patrick.net

Sell it?

It's the same house as it was when you bought it for 1M. From your question, it seems like it was worth paying a 1M mortgage to live in it in 2009. OTOH, you now have two new options: sell it for 1.75M or rent it out and rent a smaller unit.
Option 1: Stay in house - no new capital/revenue.
Option 2: Rent out house and rent a smaller unit. Presumably, your out of pocket expenses go down, by a fixed amount, but you have less space.
Option 3: Sell house, and buy / rent smaller unit.

Option 1 & 2 are easy to compare. Just look at the reduction in monthly living expenses and decide accordingly.
Option 3 is harder to compare, as this is an investment decision. If you think that housing is getting overvalued again and want to protect your 'gains' against a potential downturn, then sell it. Otherwise, pick from options 1 & 2. The risk in selling is that if housing prices continue to go up, you are stuck paying whatever rent the market bears.

If you are young and like the area, the conservative option is #2. You always need to live in a house, and assuming no depression style deflation event, you are better off owning one house.

If you are old and want to retire elsewhere, selling and downsizing is the conservative option.

Is your assessment about how much you'll be ahead accurate? A good number of properties seem priced above what rental income would cover. And can you cover two payments if the property sits vacant?

It depends on how you have invested in the house. If it's 20%, then you've basically got a $200K bond paying $1K/month or $12K/year. That is 6%/year. Which isn't horrible if that was guaranteed passive income, but in this case it's not. There is risk of not being rented, risk of repairs, etc. I'd sell and invest the proceeds--you'll make about the same profit without some of the risk.

Sell it. Pay $500,000 cash for the town home. Blow the rest on hookers and coke.

Run the NY Times rent vs buy calculator with your numbers:

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Just putting in the price of $1.75M and not modifying any other of their defaults:

If you can rent a similar home for less than ...
$5,600 PER MONTH
... then renting is better.

If you can rent the equivalent house for less than $5,600/mo, it looks like you'd better off selling and renting. Especially since you don't seem to mind moving to a smaller place.

Personally, I'd put the profit from the sale in low-overhead index funds like Vanguard's.

alpo says

I bought the house for $1M in 2009 in san mateo county. Now it is worth $1.75M. If I rent out the house I will get around $ 1,000 per month

It would take you 750 months or 62.5 years to make as much money from rent as from selling it. $750k getting an after tax return of just 5%, easy to do in the stock market, is $37.5k/yr and grows exponentially. And it's easy to sell stocks when you need to. And you can sell how much you need. You can't sell 10% of a house.

alpo says

I figure this will build wealth quickly as the rent money will pay for mortgage, property tax, etc while allowing me to accumulate an extra $1000 per month.

any thoughts suggestions.

Keep the house. It will be worth 50%more in less than 5 years.

joeyjojojunior says

If it's 20%, then you've basically got a $200K bond paying $1K/month or $12K/year. That is 6%/year.

No. You have to use his current equity to calculate his true returns, because the equity is now his true investment. And you have to factor in appreciation.

Strategist says

No. You have to use his current equity to calculate his true returns, because the equity is now his true investment. And you have to factor in appreciation.

It was a simple approximation. Really, you should account for principle paydown, property tax increases, house appreciation, rent increases, etc. And yes, I think you're right that he should approximate his present equity rather than just his down payment. After doing that, it will certainly be better to sell.

joeyjojojunior says

Strategist says

No. You have to use his current equity to calculate his true returns, because the equity is now his true investment. And you have to factor in appreciation.

It was a simple approximation. Really, you should account for principle paydown, property tax increases, house appreciation, rent increases, etc. And yes, I think you're right that he should approximate his present equity rather than just his down payment. After doing that, it will certainly be better to sell.

Only if you use little or no appreciation. Remember, if he used your calculations he would not have purchased in 2009, and would have lost out big time.

Normally people pay the biggest chunk of their income for housing. If, with cash you get from selling this house, you could buy something smaller for around what you get out of it, you'd reduce this amount drastically. That's perhaps two or three thousand per month in savings, vs. the one thousand you spoke of. Plus you are a homeowner able to make your own decisions with the new place and able to still make money on a rising market. Seems like an easy decision to me.

Strategist says

Only if you use little or no appreciation. Remember, if he used your calculations he would not have purchased in 2009, and would have lost out big time.

I don't think you can assume 10% appreciation/year forever.

joeyjojojunior says

Strategist says

Only if you use little or no appreciation. Remember, if he used your calculations he would not have purchased in 2009, and would have lost out big time.

I don't think you can assume 10% appreciation/year forever.

You can assume a long term appreciation of 6% to 7% in desirable California cities. Even 4% would tilt the outcome of your formula to a "buy"

Strategist says

You can assume a long term appreciation of 6% to 7% in desirable California cities. Even 4% would tilt the outcome of your formula to a "buy"

That's assuming a house in san mateo county, is desirable. To some maybe, to me ... well, there again I don't want any part of any place in CA.

I make that after expenses on 200K houses I buy out of state and rent out. Basically new houses as well. (few years old)

Strategist says

You can assume a long term appreciation of 6% to 7% in desirable California cities. Even 4% would tilt the outcome of your formula to a "buy"

Not if you use his equity instead of his down payment. And if you're going to include appreciation, you must also include rent appreciation as well.

It's going to be a strong sell.

Option 1: Stay in house - no new capital/revenue.

Option 2: Rent out house and rent a smaller unit. Presumably, your out of pocket expenses go down, by a fixed amount, but you have less space.

Option 3: Sell house, and buy / rent smaller unit.

If I rent out this house and move into a smaller 2x2 apartment, I would save approx $1,750 per month without loosing the ownership of the house. In next five years, I should be able to save enough to buy a 2x2 condo or a townhouse. Basically, this is the best I can come up with to increase my net worth.

The house will probably sell for more in this market, if I spend some money remodeling it. Also, if I add 1000sqft of second floor to the house (approx $200,000), or remodel the attic into living space (probably 100K), the house will probably sell for $2.5M easily, i.e there is potential money to be made here, so selling the house in this condition seems like throwing away money on the table.

But for now, I am a bit constrained for cash, so the only way I can think up of increasing my cash reserves is by renting out the house and moving to a 2x2 apartment. At the same time, the renter will continue to pay down my mortgage indirectly, so I don't loose ownership of the house. Once my cash reserves are up after saving for five years or so, I may buy a 2x2 condo or townhouse in same area and continue to rent out the original house for some extra income or maybe in future, I remodel the house and sell it for more. Obviously, I wouldn't be moving out if I had loads of money.

The way I look at it is that the $570K loan on the house is "leverage" that can be paid down with rent to increase my net worth. I am not comfortable investing in stock market etc as in my view they are too volatile and I don't have much faith in financial instruments such as stock etc.

Wondering if my plan makes financial sense?