Without doing any math at all, I'd sell. The biggest reason, by far, is that I don't have the temperment to put up with people wearing my stuff out and forgetting to pay the rent.
My pillow would be much more comfortable at night with the cash from the house sale in the bank.
Thanks everybody! (which I don't mean as "I've had enough, stop discussing"; I'm finding this all very educational)
I'm working on a spreadsheet; the house pretty solidly fails the 1% rule (estimated market price and estimated rent range gives us 0.4% to 0.44%).
I think it's likely it won't make sense to sell; but we need to finish convincing ourselves regarding how much of a special case inner SE Portland is; My family moved to Oregon from S.F. in 1985, selling our small house in Bernal Heights for $80k. Redfin currently estimates it at $990k-$1.1M. I believe a 7% growth would "only" have it at about $800k by this time.
Honestly, putting it like that, given the S.F. special case and the 34-year span, I'm even more convinced that we're unlikely to beat a more conventional investment plan in the 20-25 year run, or at least not by enough to make all the mayhem worthwhile. Inner SE Portland may always be in demand, but it isn't an area fenced in by the Pacific Ocean and next door to Silicon Valley...
Moreover, there are a couple of ideas for properties that would give us the diversification of real estate, be useful (lucrative?) as vacation rentals, and actually give us some utility ourselves in terms of having a place we could go use at more or less only the cost of not being able to rent it out that weekend. Here of course we're back to dealing with rentals, and as mentioned earlier, the more involved aspect of short-term rentals. But I digress...
Ransom said:Thanks everybody! (which I don't mean as "I've had enough, stop discussing"; I'm finding this all very educational)
I'm working on a spreadsheet; the house pretty solidly fails the 1% rule (estimated market price and estimated rent range gives us 0.4% to 0.44%).
I think it's likely it won't make sense to sell; but we need to finish convincing ourselves regarding how much of a special case inner SE Portland is; My family moved to Oregon from S.F. in 1985, selling our small house in Bernal Heights for $80k. Redfin currently estimates it at $990k-$1.1M. I believe a 7% growth would "only" have it at about $800k by this time.
Honestly, putting it like that, given the S.F. special case and the 34-year span, I'm even more convinced that we're unlikely to beat a more conventional investment plan in the 20-25 year run, or at least not by enough to make all the mayhem worthwhile. Inner SE Portland may always be in demand, but it isn't an area fenced in by the Pacific Ocean and next door to Silicon Valley...
Moreover, there are a couple of ideas for properties that would give us the diversification of real estate, be useful (lucrative?) as vacation rentals, and actually give us some utility ourselves in terms of having a place we could go use at more or less only the cost of not being able to rent it out that weekend. Here of course we're back to dealing with rentals, and as mentioned earlier, the more involved aspect of short-term rentals. But I digress...
I guess I should also clarify that the historical stock market return of 7% is after inflation. Nominal returns are more like 10%.
Yeah, $80k invested in the Dow in 1985 with dividends reinvested would be almost $4 million today. (Total return from 5/1985 to 5/2019 is 4,944.158%!) That's with no property taxes, no maintenance, and no risk of a midnight toilet overflow trashing all your finishes. I bet in the 34 years that house has taken to go from $80k to $1m, maintenance and upgrades have blown a couple hundred grand of that at least.
In reply to dculberson :
Ha! Good point; I don't know what it looks like inside now, but when we moved out when I was 13, it was not of a level of grandeur I associate with a $1M home, even in S.F... 
In reply to dculberson :
Yes, if you had 80 grand laying around to stick into the market in 1985. I sure didn't. Maybe Marty McFly would have, but Biff got ahold of the DeLorean...
But, if you had 20 grand laying around, you could buy a house for 80 grand, let someone else pay the other 60 for it, and sell it for a million 34 years later, while pocketing ever-increasing rents as your P+I payments stayed the same.
In reply to volvoclearinghouse :
Yes, the leverage common in real estate is the only way real estate is in any way competitive with the stock market (historically).
Usually, on commercial real estate, the minimum down is 30%. Meaning if the price goes from 100k to 130k you double your money (30k down, 60k out). But if the price goes down 30%, you loose all your money. Financial leverage increases risk and reward.
But leverage tools are available in stocks too, they're just not nearly as common for the average American as a home loan.
In reply to volvoclearinghouse :
Even $20k put in, in 1985, would be a million today. I was just comparing what Ransom said the values were. Even in Bernal Heights, the "hottest neighborhood in San Francisco," price appreciation hasn't topped market returns, and that's with a ton more risk and work. In my opinion. 35 years of rent does not go far to offsetting a $3m higher ending value. (In the $80k -> $4m scenario.) Plus you do not need to be a fortune teller, buying property in the single highest returning market in US history, to achieve it.
volvoclearinghouse said:In reply to dculberson :
But, if you had 20 grand laying around, you could buy a house for 80 grand, let someone else pay the other 60 for it, and sell it for a million 34 years later, while pocketing ever-increasing rents as your P+I payments stayed the same.
Most people would say that's a positive outcome, and a decent investment, but that doesn't make it the best investment or the most efficient path to wealth. I don't know about you, but if I'm investing 6 figures into some asset, I want to make sure that it's the best use of that money possible. If I can do that while reducing risk and work on my part that's a dream scenario. The time to buy rental properties was 2008-2012 for most of the country when the market was at/near it's bottom. Buying now, and not meeting the 1% rule or making sure that there's adequate cash flow to beat the market isn't necessarily bad, but it's definitely sub-optimal use of a bunch of money.
Of course nobody can predict stock market returns or whether a property value will go up/down in the future, so that's why doing the math and making sure a rental will give decent returns on cash flow alone is critical. If anybody wants to own real estate, that's their prerogative And it may be very beneficial for them to do so. Or not.
In reply to Robbie :
We've looked at buying additional properties, and looked at financing options with as little down as 10 pct. There's also options such as buying the place, living in it, and then renting it out.
I (obviously) can't debate the merits of investing in the historically good stock market we have. Indeed, my own 401k is all in index funds. And that amounts to more than we have in real estate. But I also look at it as a bit of diversification. We don't none of us really know what's in store for any market for the next 30 years. Stocks rise and fall. Japan's market still has yet to recover to its all time high - which happened decades ago. Real estate is tangible, has intrinsic value, and, as my grandfather said, "they ain't makin' any more of it". Until we start colonizing other planets, anyway.
It'll be fun to dig through the internets in 30 years, happen upon this thread, and see what actually happened.
There are other "outside" very good reasons to keep a house rather than sell as well. Here are a few examples:
1. A mortgage is a forced saving plan (at a high cost) - most people will pay a mortgage but wouldn't voluntarily save the same amount of money monthly. You are paying the bank a large sum of interest, but there is value to many in the forced nature of a mortgage because it MAKES you save money. If you need the prodding to save, a big mortgage will make a huge impact on your retirement in the right direction.
2. For anyone who has had a bad landlord before, being a landlord yourself is a way to attempt to displace the bad ones with good ones. Remember you have to actually become a good landlord to do this, and that will take work, but will benefit the world.
3. The devil you know... If you've owned the house for at least a few years you know the maintenance and upcoming expenses better than any other potential investor. If you take better than average care of your stuff, that means a house you own is of higher value to you than anyone else. The only way to get that value out is to rent (because no other people can easily assess that value so no one will readily pay for it).
These are things that are really hard to put into a calculator.
In reply to Robbie :
"2. For anyone who has had a bad landlord before, being a landlord yourself is a way to attempt to displace the bad ones with good ones. Remember you have to actually become a good landlord to do this, and that will take work, but will benefit the world."
While I don't consider myself any sort of role model to the world, or anything, I have been on the renting side of the field before and it sucks. I've had multiple tenants come through my place who rented for awhile, then got married, moved out, and bought their own places. It does feel good to have, in a small way, enabled that, by being a not-dick LL and being fair with them. My current tenants have told me to my face that I'm "the best landlord they've ever had" and I'm "a good guy". I'm not tooting my horn, because frankly I think I'm a jerk sometimes, but I guess the bar is pretty low in LL land...
Per #3, I do maintain the place; my long game is to eventually sell it, probably either when the kids need college money, or I retire, or I just to the point in my life when i don't want to deal with it anymore. Or maybe one of my kids will need a house and want it. There's options.
I've thought of a good strategy for how to rent places that might not make much money in terms of rent, but are worth hanging onto for their market appreciation. I'm a first time homeowner who's never used my property as income, but a lot of my family does.
- Is the property in an area that's just well...nice? Someplace where if crap hits the fan you might be inclined to come back to?
- Does the property provide storage that might be difficult or more expensive to purchase elsewhere? I've got a relative who has a huge shed on a rental property with some serious locks and reinforced doors. He lives in a small apartment in LA and he uses the shed to store stuff that he uses when he's in Sacremento. The property itself provides good income and has appreciated, but in general he prefers Sacremento to LA, and a shed in LA would be far more expensive (require buying property).
- Is the property in a popular vacation area, or perhaps someplace where short-term rentals might be desirable? A place on the water, or with a great overlook, or close access to a race track, or MTB trails?
If the place will be a loss, it's almost always worth selling. If it'll break even, my suggestions above might be worthwhile. If it'll make money no matter what, then it's worth renting.
We know that maintenance will be a cost for any land lord. Things break and/or need replacement. It's worth figuring out how many months of profit are offset/erased with common home repairs too. If you follow the 50% rule, you'll be setting aside some of the rent towards future maintenance and repairs, but it won't be much per month and will take years to really build up anything significant. A $5k furnace replacement can easily erase a few years of funds that have built up in your slush fund.
So, consider the condition of the property and how likely any repairs might be in the near future and far future. A new roof can be $8-10k. Will you need that money now, 5 years from now, or 20 years from now? If you sink that money into it, how long will it be before it breaks even? If you replace a roof @ year 2 for $10k, and are slowly replenishing the CapEx fund via the 50% rule, then you're looking at 5.5 years to replenish your fund @ $150/month. But what happens when the water heater goes out in year 4 and takes some of that money, and the fridge goes out @ year 5 and takes some of that money? Your original estimated payoff/break even point can be delayed by other expenses that will come up. All of that is a drag on your ability to profit. It also indicates that it's probably a good idea to have some money set aside in a slush fund when you start renting to cover any expected repairs that might come up before the property's repair fund has been filled by the 50% rule and monthly rent. The more repairs likely to be needed in the near future, the more cash you'll want available.
volvoclearinghouse said:In reply to Robbie :
We've looked at buying additional properties, and looked at financing options with as little down as 10 pct. There's also options such as buying the place, living in it, and then renting it out.
I (obviously) can't debate the merits of investing in the historically good stock market we have. Indeed, my own 401k is all in index funds. And that amounts to more than we have in real estate. But I also look at it as a bit of diversification. We don't none of us really know what's in store for any market for the next 30 years. Stocks rise and fall. Japan's market still has yet to recover to its all time high - which happened decades ago. Real estate is tangible, has intrinsic value, and, as my grandfather said, "they ain't makin' any more of it". Until we start colonizing other planets, anyway.
It'll be fun to dig through the internets in 30 years, happen upon this thread, and see what actually happened.
We certainly have had a historically good stock market, but we've also had a historically good housing market. The house prices have hit and far surpassed the "bubble" values from 2007 that supposedly caused the housing collapse and economic meltdown. The same is true with stocks, of course.
I also agree I love checking up on stuff like this over time. My bold prediction: over 30 years, house values in average markets will approximately match inflation. There will be some outliers, both on the plus side like Silicon Valley is today and on the minus side like rural areas today. Well diversified low fee stock index funds with dividends reinvested will return around 7.9% after adjusting for inflation. WOO! I'm a wild man. If in 30 years this isn't true, you can throw it in my face here. ;-)
In reply to dculberson :
It actually wouldn't surprise me to see housing prices cool a bit in the largest cities while increasing more in medium sized cities that are more affordable. Employers that pay high wages are often in major cities, but that just drives the cost of living up to unreasonable values. We're at a point now, where people are beginning to realize that a high paying job in the Bay Area, Seattle, Austin, NYC, LA, etc won't necessarily provide them any higher quality of life than a medium paying job in a location with more reasonable housing prices. As workers realize this, I expect them to begin to turn down those high paying jobs, and some employers will look to setup shop in places with less expensive real estate and a more central location. Cities like Nashville, Indianapolis, KC, Columbus, Charlotte, etc I think offer a better quality of life/$ to employees which means companies can pay slightly lower wages while getting more real estate for less$ and a better location logistically speaking than cities on the coasts.
In reply to STM317 :
Sounds reasonable, except the same thing has sounded reasonable for the last 250 years.
I can't explain why.
In this situation, I would definitely sell. I could never make it work out as better than an index fund, with a few exceptions. First exception, you buy a duplex or triplex and live in one of the units. Second exception, you can get an insane deal on a short sale or foreclosure (highly unlikely, but possible). Third exception, you live in a college town and rent it out by the troom. Often in a 3 bedroom a single room can cover the mortgage, second room can cover tax and maintenance.
This is not to say it’s not a good decision, just that I’ve never been able to get the numbers to work on paper, and it will require much more of my time than contributing to my 401k/IRA/other savings.
Robbie said:In reply to STM317 :
Sounds reasonable, except the same thing has sounded reasonable for the last 250 years.
I can't explain why.
That's a valid point. If we use long term historical trends to project future trends in the stock market, perhaps the same holds for real estate markets.
Like I said, I don't have a crystal ball but I do think that shareholder owned corporations are constantly chasing efficiency to remain competitive and profitable. At some point, it becomes detrimental to those efforts to pay so much more for real estate, taxes, and wages when located in a major city.
STM317 said:Robbie said:In reply to STM317 :
Sounds reasonable, except the same thing has sounded reasonable for the last 250 years.
I can't explain why.
That's a valid point. If we use long term historical trends to project future trends in the stock market, perhaps the same holds for real estate markets.
Like I said, I don't have a crystal ball but I do think that shareholder owned corporations are constantly chasing efficiency to remain competitive and profitable. At some point, it becomes detrimental to those efforts to pay so much more for real estate, taxes, and wages when located in a major city.
For many of those corporations the benefit of being in a major metro area is talent pool, which is a huge issue when you move out to a more rural area/secondary city/etc.
In reply to ProDarwin :
The smart, talented workers are starting to realize that a big raise to live in a more expensive location may not be enough to even maintain their same quality of life, let alone improve it. I've known talented workers who've recently turned down job offers with significant pay increases because they figured out that while they'd be making more, they'd have to downgrade their housing, and their tax burden was going to increase significantly. It was a net loss even with something like a 40% raise.
Lets consider Seattle. The median income is just over $82k, and the median home price is just over 723k. So an average home is 8.8 times the median income.
Compare that to Indianapolis, where the median income is $59k, but the median house is $144k (just 2.44 times the median income).
You can live better on less income in Indy than Seattle. I haven't done the math for any other comparisons between other cities, but I'm sure it's the same idea. DC vs Charlotte, or LA vs KC or SF vs Nashville or Louisville probably have similar numbers.
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