Selling Your Home To Rent and RE?

[kcowan]

Originally Posted by rw86347

My rule is that rental price should be +/- 15% of a 30 mortgage price, depending on the prime rate.

OK I guess your rule applies where you live. I suppose the big range (30%) is based on interest rate fluctuations.

Where I live the rent, the rents are always less. Something about everyone wanting to own in spite of the economics...for example:

Originally Posted by rw86347

Lets say that one could rent a beach front house for 30% less per month than payments on a fixed rate 30 year mortgage for the same house. 8.3 years of renting is the break even point. In other words, after 8.3 years you have now paid more in rent than simply buying the house.

But I would be investing that 30% difference in carrying a margin loan, and not spending weekends at Home Depot, for example.

[MrHopefull]

Nords,

No i think i may have confused you. Im considering SELLING MY HOME, and renting someone elses home.

And when i was talking about people in debt etc, i wasnt talking about me. I own my 170k home free and clear. I have no debt.

[Nords]

Originally Posted by MrHopefull

No i think i may have confused you.

You sure did.

But in a depressed area it's probably financially better to be a renter than an owner. Of course there are a whole bunch of other reasons to consider before staying in a depressed area...

[rw86347]

Originally Posted by MrHopefull

Nords,

No i think i may have confused you. Im considering SELLING MY HOME, and renting someone elses home.

And when i was talking about people in debt etc, i wasnt talking about me. I own my 170k home free and clear. I have no debt.

I am probably going to get flammed but...

For me renting is debt. I would (and have) agreed that in some small percentage of the world renting is better than owning. But, renting is borrowing an asset, and paying a monthly primium to use that asset.

Many years ago when a borrower would take out a monitary loan, he would pay "rent" on that money. Today we call this form of "rent" interest. But I like the idea. When someone loans you an asset you pay rent to use it. For the lender it is a money making venture, reguardless if they are renting out their cash, or a building.

Put it anouther way. You want to sell your home for $170K, placing the money in an account. Then from that account you want to pay on an intrest only loan for a different house. (actually renting is a little less advantagous than an IO loan) You will never pay the place off. When the prime rate goes up so will your rent. But unlike an IO loan I can raise your rent because it is a popular place to live. Heck I can raise your rent because I don't like you.

If you really want to downsize, why not buy a small, apartment sized, condo in cash. At least then you know the terms. As a landlord I raise the rent as often as I can get away with it.

Proverbs 22:7 "The borrower is slave to the lender" ... And I expect slave like actions from my renters.

[kcowan]

Originally Posted by rw86347

But, renting is borrowing an asset, and paying a monthly primium to use that asset.

There are many examples of renting today. We rent our water company assets to get water, we rent the streets and sewers through property taxes, we rent phone company assets, and power company assets. We rent all these because it is more economic than the alternative of owning our own. We rent out our own asset of time while working to pay for these. And we also rent the time of others because it make sense economically.

So it is really important that we assess the economics of any potential asset rental without bringing in the emotion of ownership. After we retire, we reverse the equation and we rent out our assets in return for an income to live on.

I discovered that I could make more money (ROI) renting out financial assets than I could renting out real estate assets so I am letting someone else do that for me. If the situation changes, I will reconsider.

[MrHopefull]

Kcowan please explain this more for me if you would...


I discovered that I could make more money (ROI) renting out financial assets than I could renting out real estate assets so I am letting someone else do that for me. If the situation changes, I will reconsider.

[Financial Jungle Guy]

Renting gives you more flexibility for an active early retirement. If you want to travel the world for a years, you can rent a tiny appartment to store your belonging, and have a great time. You can invest the proceed of the sale to buy a diversified dividend payers to fund your travel.

Renting isn't money out the window if your dividends can cover your rents. There are many stocks that have longer track records than your home, and have been raising dividends near double digits for decades. No landlord can raise rents at that rate consistently for many years.

[kcowan]

Originally Posted by MrHopefull

Kcowan please explain this more for me if you would...

I discovered that I could make more money (ROI) renting out financial assets than I could renting out real estate assets so I am letting someone else do that for me. If the situation changes, I will reconsider.

I let other people use my money (renting out financial assets) and they pay me more for that (ROI) than what I would save by not renting my home. So the people that rent me my home are settling for a lower return (ROI) from me than I am getting elsewhere.

If my portfolio returns drop sufficiently that it makes sense to own again, I will. There are also favorable tax incentives to owning a home so I am considering the tax effects as well. OTOH I am always suspicious of incentives from government taxation/policies. Tax incentives relate to their agenda not mine.

[MrHopefull]

So it seems that most of you feel its a bad idea..

I guess my thoughts were, that A. I would have the money available if in a few years we changed our minds, where we could build again and still not have a house payment and own the home outright. B. I would buy right now, the lot for the future if again, we changed our minds so we wouldnt be hunting or dealing with higher land prices.

That the money coming in from investing it would be double than what i would be paying for rent, i dunno...

[rw86347]

Originally Posted by MrHopefull

So it seems that most of you feel its a bad idea..

I guess my thoughts were, that A. I would have the money available if in a few years we changed our minds, where we could build again and still not have a house payment and own the home outright. B. I would buy right now, the lot for the future if again, we changed our minds so we wouldnt be hunting or dealing with higher land prices.

That the money coming in from investing it would be double than what i would be paying for rent, i dunno...

I also live is a small town (about 1/5th the size).

I have 6 acres of land 1 mile outside of town. I have thought about building a garage with a loft above the garage. then moving my stuff above the garage. Then I would rent out my house. This would allow me to travel, and leverage the value of my house.

just a thought.

[kcowan]

Originally Posted by MrHopefull

That the money coming in from investing it would be double than what i would be paying for rent, i dunno...

I just looked up what a average home like ours sold for 25 years ago ($163k in 2Q82) and what the average selling price was in 1Q ($415k) so that has provided a CAGR of 3.8%. Now these are highrise condos (we have downsized) and are subject to condo fees and leaky condo (& other) special assessments. Like any home, you also have to pay taxes, maintenance and realtor fees (6% here by us or our estate). All this reduces the yearly gains on paper.

Of course you get tax advantages and you are not throwing your money away on rent.

Inflation during the same 25 years has been 3% CAGR here. So for sure the investment is questionable when compared to other alternatives. I would be interested in the experiences of others in their neighborhoods.

Will the next 25 years be the same as the past? Nobody knows. But it is sure a good starting place.

[mathjak107]

we sold our home 5 years ago and are renting. everytime we think about buying we decide against it right now as just the interest we get on what a condo would cost us more than pays the rent with about 1,000 a month left over after all is paid.. we figure until prices start rising again we have pretty much the apartment we would buy plus 1,000 a month going in the bank rather than just the apartment if we bought.

[rw86347]

Originally Posted by kcowan

Of course you get tax advantages and you are not throwing your money away on rent.

I would included the tax deduction in the calculation however, to be clear there is no "advantage" in this deduction.

you pay the bank a dollar so that you get a quarter back from the USG. Heck I will give you $0.50 back for every dollar you give me :P

[Nords]

Originally Posted by rw86347

I would included the tax deduction in the calculation however, to be clear there is no "advantage" in this deduction.

Once the standard deduction is figured in, I don't think there's much of a tax advantage to having a mortgage.

Reducing the mortgage interest rate by one's marginal tax bracket is not what's actually being "saved", and the concept behind the math is as screwed up as that "80% of pre-retirement income" thumbrule that journalists are always blathering about.

But that interest deduction has sure guided a lot of home-buying behavior, as well as all those heart-warming FHA commercials... so as a government subsidy I suspect that it actually delivers a whole lot of bang for the forsaken tax revenue.

[REWahoo]

Originally Posted by Nords

Once the standard deduction is figured in, I don't think there's much of a tax advantage to having a mortgage.

I wonder how today's mortgage tax advantage (or lack thereof) would compare to the late 70's through the 80's when mortgage rates were double digit and the standard deduction much lower? I 'fondly' recall relocating in 1983 and struggling to sell my home and buy another. We were lucky though, since rates had dropped from a high near 17% in 1981 all the way down to a mere 13%!

Of course housing prices were much lower also, which would reduce mortgage size thus diluting your deduction...

[jav]

Originally Posted by MrHopefull

So it seems that most of you feel its a bad idea..

I guess my thoughts were, that A. I would have the money available if in a few years we changed our minds, where we could build again and still not have a house payment and own the home outright. B. I would buy right now, the lot for the future if again, we changed our minds so we wouldnt be hunting or dealing with higher land prices.

That the money coming in from investing it would be double than what i would be paying for rent, i dunno...

I don't think it's a bad idea at all and this is coming from someone that owns rental property as well as a primary residence. I'm sure it differs by region but right now, renting is very attractive due to low rents versus high ownership costs. My properties are paid off and when I compare my recurring expenses of ownership,(taxes, insurance, municipal utilities, maintenance and up- keep,) it's about 1/2 of what rent would be for a similar place. Keep in mind, this is with no mortgage. I don't think buying today with little or no equity makes financial sense.

If I sold my primary residence tomorrow, invested the funds, and the return on capital was a modest 6-7%, the earnings alone would pay for the rent with enough left over to provide 5% growth on equity when the elimination of recurring costs are factored back in. Thats a pretty good deal and it's what the person is contemplating. Theres two side to this equation - cash flow, and ROI. Renting hands down wins the cash flow side and only if property were to continue to appreciate at a rate of 5% above expenses, could an arguement be made for the ROI equation. Factor in the expense of borrowing and the arguement becomes harder.

Here's a real world example of soemthing we looked into recently. We were looking at 2 unit house on the water here locally (setting up for ER). Nice place, in good repair, modern and neat but not extravegant. The bonus was that the end of the backyard is a sandy beach. The price started at 1.1M and was down to $849K. Similar places in the neighborhood are renting for around $1750/MO per unit. Considering the ownership vs. renting equation- Renting would have cost us 21k per year (1750x12). Ownership would have cost us 71k per year if we didn't rent one side, and 50k if we lived in one side and rented the other. Those are actual numbers based on an 800k 30 year/6% mortgage, 10k property tax, 2.5 insurance, and only 1k in municipal utilities. Property values versus rent is currently favoring rent as a sound financial decision IMHO.

[MrHopefull]

Jav, thanks for your input! You spoke directly to what im considering

Thanks again....


Again, property, taxes etc are alot lower here than what your experiencing but again if i sold the house invested it in just a bank CD it would return double what rent would cost me in my area.

Im really considering it, and like i said before. If circumstances changed in the future, i could flat out rebuild a home. I do as insurance plan on buying a piece of land just in case i change my mind and build.

Thanks again

[jh123]

I'm currently a renter and I think I always will be. There are simply too many hassles to owning and there are always unexpected problems that crop up that you just don't know about until you live in a place year round.

A friend of mine had his apartment invaded by brown recluse spiders. What did he do about it? He got the hell out within the week. If he was an owner he'd have to stay and do battle with those bugs. It's so nice to be able to bail if/when something like this happens.

I prefer to rent month to month. It always costs a little more but it's worth it.

[HFWR]

Originally Posted by jh123

A friend of mine had his apartment invaded by brown recluse spiders.

Texas?