House to Apartment Financial aspect

[Stormy Kromer]

DW announced that our next move is going to be from our house in the northern Minnesota woods to an apartment in a small city south of here closer to our children. This won't be for another 5 or 6 years. My question for all here is from a financial point of view.

We haven't had a mortgage in years and the thought of paying rent each month doesn't appeal to me. I know that living in a house isn't free, even when it's paid for. The opportunity cost on the money invested in the house alone would probably cover our rent, not to mention the savings in utilities, property taxes, insurance routine maintenance and most of all the updates necessary every few years like a new roof, siding, well, septic.....

Anyway. For those who have made the switch from your private home to an apartment how has it went for you ?

I'm thinking of taking the sales proceeds from the house and investing it in a balanced portfolio at Vanguard in something like their Balanced Fund, or possibly 50-50 in a Total Stock Fund and a Total Bond Fund, and taking proceeds each month to pay the rent. The estimated sale proceeds should be around $250,000, if we take 4% of this amount it would give us $10,000 annually towards the rent. That, along with the savings in property taxes and insurance & utilities would easily pay the rent at the apartment we're looking at.

Does this sound like a reasonable approach ? My biggest fear is inflation. We'd both be in our early 60's and the rent could easily double or more in the decades that we're renting and eat up our house equity nest egg.

I'd appreciate any comments and advice from member's experience. Thank you.

 

[braumeister]

Property taxes, utility costs, and insurance are very dependent on the exact locations involved. I would advise investigating those costs for the actual location you're considering, because averages or anecdotes from other areas are probably not going to be very meaningful for you.

 

[Bamaman]

Many of us yearn to keep our independence. But at one point in our lives, assistance is often needed to maintain our lifestyles. And sometimes that means moving closer to our children and families, especially when there are health issues.

We're in our late 60's, and hopefully we're 10 years or longer before such a move would be required.

And your thinking on how to pay for any apartment rental seems right on. But don't forget that a whole lot more $ is required to pay for healthcare that what you will get out of your house. And there's no substitute for substantial savings, 401K's and IRA's in case more expensive living arrangements are required like assisted living or even full nursing homes.

 

[Andre1969]

I don't know how prevalent this is in your neck of the woods, but I know a few people here in the DC area who rent apartments, and after one year, the rental company will often jack up the rent, figuring they have a captive audience. It seems like the "magic number" tends to be around $1500/mo to get them into a 1br/1ba, but then once the year lease is up, they jack it to around $1800/mo.

So, to keep from paying it, my friends are constantly moving, about once a year, to save on that rent. Sounds like a hassle to me, but I guess they figure they have you over a barrel.


But hopefully, this is the exception and not the rule.

 

[nancyfrank232]

Many people count the value of their primary residence as part of their wealth but many end up dying before touching this dead equity

Ironically once it gets into the hands of the kids, they will liquidate it and repeat this pattern

 

[Sarah S]

I moved last year from a paid off house to an apartment. Yes the monthly costs are higher though mostly if not all offset by the addition of the house price to my investment portfolio resulting in increased income.

I have only had one renewal cycle and the rent did not change yet. It will , I am sure, in the future and I have planned for a good amount over time. If needed I could move again, smaller, less desirable apartment or location.

Ultimately it is a lifestyle choice. I am extremely happy with my move. I hope it works out for you

 

[OldShooter]

... I'm thinking of taking the sales proceeds from the house and investing it in a balanced portfolio at Vanguard in something like their Balanced Fund, or possibly 50-50 in a Total Stock Fund and a Total Bond Fund, and taking proceeds each month to pay the rent. The estimated sale proceeds should be around $250,000, if we take 4% of this amount it would give us $10,000 annually towards the rent. That, along with the savings in property taxes and insurance & utilities would easily pay the rent at the apartment we're looking at.

Does this sound like a reasonable approach ? ...

No way to know because you're not looking at a complete picture. There is noting special about the money you will get when you sell. It doesn't remember where it came from and, really, neither should you. It's just part of your assets and should be managed accordingly.

Richard Thaler calls this "mental accounting:"

"According to the theory of mental accounting, people treat money differently, depending on factors such as the money’s origin and intended use, rather than thinking of it in terms of the “bottom line” as in formal accounting (Thaler, 1999). An important term underlying the theory is fungibility, the fact that all money is interchangable and has no labels. In mental accounting, people treat assets as less fungible than they really are."
​

from https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/mental-accounting/

Mental accounting can be very useful, as in budgeting and retirement savings strategies, but IMO it is very important to know when and why you're doing it.

 

[Stormy Kromer]

No way to know because you're not looking at a complete picture. There is noting special about the money you will get when you sell. It doesn't remember where it came from and, really, neither should you. It's just part of your assets and should be managed accordingly.

Richard Thaler calls this "mental accounting:"

"According to the theory of mental accounting, people treat money differently, depending on factors such as the money’s origin and intended use, rather than thinking of it in terms of the “bottom line” as in formal accounting (Thaler, 1999). An important term underlying the theory is fungibility, the fact that all money is interchangable and has no labels. In mental accounting, people treat assets as less fungible than they really are."
​

from https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/mental-accounting/


Great advice, I need to look at the overall picture. I should also point out that this move will be from a high income tax state to a state with no income tax. At the time most of my income will be ordinary income, pension, IRA withdraw & Social Security (85% taxable). I predict an income tax savings of $10,000. This has to be thrown into the overall picture too. This isn't the purpose of our move, but we will certainly enjoy it.

 

[bloom2708]

Your $250k proceeds will pay for 10-15 years of rent.

Your insurance, property taxes and maintenance will go to near $0. Renter's insurance will be $100 or less likely. These add up to $7,000 per year and up depending on what needs to be fixed or replaced.

Your $250k can be conservatively invested and it will grow. Adding more "payments".

After owning for 25+ years, I can see a time where renting would be my desire. Pay for 1 year up front. Then no monthly payments. Paying up front might lock you into a lower rent payment.

The best thing is you can try it and then buy if you don't like it. Kind of like streaming TV. Try it out. Short commitment. Change if you don't like something. Of course moving and downsizing are hills ahead.

 

[pb4uski]

You might want to run your situation through the NYT rent vs buy calculator.

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Perhaps a compromise would be to buy a condo. We own a condo and a house and I really like condo living.

 

[brett]

We downsized and sold our home immediately after early retireemnt. Our plan was to travel for seven months, then return and buy a condo or duplex.

When we came back we rented a furnished apt for 3 months. We did not see what we wanted to buy on the market so we moved to a rental condo and moved our furniture in from storage. That rental was supposed to be for a year. It turned out to be three years.

We really noticed the difference in expenses while we were traveling...no pesky heating/cooling/water/sewer bills, no insurance. Same when we rented.

We did not buy because the market was tanking. We put invested our house proceeds in a mixed bag. While these invested funds were appreciating at a rate about inflation, condo and house prices were dropping in our area.

As an aside, I really enjoyed being a renter after 45 years of home ownership. But we both came to the conclusion that home ownership is not such a big deal. Renting definitely has it's advantages. Especially if the economics are on your side.

 

[Taxman59]

I have been looking at this question. The house is paid for, but the monthly expenses, (cable, electric, gas, lawn care, insect prevention, etc) is about 90% of the cost of an apartment. The proceeds from the sale of the house would generate about 1/3rd of the cost of the apartment. Financially, it appears to make sense to sell and move. Now to convince DW that is the right choice.

 

[pb4uski]

.... But we both came to the conclusion that home ownership is not such a big deal. Renting definitely has it's advantages. ...

Agree, though DW much prefers to own.

 

[JDARNELL]

We sold the McMansion and moved into one of our townhouses for a home base. We then purchased a second home in a tourist area that is managed by an overnight rental company that we stay at a few weeks a year. So far so good. I am keeping good records with positive cash off the second home and my expenses on the townhouse is 25% of the townhouse. If we go back to a house one day it will be low maintenance low cost and all maintenance will be subbed out.

 

[Teacher Terry]

Our cost to own is a third of rent here locally.

 

[nancyfrank232]

Our cost to own is a third of rent here locally.

If this were true, then CAP rates would be much higher than 6% in Nevada

 

[Alan]

I have been looking at this question. The house is paid for, but the monthly expenses, (cable, electric, gas, lawn care, insect prevention, etc) is about 90% of the cost of an apartment. The proceeds from the sale of the house would generate about 1/3rd of the cost of the apartment. Financially, it appears to make sense to sell and move. Now to convince DW that is the right choice.

In our case it was DW that convinced me. We had decided to rent an apartment when we retired so we could "lock and leave" and do lots of traveling (which we did do). However, about 5 years before retiring DW and I sat down and totted up all the expenses of running the house and came to a similar conclusion, so we sold the house, invested the proceeds and rented. It worked great, and after 13 years our circumstances and country had changed so we decided to buy a house again. The house money had been invested in a single fund and had more than doubled. (We hadn't needed to touch it since rent came out out of earnings, then pensions.)

These days we still do plenty of travel but no more than 2 - 4 weeks at a time.

 

[The Cosmic Avenger]

I don't know how prevalent this is in your neck of the woods, but I know a few people here in the DC area who rent apartments, and after one year, the rental company will often jack up the rent, figuring they have a captive audience. It seems like the "magic number" tends to be around $1500/mo to get them into a 1br/1ba, but then once the year lease is up, they jack it to around $1800/mo.

So, to keep from paying it, my friends are constantly moving, about once a year, to save on that rent. Sounds like a hassle to me, but I guess they figure they have you over a barrel.


But hopefully, this is the exception and not the rule.

That is a good point, you can look for a lease with a maximum increase, or ask around with the tenants to see if any have been there longer than a year (or maybe much longer).

And I don't know how old you are now, but if you do try to stay for many years, look for design elements that will help you age in place, such as grab bars, and wider (32") doorways with low or no thresholds. You can search for "aging in place" and the word design or renovation or modifications to get ideas. Landlords might allow you to make those modifications at your own cost, as it could increase the rent they could get when you leave.

 

[tmm99]

Renting an apartment may be a viable option in areas where the housing prices do not go up much, as the rent for apartments also tends to stay flat, if the housing market is hopping in the area, so is the apartment rental fee, so I'd keep that in mind. I'd rather own than rent in a good housing market.

 

[ncbill]

Downsizing from a detached single family residence (SFR) to a townhouse/condo is another option.

I doubt I'll ever be able to live as cheaply as I do now in my townhouse, 3BR/3BA, ~2,800 sqft.

HOA fee (includes water/sewer) + property tax + insurance + electricity/gas is under $600/month.

Since all exterior maintenance is included in the HOA fee it's easy to lock & leave for vacations.

 

[davebarnes]

if we take 4% of this amount. ... My biggest fear is inflation. We'd both be in our early 60s and the rent could easily double or more in the decades that we're renting and eat up our house equity nest egg.

But, your nest egg should (based upon past market performance) grow if you only extract 4% per annum from it.

 

[travelover]

We rented for a year and a half when we moved to another state. I'll let others address the finances, but I'll share that I hated renting. You go from being king of your own castle to a second class citizen, having to follow a bunch of rules that can be capriciously enforced depending on how well they like you. And "they" are often people that were flipping burgers a month ago but now work in the rental office. Kind of like a bad home owners association on steroids.

So, my caution is - don't just look at the financial aspect of renting, think about how you will adjust to a downgrading of autonomy. For a PITA like me, it was a deal killer.

 

[misshathaway]

I just sold my single family house a few months ago and became a renter. Property taxes going up substantially was the catalyst, but I could have stayed. It just got me thinking about why I would stay and what my other choices were.

I added up all of my house improvements and repairs and divided them by the # of years I had the house. With that figured in, along with utilities, property tax etc. my rent plus utilities here in FL is about 20% more.

So far it's worth it to me. No more winter. No home maintenance. I can walk to the grocery and Target. What more do you need

I wanted room to maneuver so I sold everything before I left and have a bare minimum of stuff that I can move myself in a few carloads. Yup, even the bed - air mattress. If the rent goes up substantially and it's not worth it any more, I"ll go somewhere else.

At first I was looking at the over-50 communitites and that was a real eye-opener. There are too many gotchas with them that you may not realize until you've already bought in. Then you are stuck trying to unload your house. Obviously you don't have to live in an over-50. You can just buy a house. But that got me thinking about why I would buy another house.

 

[razztazz]

Yup, even the bed - air mattress.

Not to drag this off topic but this sounds interesting. Just what kind of air mattress do you have? I am interested in losing all my "heavy stuff" before I get too old to move it myself. Especially the heavy stuff that's also BIG and mattresses / box springs are BIG. It's one thing I have not found a way to live without or find a lighter version of.

 

[rjk514]

Explain the gotchas in the over 50 communities....would like to know before we jump...