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I am looking for sound financial reasons to stay in the house, but not finding any. My expenses will go down by around $750 per month if I move into an apartment. Beyond that I will make $1,000 a month extra by rending out the house. So in total I will gain $1750 every month by moving out.
You really need to talk to a good tax guy before you do anything. There are many tax considerations. The entire $5000 a month rent is taxable income to start. You lose your 250k (500k if married) capital gains exemption if you do sell the house. . etc, etc, etc.
You need to maintain the property. There will be down time There will be tenants that stop paying and you have to go to court to get them out, some states that can take months. There will be tenants that do thousands in damages beyond the security deposit and disappear. You will almost certainly have to pay someone to manage the accounting and tax filings. All of this is going to nibble away at your theoretical 1750 every month.
There are plenty of rental markets out there paying 1% gross with strong nets. A 100,000 house rents for 1000 a month a 200,000 rents for 2000 a month. Once you get over 300k in most markets you start to lose ground. A 1.75 million house should, but never will, rent for 17,500 a month. You will be getting 1/3 of the rental income that you would get selling the property and buying in other markets using a professional property manager. Even with paying capital gains on 500k the numbers are still way against you renting out a 1.75m house.
A house is a big wooden box. Period. Use your boxes to make the most money you can. If the numbers fall then move on to better opportunity cost. Selling a house isn't very hard in most markets. Don't give any thought to appreciation. Only look at cash flow. You will never be disappointed that way.
FortWayne
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2017 Mar 4, 9:38am
You need to maintain the property. There will be down time There will be tenants that stop paying and you have to go to court to get them out, some states that can take months. There will be tenants that do thousands in damages beyond the security deposit and disappear. You will almost certainly have to pay someone to manage the accounting and tax filings. All of this is going to nibble away at your theoretical 1750 every month.
That's the worst case scenario from hell.
Most of the time if you consider about 10% vacancy you'll be accurate. I hear in Bay Area there are waiting lists for rentals, so you might not even have that problem. Not saying you won't have issues, there is always a learning curve to everything, just giving you the average for LA which is a good comparison for a big city.
Your income = (MonthlyRent * 12) * 0.9 - maintenance(~2%) - taxes - loan.
0.9 in there is assuming 10% vacancy rate over a long period of time, reasonable standard for big cities.
Hope this helps.
most importantly ask yourself, will you feel comfortable with whatever you are doing if downturn hits? it'll happen eventually, boom and bust cycles happen periodically.
anotheraccount
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2017 Mar 4, 11:36am
You need to maintain the property. There will be down time There will be tenants that stop paying
Agree with SF Ace and Bob. From what I hear it's now difficult to find credit worthy long term renters in San Mateo county. Putting 500K capital gain tax free at risk is not a good idea.
Do you have a family? If yes, I would just keep the place. If not, sell it , and put your money into NAC or something with shorter duration. What's your approximate wage income?
That's the worst case scenario from hell.
How many properties do you rent out right now? Rent out long enough or often enough then sooner or later you get screwed by a tenant big time. My worst deadbeat was a cardiologist. It looks like it would take 90 days to evict a non payer in CA, then probably another month to get someone in. Carrying a 570k mortgage plus taxes, utilities, etc. for 4 months would be a big hit on that 1750 a month in savings.
Most of the time if you consider about 10% vacancy you'll be accurate.
and every time you turn over there will be touch ups, key changes, advertising costs, etc., etc.. All of this comes out of the projected savings. Maybe someone will move in and stay 10 years, maybe the house turns over every year. You never know.
Personally I would take the cash out and invest in houses in markets that have the highest ROI. Find a really good property manager and let them do their job. This would require lots of homework. I wouldn't go crazy with leverage, but with interest rates so low putting 50% down and taking a 15 year or 10 year would be a good compromise. Cash flow would be reduced, but equity would build quickly. There are markets where 500k cash plus 500k in mortgage could get you close to double the gross income you are projecting while leaving you a large amount of cash (1.75-570k mortgage -500k investment is a lot of cash) Nets would be somewhat lower with a property manager, but still much higher than your current projections.
If you can rent a 1m apartment for 3k a month then why would you even consider buying it? That's .3%. Arbitrage the 1% in income in another area against your .3% locally and smile.
Strategist
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2017 Mar 5, 7:48am
Personally I would take the cash out and invest in houses in markets that have the highest ROI.
The highest rents are in places where the appreciation is rates are the lowest. I would go with the appreciation.
If you can rent a 1m apartment for 3k a month then why would you even consider buying it?
Definitely not worth buying as an investment, but it's a whole different formula when you will be living in your own home. The satisfaction of owning your own home has a lot of value.
FortWayne
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2017 Mar 5, 7:55am
Personally I would take the cash out and invest in houses in markets that have the highest ROI. Find a really good property manager and let them do their job. This would require lots of homework. I wouldn't go crazy with leverage, but with interest rates so low putting 50% down and taking a 15 year or 10 year would be a good compromise. Cash flow would be reduced, but equity would build quickly. There are markets where 500k cash plus 500k in mortgage could get you close to double the gross income you are projecting while leaving you a large amount of cash (1.75-570k mortgage -500k investment is a lot of cash) Nets would be somewhat lower with a property manager, but still much higher than your current projections.
yeah it's one of the reasons I don't invest into rental properties. I invest into stock market, over years it beats real estate. Has it's risks and up and downs, but it's better overall, and there are enough strategies to cover yourself. Plus I feel better about myself, I don't feel that it is morally right to buy houses to rent them out, rather leave that housing to families who want to buy and live there.
Strategist
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2017 Mar 5, 8:00am
Plus I feel better about myself, I don't feel that it is morally right to buy houses to rent them out, rather leave that housing to families who want to buy and live there.
You need to rethink your morals. A third of the population would be homeless. Students would not be able to attend college. Young people would find it impossible to start families. Society would sink in the chaos.
FortWayne
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2017 Mar 5, 8:39am
Plus I feel better about myself, I don't feel that it is morally right to buy houses to rent them out, rather leave that housing to families who want to buy and live there.
You need to rethink your morals. A third of the population would be homeless. Students would not be able to attend college. Young people would find it impossible to start families. Society would sink in the chaos.
It was just fine before Democrats decided to create all kinds of legislation that keeps development low to inflate housing. Turning land owners into kings. Today I don't feel that it is morally right to buy SFR when there are so many families who have to compete with investors for this. Less demand = lower prices. Plus I get to make really good money on the stock market from time to time investing into future of America.
I know it's not for everyone, it's just my views. I have nothing against people who are buying properties to rent.
Patrick
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2017 Mar 5, 10:04am
The satisfaction of owning your own home has a lot of value.
The satisfaction of owning large amounts of appreciating stock is also pretty nice.
Patrick
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2017 Mar 5, 10:08am
If you can rent a 1m apartment for 3k a month then why would you even consider buying it?
Bingo
The satisfaction of owning large amounts of appreciating stock is also pretty nice.
Watching your investment account explode and having immediate access to the funds - amazing.
Personally I would take the cash out and invest in houses in markets that have the highest ROI.
The highest rents are in places where the appreciation is rates are the lowest. I would go with the appreciation.
Good for you, I'll take cash flow and ROI. I don't even look at appreciation in my calculations. If it appreciates then great. If not then who cares? The money comes in every month.
Definitely not worth buying as an investment, but it's a whole different formula when you will be living in your own home. The satisfaction of owning your own home has a lot of value.
Not to me. A house is a big wooden box that keeps out the rain. I've owned 8 to live in so far plus rentals. If the numbers run I buy, if they don't I rent. I'm currently an owner. I was a renter the last 4 places I lived.
It was just fine before Democrats decided to create all kinds of legislation that keeps development low to inflate housing.
Which legislation is that specifically?
SFace
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2017 Mar 7, 8:09pm
"And if you just held through that time, you'd have been fine:"
The problem is, Homeowners owns all the stocks too.
FortWayne
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2017 Mar 7, 8:23pm
It was just fine before Democrats decided to create all kinds of legislation that keeps development low to inflate housing.
Which legislation is that specifically?
Housing regulation and zoning laws that prohibit density building, causing shortage of housing supply in many areas.
SFace
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2017 Mar 7, 8:26pm
"It was just fine before Democrats decided to create all kinds of legislation that keeps development low to inflate housing. Which legislation is that specifically?Housing regulation and zoning laws that prohibit density building, causing shortage of housing supply in many areas."
Lawmakers are all old geezers that also owns home and their circle of friends own home. From that perspective, it does not matter what party affiliation it is. No one wants a big ass apartment complex near your hood.
AdamCarollaFan
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2017 Apr 5, 11:52am
buy a 200sf tiny house and put it in the backyard.
then rent your house out.
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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 after all house related expenses (mortgage, property taxes etc). I am thinking I should move into a smaller apartment and save money over the next five years or so, to eventually have enough for making downpayment on a smaller town home. I will then stay in the smaller town home and continue renting out the original house.
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.
#housing