patrick.net

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.

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.

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.

bob2356 says

Why does anyone own a rental in the bay area?

In particular with all the socialists out there and rent control spreading..

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.

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.

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.

alpo says

3. 40K - from liquidating money lying in last employers 401K plan.

Ummm... I hope you didn't cash out your 401k to pay down the mortgage. That's investment-advantaged account that doesn't pay incremental capital gains on each stock transaction. Also, you'll owe penalties if you aren't of retirement age.

I wish I had seen this thread 2 months ago. I am in a similar boat to you except that I have little desire to keep my house long term. I ALSO refer to my $2M house as a "shack!" I've been thinking of selling the whole thing and fleeing the state. But, there are a bunch of painful costs:
• real-estate cartel will try to grab their 6% (even if they grab 3 or 4% that's a big chunk because it is on the whole thing, not just the appreciation)
• federal and state capital gains taxes. My capital gains will be $2M - $0.8M, so I'm looking at 0.4M in capital gains. (That includes the Obamacare and other extras on high capital gains.)

So I'm really looking at having $1.5M in my pocket at the end of the day, not $2.0M. That alone starts (slightly) to tip the balance in favor of keeping the house.

That being said, it seems that my area's houses rent for worse even than yours: about $4.5k/month. Add in a property tax of $1k/month and $0.5k/month for upkeep (it's an old shack) and I'm facing a very poor return on equity — less than 2.5% of $1.5M.

pkennedy says

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.

Maybe you aren't from around here. :-)

A $2M house close to Apple or Google is a mighty lousy one if it is one of the older ones. It'll be in need of much expensive upgrading. On the plus side, it'll have a "huge" 7000 sq ft lot in a quiet neighborhood without much traffic. The thing is, renters care more about the inside of the house than they do about the neighborhood. Thus the imbalance between rent and own.

In my neighborhood, the price imbalance is actually worse than that of the original poster.
A $2.0M typically rents for about $4k/month. Yikes!

I joke that I should sell my house but with a rent-back stipulation that has no expiration. I'd just permanently rent my place back from whoever was dumb enough to buy it from me!

Check out this one that caused quite a stir when it sold. Sale price $2M. Rent zestimate: $3595/month!
https://www.zillow.com/homes/for_sale/Sunnyvale-CA-94087/19537995_zpid/97549_rid/0-900_size/37.364499,-122.053278,37.358803,-122.063031_rect/16_zm/1_rs/

pwagner says

Ummm... I hope you didn't cash out your 401k to pay down the mortgage. That's investment-advantaged account that doesn't pay incremental capital gains on each stock transaction. Also, you'll owe penalties if you aren't of retirement age.

I actually did :-), but on the bright side paying off 40K in mortgage principal right now will save me approx $10K in mortgage interest payments over next 4 years or so that I expect to hold this mortgage. I look at 10% 401K penalty as 10% stock market fluctuation. Most of this is psychological, numbers can be very convincing for any future scenario specially when looking forward in 4 to 5 year time frame.

pwagner says

I've been thinking of selling the whole thing and fleeing the state. But, there are a bunch of painful costs:
• real-estate cartel will try to grab their 6% (even if they grab 3 or 4% that's a big chunk because it is on the whole thing, not just the appreciation)
• federal and state capital gains taxes. My capital gains will be $2M - $0.8M, so I'm looking at 0.4M in capital gains. (That includes the Obamacare and other extras on high capital gains.)

Yeah, I thought about selling too or actually came close to being forced to sell during divorce financial settlement specially with a vindictive ex. But selling without adding a second floor or remodeling the attic is leaving money on the table. rental is bad but dollars per square foot is pretty high.

Doesn't look like anyone has mentioned it yet, but being a landlord is no picnic, especially in California where tenants have all the leverage, and you have almost none. Your $2,000 income is potential, only realized once you have a good renter(not easy to find), who is not going anywhere. It could take you multiple tenants to find that person, and what you get along the way could eat up a vast chunk of your time, and your potential profits.

As others have already mentioned, you are looking at a topping market. Invest elsewhere, save, pay off your debt, and wait for the crash to get that smaller place.

I'm actually contemplating moving to an RV fulltime, not sure how the parks are up there, but that could be an alternative to the townhouse, depending on what type of lifestyle you enjoy.