Selling Your Home To Rent and RE?

[MrHopefull]

Whats your thoughts on selling your home to then invest in CD's to help retire early. The 6% would be alot more a year than renting would be. No property taxes, insurance, maintence etc

Any thoughts ?

 

[tryan]

Rents are a BARGIN compared to housing prices. So economically it makes ALOT of sense. Get a long term lease to lock the savings and add stability.

BUT there's a quality of life issue that only you can address.

 

[kcowan]

We did this in 1997. (Sold, downsized into rental penthouse.) Since then Real Estate has more than doubled while our rent has gone up by 12%, including utilities.

Equity investments that would have been diverted to purchase have increased by 72% in the same time, including the dip in 2001-2. This increase is allowing us to close in on our SWR target of 3.5% whereas the ownership would not without further downsizing.

So renting for us is enabling FIRE.

 

[cb7010]

I have been considering a similar course recently..have about $200K equity in a $425K house (yes for a couple years there was some good appreciation in my area, but it has been stagnant for the last couple)..on paper taking my equity and investing it, even in a conservative way, would be a financial boost...but, moving into a cheaper rental house or even buying a cheaper house scares me a bit. So, for me, until I am absolutely sure I can and want to deal with downsizing, I am staying where I am at...but, when I have the calculator out, it sure is tempting!

 

[tryan]

on paper taking my equity and investing it, even in a conservative way, would be a financial boost...

Everytime I look at this it's never made sense to borrow against the house for an equity investment. Home equity lines are around 6% ... add another percent for a HELOC. Add ANOTHER 1.25% if not the primary residence. Sooo, you need an investment that breaks 8%/year consistently. Just not seeing anything out there that's worth the risk.

 

[cb7010]

I would not advocate a second mortgage to do this..my idea was always to move into a smaller cheaper house, putting 20% down on the new property and investing the remainder of the built up equity. Remember, with tax breaks on mortgage interest..the 6% is probably only costing you 4.5% or 5% depending upon your tax bracket..the S&P's historical return is over 10% and there are even some decent corporate bonds out there for 7.5%-8.5%..enough of a spread to put money in your pocket every month and in theory justifies why you should always borrow the max on your mortgage...it's cheap money with the tax benefits.

 

[wabmester]

Whats your thoughts on selling your home to then invest in CD's to help retire early. The 6% would be alot more a year than renting would be. No property taxes, insurance, maintence etc

Any thoughts ?

Rent and housing costs in general go up with inflation. CD's do not. I might do it as a short-term market-timing strategy given the insane home prices in many areas, but I don't think it's a good long-term strategy.

 

[cube_rat]

We sold our home last year in the San Francisco after holding for two years. We now rent a much bigger, newer place, two minutes from my office for $2000 a month cheaper (when you factor property taxes and insurance on top of the mortgage). Our decision was primarily based on a few factors: a) after looking at the numbers, I did not anticipate a great deal of real estate appreciation in the short term in our area. In fact, prices were in free fall and now stuff is just sitting on the market for months, in most cases, but not all b) I detested my former home which was solidified our reason to sell when the time was right.

We don't regret our decision to change from home ownership to renting. We have a nice pile of cash split out in our MM and Vanguard funds earning a nice return.

I believe the decision sell your home and rent is a highly personal based primarily on a person's situation and future financial objectives. I don't think there's a one size fits all answer.

 

[SLC Tortfeasor]

We did this in 1997. (Sold, downsized into rental penthouse.) Since then Real Estate has more than doubled while our rent has gone up by 12%, including utilities.

Equity investments that would have been diverted to purchase have increased by 72% in the same time, including the dip in 2001-2. This increase is allowing us to close in on our SWR target of 3.5% whereas the ownership would not without further downsizing.

So renting for us is enabling FIRE.

Wait, I think may be missing something here. You say home values in your area have more than doubled, i.e., gone up more than 100% since 1997. But rent has only gone up 12% since then. And the money that you would have spent on buying a house back in 1997 was invested in the market instead, and has gone up by 72%. Okay.

Doesn't that mean that you would have been better off buying a house in 1997? If you'd bought a house back in '97, it would have more than doubled by now (i.e., up more than 100%), while your equity investments have only returned 72% in that time. You could sell the house and start renting today for only 12% more than what your rent would'be been back in '97.

Are you confused, or am I?

 

[DangerMouse]

We have run the numbers and they tell us that logically we will be better off in retirement if we rent rather than own our own home.

However, there is the emotional side of us that wants to have our own place. We do keep reminding ourselves that if we don't own a place, we will feel better about heading over to Italy to live for 6 months because we won't be incurring any costs on a principal residence.

 

[chinaco]

It depends. When you rent are you also downsizing? Or changing other expenses?

The only way to properly analyze this is if you compare the same or like properties. For example: If you sold your house for $200k and rented it back at $1500/Month. You could try to project the increases for tax, insuranance, maintenance, returns from invested proceeds of the sale etc... for both senarios (rent and buy). Both of them have expected cashflows. Take the projected cashflows and do a Net Present Value (NPV) analysis. I would do the calculation for at least 2 scenarios. One is the (if things realistically worked in my favor) and one would be the (Things did not not work out so well). This will create two NPV numbers... a high and a low. You will probably wind-up somewhere between that range (if done properly).

If you are intending to down-size the house then do the same exercise using the property that you are considering.


The real wild card is the expense projection and the expected return on the assets (house proceeds invested or owned house appreciation). These both depend on their respective markets.

If you do the calculation... let us know how it turns out. One final note. Just doing analysis using this years numbers will provide some insight... but it is likely to lead to wrong conclusions. Plus, this is a very complicated thing to project. There is a bit of luck to the whole thing... (i.e., which market will out perform stock/bond or personal real estate).

 

[kcowan]

...
Doesn't that mean that you would have been better off buying a house in 1997? If you'd bought a house back in '97, it would have more than doubled by now (i.e., up more than 100%), while your equity investments have only returned 72% in that time. You could sell the house and start renting today for only 12% more than what your rent would'be been back in '97.

Are you confused, or am I?

Yes your analysis is correct but it ignores several aspects (which I did not highlight). Property taxes have kept pace with real estate values, doubling during the period. Maintenance is extra. The escalating property values do not provide income (we are retired). The increase can only be harvested through paying a real estate agent and a moving company. Because the 6% sales commission is on the gross selling price, that reduces the increase by 12% to 88%. As well there is the personal disruption that needs to be valued. And the real prospect of values declining back to baseline over the next 7 years. We are not good market timers.

Also the costs of ownership are higher in the first place for comparable places, so we would have had less to invest (the 72% did not include new investment money made possible by the lower costs of renting and its appreciation - maybe it should have). I am very sure that a complete cost analysis would show that even an apparent 100% increase is very misleading. And this causes people to make bad conclusions. 8)

 

[rw86347]

I have never understood this argument.

I own a rental. It costs me about $1500/mo for all expenses. I rent it for $1800/mo. My expences will increase slightly over time, then drastically decrease as the mortgage is paid off.

But not for my renters, by then I hope to be charging them $2000/mo., then $2100/mo, then $2200/mo ...etc. In the end they will pay more for the same place I bought.

Apples to apples, renting is more expensive. A renter is paying for the house, taxes, maintanance, insurance, and my vacations.

rw

 

[haha]

I have never understood this argument.

I own a rental. It costs me about $1500/mo for all expenses. I rent it for $1800/mo. My expences will increase slightly over time, then drastically decrease as the mortgage is paid off.

But not for my renters, by then I hope to be charging them $2000/mo., then $2100/mo, then $2200/mo ...etc. In the end they will pay more for the same place I bought.

Apples to apples, renting is more expensive. A renter is paying for the house, taxes, maintanance, insurance, and my vacations.

rw

This depends on where you are, In many coastal markets rents have not kept pace with house prices, so the figures you give would not be illustative of a landlord's position in this type of market.

ha

 

[kcowan]

This depends on where you are, In many coastal markets rents have not kept pace with house prices, so the figures you give would not be illustative of a landlord's position in this type of market.
ha

Yes I should have mentioned that I live oceanfront on the pacific coast. I know I could own in Detroit cheaper than I am renting here but I choose not to. Like we have all learned on this and other forums, there is no substitute for detailed financial analysis.

Also I don't want another job as a landlord. I could make more money going back part-time to my prior vocation. As long as the markets behave : I am not planning to do that either.

 

[MrHopefull]

Wow, there are some great replies in here to my thread and they are all appreciated. Alot in depth than i anticpated. Again my thanks...

My scenario is as follow, im in a very rural area - around 6000 people in my town. I can rent a 1900 square foot home for about $550 a month

My business is about to sell, i should clear about 70k on it, and my wife and I are considering selling our house and we should clear about 155k on it. Thats 225k at plain CD rates is around 13k a year. Rent would be half of that amount. It seems would be coming out ahead.

Also, if we did this scenario we have found a nice lot for sale that we would plan on buying and leaving empty for now. In case some years pass and we change our mind.

I guess i should explain some more about my situation. We are in a economically depressed area, jobs are few and everyone around us is drowing in debt, insurance poor, credit cards, overspending, buying 30k new trucks on 20k incomes. etc. We are not in this group. We are frugal, DEBT FREE and watch our pennies.

My wife and I , we dont care to be rich, retire rich etc. In fact its safe to say that if we had 20k a year we would be very happy.

Please dont spam me if my thinking is off the wall, i love this board and enjoy reading everyones thoughts. Please give me some feedback that i can use to help me and my family make some decisions.

Thanks again

 

[Nords]

We are in a economically depressed area, jobs are few and everyone around us is drowing in debt, insurance poor, credit cards, overspending, buying 30k new trucks on 20k incomes. etc.

Wow, sounds like a great place to go fishing for tenants.

Are you sure you want to be a landlord to these people?

 

[chinaco]

I was originally grew up in a similar area. After military, I went back briefly. Then I relocated to go to college and on to a large metro area. Job security and earning power is much better. I know people do not like the idea of leaving home... but my advice would be to relo. Once you retire, you can move back if you want. Most of these areas are close enough to some metro area where fairly frequent visits back home are workable... and the employment economics are better.

If I did not do that 28 years ago... I probably would not be posting this message today!

 

[rw86347]

Also I don't want another job as a landlord. I could make more money going back part-time to my prior vocation. As long as the markets behave : I am not planning to do that either.

My point wasn't to suggest being a landlord. Rather it was the ultimate apples to apples comparison. The same house either way.

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.

I guess if you could rent at 1/3 of a mortgage payment I would consider renting. But I have a hard time imagining such a huge disarity between the two prices. My rule is that rental price should be +/- 15% of a 30 mortgage price, depending on the prime rate.

 

[Nords]

I guess if you could rent at 1/3 of a mortgage payment I would consider renting. But I have a hard time imagining such a huge disarity between the two prices. My rule is that rental price should be +/- 15% of a 30 mortgage price, depending on the prime rate.

In 1994, near the pits of the Hawaii real estate market, spouse & I managed to work ourselves into a corner with a $2631/month mortgage payment and $1900/month rent. Two years later we were able to "raise" it all the way to $2000/month.

The hazards of trying to pay off a mortgage early amid an imploding rental market.

 

[kcowan]

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:

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]

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]

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]

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.