it off in 3 to 4 years.
Your payment reflects mostly Principle on that last year.
You'll have so much economic freedom and an asset you own outright.
There's a correction coming, you may miss buying at the top of if you wait a few years.
7   alpo   2018 May 26, 1:14pm  

Tenpoundbass says
I would throw an extra $80K a year at it and pay it off in 3 to 4 years.
Your payment reflects mostly Principle on that last year.


Yeah this is the safest obvious choice and I have been aggressively paying down mortgage for last two years or so. Probably won't be able to do 80K an year, but 60K an year looks possible. On the other hand I feel like I am missing out a financial opportunity because if I rent out this house, all the expenses (mortgage + property tax + etc) will be paid by the renter + I will make 2000 on top that I can use to offset mortgage on my new townhouse. The only problem is that I donm't have money for a downpayment for a townhouse and general job insecurity.

Tenpoundbass says
You'll have so much economic freedom and an asset you own outright.


Yeah, I wouldn't have to worry about job loss anymore and I have been through more than a fair share.

Tenpoundbass says
There's a correction coming, you may miss buying at the top of if you wait a few years.


I thought the correction was coming two years ago when median prices plateaued in 2016, but then things started going up really strongly. More than 10% correction seems difficult since there is no obvious reason (dot com bust, credit default swaps) in play.
8   Tenpoundbass   2018 May 26, 1:54pm  

alpo says
Yeah, I wouldn't have to worry about job loss anymore and I have been through more than a fair share.

Well if we have Trump until 2024 your job will be safe. Pay it off by then.
9   bob2356   2018 May 26, 2:39pm  

alpo says
if I rent out this house, all the expenses (mortgage + property tax + etc) will be paid by the renter + I will make 2000 on top that I can use to offset mortgage on my new townhouse.


Only the interest on the mortage is deductable as a business expense. Any principle part of the mortgage payment will be taxable income. The 2k income above expenses is taxable income. You need to allow for that. At 220k it's 33% so if 1500 is principle and 2k profit uncle sam is going to be taking 1200. That's a pretty big chunk out of your offset. You will have deprecation deduction, but you give that back when you do sell. Depreciation recapture at sale is taxed as ordinary income. So essentially you are simply borrowing interest free from from the IRS to be repaid on sale.
10   HeadSet   2018 May 26, 3:52pm  

Only the interest on the mortage is deductable as a business expense. Any principle part of the mortgage payment will be taxable income. The 2k income above expenses is taxable income. You need to allow for that. At 220k it's 33% so if 1500 is principle and 2k profit uncle sam is going to be taking 1200. That's a pretty big chunk out of your offset. You will have deprecation deduction, but you give that back when you do sell. Depreciation recapture at sale is taxed as ordinary income. So essentially you are simply borrowing interest free from from the IRS to be repaid on sale.

Absolutely correct. You sound like someone who has actually done a Schedule E, along with selling a former rental. Only thing I would add is that California will take some tax as well.

Unless I mis-read his post, is alpo saying he will rent out a $2M house for $2k per month? If that is the case, why would anyone buy when rents are that cheap?
11   alpo   2018 May 26, 4:01pm  

HeadSet says
Only the interest on the mortage is deductable as a business expense. Any principle part of the mortgage payment will be taxable income. The 2k income above expenses is taxable income. You need to allow for that. At 220k it's 33% so if 1500 is principle and 2k profit uncle sam is going to be taking 1200. That's a pretty big chunk out of your offset. You will have deprecation deduction, but you give that back when you do sell. Depreciation recapture at sale is taxed as ordinary income. So essentially you are simply borrowing interest free from from the IRS to be repaid on sale.

Absolutely correct. You sound like someone who has actually done a Schedule E, along with selling a former rental.

Unless I mis-read his post, is alpo saying he will rent out a $2M house for $2k per month? If that is the case, why would anyone buy when rents are that cheap?


I would rent out a $2M house for $5200 a month. After all expenses (2000 mortgage, 1000 property tax, etc), I would get 2K in income per month. Offcourse thisdoesn’t factor in income taxes.
12   Patrick   2018 May 26, 5:15pm  

alpo says
I would rent out a $2M house for $5200 a month.


That's basically the whole point of this site, lol. You'd get 3.12% gross, and 1.2% net before income taxes

Owning a house is a very bad deal around here, except for the potential appreciation. I'm not saying it can't continue appreciating, but personally I'm not about to make that bet.
13   mell   2018 May 26, 5:33pm  

Patrick says
alpo says
I would rent out a $2M house for $5200 a month.


That's basically the whole point of this site, lol. You'd get 3.12% gross, and 1.2% net before income taxes

Owning a house is a very bad deal around here, except for the potential appreciation. I'm not saying it can't continue appreciating, but personally I'm not about to make that bet.


If you're really willing to downsize quite a bit, you could sell and buy a place for 800K-1MM and use the rest to buy a very small rental all cash. You'd still get $1500-$2000 minimum on a studio/1 bedroom rental, be debt free and the rent would pay your property taxes on both places, Everything is owned buy you, you could sell the rental if something unforeseen happens and everything you make you can spend. Plus smaller units lose much less value when the market turns down. Of course everything you buy is overpriced right now, so the alternative would be to sell and rent and use all the extra cash for other investments, stocks/dividends/funds/bonds, also debt free. Or leave the bay area and live like a king elsewhere.
14   bob2356   2018 May 26, 9:03pm  

mell says
If you're really willing to downsize quite a bit, you could sell and buy a place for 800K-1MM and use the rest to buy a very small rental all cash. You'd still get $1500-$2000 minimum on a studio/1 bedroom rental, be debt free and the rent would pay your property taxes on both places


He said selling is not an option so this is not relevant If it were then getting 2k gross on a 600k is really weak. That's less than 5%. I can think of a dozen markets where you can gross 2k on 300k. I'm grossing well over 2k on 200k right now. Why does anyone own a rental in the bay area?
15   mell   2018 May 26, 9:11pm  

bob2356 says
mell says
If you're really willing to downsize quite a bit, you could sell and buy a place for 800K-1MM and use the rest to buy a very small rental all cash. You'd still get $1500-$2000 minimum on a studio/1 bedroom rental, be debt free and the rent would pay your property taxes on both places


He said selling is not an option so this is not relevant If it were then getting 2k gross on a 600k is really weak. That's less than 5%. I can think of a dozen markets where you can gross 2k on 300k. I'm grossing well over 2k on 200k right now. Why does anyone own a rental in the bay area?


Yeah it's weak but better than grossing 5k on 2MM, and much easier to sell. Plus he'd be debt free. Rentals are not that great in the bay area, esp. since the affordability threshold has been hit and rents stalled/dropped while house prices kept rising.
16   bob2356   2018 May 26, 10:13pm  

mell says
Rentals are not that great in the bay area, esp. since the affordability threshold has been hit and rents stalled/dropped while house prices kept rising.


Why are there any rentals in the bay area and why would anyone own one? There has to be some reason but I can't figure it out.
17   mell   2018 May 26, 10:22pm  

bob2356 says
mell says
Rentals are not that great in the bay area, esp. since the affordability threshold has been hit and rents stalled/dropped while house prices kept rising.


Why are there any rentals in the bay area and why would anyone own one? There has to be some reason but I can't figure it out.


It's ok if you put as many small rooms into the property as possible and rent them out. People are used to live in small rooms and if you can charge 1K-2K per room depending on the area. It doesn't work well for real family homes that have not been converted into mass-cages, but it works for units specifically built for renting. That's why the living space per person gets smaller and smaller here. Plus many landlords slum it by not repairing and not paying for inspections for many years.
18   bob2356   2018 May 27, 4:14am  

mell says
It's ok if you put as many small rooms into the property as possible and rent them out. People are used to live in small rooms and if you can charge 1K-2K per room depending on the area. It doesn't work well for real family homes that have not been converted into mass-cages, but it works for units specifically built for renting. That's why the living space per person gets smaller and smaller here. Plus many landlords slum it by not repairing and not paying for inspections for many years.


Sounds like heaven on earth. This is all worth while how exactly?
19   MisterLefty   2018 May 27, 5:53am  

It sounds like selling the $2M house is not an option. So if you rent it out, someone else is paying you to invest in the Bay Area RE market. However, you seem to be considering doubling down in this market, by investing in a second property. A potential double loss in a RE downturn will be tempered by the equity in your current home. The unknowns include future trends in the RE market, but for sure, RE only goes up in the long term.
20   tovarichpeter   2018 May 27, 8:31am  

Build an ADU, move into it, rent out main house
21   FortWayne   2018 May 27, 8:45am  

why not just rent out rooms, and still live there?
22   alpo   2018 May 27, 9:14am  

Patrick says
You'd get 3.12% gross, and 1.2% net before income taxes

Owning a house is a very bad deal around here, except for the potential appreciation. I'm not saying it can't continue appreciating, but personally I'm not about to make that bet.


True, when I bought the house for $1M it's rental was $3K/month (3.6%). Now the house is worth $2M and rental is $5.2K/month (3.12), but in the meantime the house appreciated from $1M to $2M. I guess in that sense things worked out for me. I am not expecting future appreciation, but I am also not expecting future declines. Actually there may be future declines, but I think it would be less compared to other areas in US. By attempting to buy a second house in bay area, I am basically more closely tying my economic future to bay area's economic future and I think that is a good bet to make in the long term as bay area isn't about to become a Detroit any time soon. Sure there are earthquakes, but they will shake things up and then go away just like there are volcano's in Hawaii.

MisterLefty says
However, you seem to be considering doubling down in this market, by investing in a second property. A potential double loss in a RE downturn will be tempered by the equity in your current home. The unknowns include future trends in the RE market, but for sure, RE only goes up in the long term.


The thought of not doubling down in this market did cross me, but if I bought somewhere else it would be more difficult to manage the property. Buying in bay area is more attractive as a rental will be easier to manage and maintain and it will provide more personal flexibility from personal and family use, but yeah I am still keeping option to buy in few other areas open where I could easily imagine me living after I am done with my career here in bay area. I guess investment isn't the only goal here.

tovarichpeter says
Build an ADU, move into it, rent out main house

I don't think I have enough space to build a decent size ADU. Maybe an 8x20 unit, but anything bigger would be difficult. I have family that comes to visit and ADU just wouldn't work :-) It will be more profitable to build a second floor or do attic remodeling as that will add sqft to the house and increase it sale price significantly.


bob2356 says
Why are there any rentals in the bay area and why would anyone own one? There has to be some reason but I can't figure it out.


Somebody just build a big apartment building (100 units probably) close to where I live. Since it is new brand building, a studio rents for $3600, a one bedroom for $4700, and a three bed for $5580. My house will probably rent for $5500 tops, so not sure how these new apartment complexes are gouging customers for 5580. In older apartment complexes you can rent a 1x1 for $2500 and a 2x2 for $3600. Compared to that my house expenses for a SFH that is double the size of most 2x2 is $3000 per month. Owning a house with significant equity does have its advantages. I am no longer tied to ups and downs of rental market or bad apartment management.

mell says
If you're really willing to downsize quite a bit, you could sell and buy a place for 800K-1MM and use the rest to buy a very small rental all cash. You'd still get $1500-$2000 minimum on a studio/1 bedroom rental, be debt free and the rent would pay your property taxes on both places, Everything is owned buy you, you could sell the rental if something unforeseen happens and everything you make you can spend. Plus smaller units lose much less value when the market turns down. Of course everything you buy is overpriced right now, so the alternative would be to sell and rent and use all the extra cash for other investments, stocks/dividends/funds/bonds, also debt free. Or leave the bay area and live like a king elsewhere.


I am willing to downsize, but not willing to sell this house. If in future my needs change I won't be able to buy this house back at $2M+. My salary hasn't kept pace with housing market appreciation here in bay area. Plus I get the advantage of having low property taxes courtesy of prop 13 if I continue with this house. My property tax is lower than property tax that people are paying for some of the townhouses around here. I still see a strong economic future for bay area and I think having a house here that is fully paid off offers a lot of personal freedom and flexibility and peace of mind with respect to job loss, etc.

But yeah, I need to think if the second place I buy should be in bay area or somewhere else. Buying the second place in bay area would provide more personal flexibility since I live here, but it wouldn't be bad to buy in some of the other places as well.
23   bob2356   2018 May 27, 10:20am  

alpo says
But yeah, I need to think if the second place I buy should be in bay area or somewhere else. Buying the second place in bay area would provide more personal flexibility since I live here, but it wouldn't be bad to buy in some of the other places as well.


If you aren't moving money out of a high appreciation area to a low appreciation area then the whole thing is a giant re arranging deck chairs exercise. Selling one appreciated house to buy another one that appreciated just as much is a zero sum game. There's always some place undervalued with a great rate of return. Park the money, collect the returns, and wait for somewhere to crash big time then go pick up the pieces. It always happens sooner or later.

Houses are just big wooden boxes. Nothing more.
24   Hircus   2018 May 27, 4:10pm  

alpo says


My house will probably rent for $5500 tops, so not sure how these new apartment complexes are gouging customers for 5580

I've noticed the same - apartments renting for about the same as homes.

Often, but not always, they do seem to have good locations close to public transit, so that's an advantage for their price. They also often have communal perks, like a gym/ laundromat, and they tend to be brand new and pretty nice looking. And maybe some prefer the low/no maintenance of an apt - not wanting to mow a lawn & rake leaves etc...

But, still...it must be a preference thing, but I'm willing to pay significantly more to live in a home vs apartment, giving me some breathing room & privacy away from neighbors.
25   alpo   2018 May 28, 1:22pm  

ThreeBays says
The latter would look something like this: refinance and cash out $400K with a current rate of 4.375 %; with a $4000 mortgage payment. Rent it, which will generate a rental income of $0 (and $1100 principal payment). You're looking for whatever amounts give you near $0 net rental income. Take the $400K cash and buy a townhouse (and put more $ in retirement accounts).

The "Debt is Slavery" rhetoric can mislead you here. All you need to consider is that it's better to have a mortgage balance on your rental than on your primary residence. That's because mortgage interest on rentals is 100% tax deductible from rental income, whereas mortgage interest on your primary home is only deductible up to a limit and only above your standard deduction.


The only problem that I see here is that when it is time to retire (say 15 more years), I will neither own the house nor will I own the townhouse. neither will produce any income as well. The only thing that I will have is massive debt and enslaved to my job to pay off that debt. Tax issues aside, as things stand now, if I were to move into a cheap camper van, the house would at least produce an income, i.e I at least have the option to use the house as a source of some income right now.

If I stretch myself a bit, I should be able to pay an extra 5K per month towards mortgage and will hold the house free and clear in middle of 2023 (5 years from now). After that I should be able to save 85K an year. By middle of 2028 (5 more years), I would have saved 400K. At that point, I will buy a townhouse for $1M with 300K down and a mortgage of 700K. This 700K will quickly reduce to 200K by 2033 (another 5 years) because I will not only be able to pay down the mortgage on the townhouse using my income, but also using the rental income from a fully paid off house.

At the end of 15 years from now, I will have a fully paid off house worth $2M that is generating an income for 4K a month and a townhouse worth $1M with 80% equity. I will then buy a decent camper, quit my job, and go on a long long road trip (say an year or two) driving all the way from Alaska to Southern tip of argentina. During that time I would rent out both the house and the townhouse for a total rental income of approx $7K per month which should be good enough for me to do anything within reason.

I think paying off mortgage aggressively and early would allow me to save on money that would be wasted on paying mortgage interest and then use that money to buy a townhouse. In 15 years after all is said and done, I will have solid net worth and a solid source of monthly income that is not subjected to ups and downs of financial markets. 401K may be wiped out or people can run out of 401K, but the house will continue to produce rental income as long as there are people in bay area needing a place to live. Basically any model that doesn't allow me ownership or income at the end of 15 years doesn't really work.
26   clambo   2018 May 28, 1:36pm  

If you don't have yet the downpayment for the townhouse, you may be better off with just one roommate and save up the downpayment.

Re; Roommates; never get a self employed person, never someone who is a female living on alimony, etc. Always get a 1. nerd 2. square person working at a large stable job. Do not rent out to any "creative" types.

A $2 million property producing $4,000/month is not much income. As an example, I was quoted by Vanguard a fixed annuity which will pay out at 6.45% (it varies with age=life expectancy).

For therefore $1 million I would get $64,500/year, $5375/month guaranteed for life.

I would consider renting or owning in a state with no income tax when you finally decide to quit working. When I take my retirement assets and start to spend them down, I don't want to be a California resident.

Asia, Australia, Hawaii are more accessible from the West Coast. Europe is more accessible from the East Coast.
27   alpo   2018 May 28, 2:25pm  

clambo says
If you don't have yet the downpayment for the townhouse, you may be better off with just one roommate and save up the downpayment.


Yeah, I think that is my main problem. Plus I am paying $1300 in mortgage interest per month, that basically means that if I save/invest $5K per month, I am really saving/investing only $3.7K per month while continuing to pay $2K mortgage. If the whole shebang is paid off, I will be easily able to save $7K per month as long as i still have a job.

I mean if I pay $1300 per month of interest for my 400K mortgage loan, I don't quite see the point in investing $5K a month at 7% rate or return which gets me a huge amount of $30 per month as compared to the $1300 per month that I am paying in mortgage interest. Only after investing 5K a month for 4 years at 7% rate of return will my investment income start cancelling out $1300 of mortgage interst that I have paying every month - by that time I would have paid approx 60K in mortgage interest. I think the only real option I have is to pay down the mortgage to eliminate all the money that is being wasted in mortgage interst.
28   bob2356   2018 May 28, 6:24pm  

clambo says
I would consider renting or owning in a state with no income tax when you finally decide to quit working. When I take my retirement assets and start to spend them down, I don't want to be a California resident.


Be very careful with this. CA is the most aggressive state in the nation going after taxes from people they consider still resident. Everything needs to be totally out of CA or you might find yourself with a really big tax bill.
29   clambo   2018 May 28, 7:39pm  

I meant be a resident of another state. I think then you can visit California for 180 days or so if you feel like it. You can rent or own in the other state.
30   Strategist   2018 May 28, 8:06pm  

bob2356 says
alpo says
if I rent out this house, all the expenses (mortgage + property tax + etc) will be paid by the renter + I will make 2000 on top that I can use to offset mortgage on my new townhouse.


Only the interest on the mortage is deductable as a business expense. Any principle part of the mortgage payment will be taxable income. The 2k income above expenses is taxable income. You need to allow for that. At 220k it's 33% so if 1500 is principle and 2k profit uncle sam is going to be taking 1200. That's a pretty big chunk out of your offset. You will have deprecation deduction, but you give that back when you do sell. Depreciation recapture at sale is taxed as ordinary income. So essentially you are simply borrowing interest free from from the IRS to be repaid on sale.


WTF. I did not know depreciation recapture is taxed ordinary income. I thought it would be at capital gains tax.
So if you have owned an investment property for a long time in California, you may as well keep it for ever, or do the 1032 tax exchange. Or else you pay:
Federal capital gains tax.
CA capital gains tax at ordinary income tax rates.
Federal depreciation recapture at ordinary income tax rates.
California depreciation at ordinary income tax rates.
Give up prop 13 property tax.

Wow. If you recalculate the ROI on the same property based on the net proceeds if you were to sell it, it will go down by some 70%.
To the billionaires who want to buy my properties for $1 billion......don't bother. I'd rather live in poverty.
31   clambo   2018 May 28, 8:26pm  

I concur with Threebays, I also would have preferred to invest money in financial assets like stock and stock mutual funds.

I put small amounts of money decades ago into a SEP-IRA when I did odd jobs on weekends. This was in a mutual fund at T.Rowe Price. Now if I decide to spend it, I'll get $500 or so per month for life because I will buy an annuity with it. This income will be taxed.

I also had money left over from IRA contributions and bought a Vanguard Variable Annuity, the costs are below the mutual funds at T.Rowe Price. This I made just two contributions and it will eventually pay me an income of about $700/month, which will be taxed.

My real money is in IRA, Roth IRA and regular accounts. I will be forced to take distributions of my regular IRA someday.

I decided to take some extra risk in 2010 and bought some Apple stock. The Apple shares split and started paying dividends. My Apple dividends are taxable but are now $900 every 3 months, $300/month. Right now I am buying more shares with the dividend, but I could someday take it as cash.

My point is I think it's better and more fun to feel like my net worth is liquid and has grown well.

California added a special tax for capital gains of house sales, this is unfair but another reason to invest elsewhere I think.
32   anotheraccount   2018 May 28, 8:33pm  

alpo says
I am basically more closely tying my economic future to bay area's economic future and I think that is a good bet to make in the long term as bay area isn't about to become a Detroit any time soon.


I agree that bay area is strong and is essentially high beta on world economy. In my opinion here are the factors that drive it
- financialization of software - switching to sas and cloud subscriptions
- sacrifice of privacy to drive better advertising returns
- machine learning

Those could all run their course. All bay area companies are prices as if revenue growth will continue double digit forever. Their customers are not lucky enough to have the same revenue growth. I know of many cities running deficits that are still buying too much cloud software. There are many marketing directors that don't truly understand their spend on Google or Facebook. And machine learning may have solved the easy 20% of problems and the rest might be more difficult.

That said, the rest of the world can't handle high interest rates and that's the best thing for bay area. If interest rates get high enough and put the rest of economy in the recession, then bay area will follow harder.
33   alpo   2018 May 28, 9:15pm  

ThreeBays says
All of this is wrong. Saving $5K a month with a 7% compounding rate of return would save you over $33K more in 5 years compared to pre-paying $5K per month towards your mortgage. In 5 years saving $5K a month would grow to $358K, which would yield a return of $2090 per month which would cover your interest plus principal cost.


Let's say I get a 7% rate of return for next 5 years of investing 5K a month. So at the end of five years I would be sitting on a cash pile of $358K and a mortgage balance of approx $372K. If I extend this to 15 years then at the end of 15 years I would be sitting on a cash pile of $1.5M and a mortgage balance of approx $250K. Net worth is approx $1.2M cash + $2M house - $250K mortgage = $2.95M.

On the other hand, if I pay down my mortgage, in 5 years my mortgage balance will be zero and I will be able to save $7K every month for next 10 years. So at the end of 15 years I will have a mortgage balance of zero and a cash pile of 1.2M, i.e net worth is 1.2 cash + 2.0 house = $3.2M.

The numbers favor paying off the house (but they can always be adjusted a bit to not do so). In either case, both the cases look very similar and I don't see significant difference between either case except that I am taking less risk with bay area housing market as compared to risk involved in global financial markets. Having a fully paid of house in bay area is much less risky and offers much more peace of mind and security as compared to putting faith in global financial markets.
34   alpo   2018 May 28, 11:43pm  

ThreeBays says
If you have $1.6M liquid assets ($1.8M with current savings) plus a house that can pay for itself if you want it, you have very little risk my friend except by putting all eggs in one basket.


ThreeBays says
Your idea of paying off the 1st house, then saving 5 years, then getting into more debt 10 years from now, sounds both super conservative for the first 10 years and then risky as heck for the following 5 years.


I see your point. Although, I think I will have more peace of mind if I pay off the mortgage first. At the end of five years, once this mortgage is payed off, I guess I will re-evaluate and see how to proceed further.

ThreeBays says
How did you manage to get where you are with such a small 401k? Did you prioritize paying off the mortgage before maxing your 401k contributions? I would max my tax advantaged accounts before prepaying another cent of the mortgage.


All the liquid assets were used to buyout the house from ex-bitch as part of divorce settlement. At the time it seemed like I was getting a bad deal and had to refinance the house to take out a much larger loan at higher percentage, but since then the house has appreciated probably 350K in value and I have paid off around 200K off the mortgage. I kept the house and a minimal amount of cash for emergency while as the "bitch" took all the liquid assets and her fancy car.
35   pkennedy   2018 May 29, 2:48am  

alpo says
I am willing to downsize, but not willing to sell this house. If in future my needs change I won't be able to buy this house back at $2M+. My salary hasn't kept pace with housing market appreciation here in bay area. Plus I get the advantage of having low property taxes courtesy of prop 13 if I continue with this house. My property tax is lower than property tax that people are paying for some of the townhouses around here. I still see a strong economic future for bay area and I think having a house here that is fully paid off offers a lot of personal freedom and flexibility and peace of mind with respect to job loss, etc.


You might want to make sure your rental numbers are correct for the house. 5K might not be anywhere near the right amount, it might be 7-10K, or more. Most of the people on here are either cheap or more savvy than most, so we view things as obscene, but there are people who pay these rents.

I know I was surprised by some of the rental incomes from the bay area properties. These rents are paid by companies and/or very highly paid executives who don't want to buy because they jump around.

Your prop 13 advantages will make rental income much more attractive for sure.

Renting a room...

Others are saying rent out a room. You'll never get the same income, because someone paying 8K isn't paying 8K to have room mates... 2000+ for a room might be available in your area though.

When I first mentioned renting a room years ago, I had 2 reactions. First was from friends who did it when they were young. The nightmare stories of people taking other peoples food. Not washing dishes. No one having money. Rent problems. The second was from professionals who said it's awesome. Just go do it, you'll love it. Some of their best adult friends came from that situation. Built in friendships, people to share things with, etc.

And they were right. Still talk with the guys I shared the place with, it was great. Share food, had people to go to movies with, go to events with. Learned about a lot of different events I would have never knew about otherwise.

Anyone paying 2500 is going to be a professional. Find someone around your own age, or in the 30's range. Find someone interesting, who you're going to get along with. Don't get some massive hermit who just happens to make the money. In my situation, there were 3 of us, the guy who rented the house just wanted to reduce his rent (had kids previously living there) and we just wanted some company and a different lifestyle. Rent was a tiny fraction of our income, we were doing it for the lifestyle.

Don't like it? Ask the person to leave and rent the whole place out. But it sounds like you're in a situation where a room mate might be both good for you in terms of income and lifestyle.
36   bob2356   2018 May 29, 3:41am  

ThreeBays says
I don't think that's quite right. If you deduct annually based on the linear formula over 27.5 years, you pay a flat 25% rate on recapture. If you use accelerated recapture, that is depreciate faster than the linear formula then the excess recapture over the linear formula is taxed as ordinary income.


No it wan't quite right. I forgot to say up to 25%. Still a big hit that many small RE investors get very surprised by.
37   just_passing_through   2018 May 29, 8:31pm  

bob2356 says
Why does anyone own a rental in the bay area?


In particular with all the socialists out there and rent control spreading..
38   alpo   2018 Jul 15, 2:40pm  

Got a bit lucky, the money tree shook, and stuff fell.

1. 20K - from cousin returning loan from a few years back.
2. 5K - from liquidating my secret cash stash.
3. 40K - from liquidating money lying in last employers 401K plan.
4. 30K - from severance pay after last employer axed me.
5. 5K from my salary with new employer.

So adding two plus two together means I paid of another 100K off my mortgage over last two months. The good part is that my mortgage is now down to 300K, the bad part is that the final leg of paying off the mortgage is going to be a long slow three year grind 4K - 5K a month at a time. But I am still keeping my fingers crossed for money tree to shake again sometime in future to drop other shit load on mortgage.
39   everything   2018 Jul 16, 4:25pm  

Why are you paying off a loan that is essentially shorting the dollar?, couldn't you invest that money and make more on it than the interest you pay on the loan, or that is if you refinanced two years ago when we hit 2.256 on 15 year loans. But wow . money bags. I would sell now and rent a room, a relative of mine lives in CA CHEAP this way and loves it.

Or rent a room and use your time before you escape to find a good long term renter with an excellent long term revenue stream then you don't have to gouge on rents trying to chase greed, then also a good property manager, bingo you have an income stream heading into retirement or to feed into another future revenue stream, or rebuild a cash pile.

Properties are expensive right now, we are at a top, the fed is threatening to raise rates, it's a catch 22. They will raise rates to cool off the economy and stifle inflation, and it will be a repeat of the last recession to wash away all the spending power the people lost, then the worthlessness of it all will start over again. At which point you can refinance your remaining balance at a low, low rate. Of course they'll drop rates right away to zero again, I mean .. they they are shorting the dollar, why would they want to pay any more interest on the debt than they have too.

Debt is good, it's king .. that is as long as you can service it via whatever revenue stream. Since your way, way above water, the debt doesn't matter, it's leverage my friend, leverage. And, you need it to feed your credit rating. Any/all revenue streams you continue to have or make will also fuel your ability to borrow again when the time is right and you find a good deal that is worth it. But, the cash pile is nice too, it gives you bargaining power when/if you want to purchase .. anything.

Now, let me say this.. What I say above is only opinions/options, I'm not trying to tell you what to do. I'm just laying out some scenarios in debate style fashion, I don't mean to sound pushy. Good work, you've done well, very well.
40   alpo   2018 Jul 16, 10:00pm  

everything says
Now, let me say this.. What I say above is only opinions/options, I'm not trying to tell you what to do. I'm just laying out some scenarios in debate style fashion, I don't mean to sound pushy. Good work, you've done well, very well.


300K mortgage is a happy number for me, so I am probably going to start investing a bit on the side every month and loosening my spending a bit while still putting bulk of the money that flows my way into paying down the mortgage. From what I calculated, by the time my emergency fund / savings go up to 100K, the mortgage will be paid off - still three to four years away, but I hope to cut that time down - hopefully the money tree will shake again.

Your opinion is appreciated and certainly I realize that the path that i am taking to aggressively pay down the mortgage may not be the best path financially, but "investment" isn't the main motivating factor for me, "insecurity" is. I will feel much much secure once this house is paid off. In the meantime I have tons of spreadsheets going calculating all sorts of financial scenarios (and factoring in various opinions and options that I hear from others). There may be better options than paying off mortgage, but for sure, one can't go wrong by paying off the mortgage.

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