patrick.net

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.

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

I understand you bought for much less

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.

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.

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).

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.

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.

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.

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.

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?

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.