Reply to spinoff: Dave Ramsey and second houses

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[quote=Anonymous]OP, the way to look at is is that you have a certain amount of your assets tied up in this townhouse (based on your posts, it sounds like you have about $100k in equity in the house). Is the rate at which the value of your townhouse is appreciating comparable to the return you'd get on that money if you used it a different way? If your townhouse has been appreciating at roughly 1% a year since the market bottomed out, it's gaining about $3k a year in value, which is an annual return on your equity of about 3%. If you sold the townhouse and invested that $100k in sensible funds, over time you should average a greater than 3% return on your investment, which argues in favor of selling.

Another consideration is that once the mortgage is paid off, your rental income will then go back to you, and can provide you with an income stream down the road. The math on that gets a bit complicated, because you have to factor in the extra $2,400k a year you're paying on top of what your renters pay, extra amounts for any tenancy gaps, costs of repairs, etc. But let's set those numbers aside for a moment. If we assume you have 10 years left on your mortgage, and we assume that investing the money in alternative ways would result in an average gain of 6% per year (most sources put the long-term annual average on stock funds at 8-12%, but I'm being conservative here because we're talking about 10 years, not 20+), if you put equity into other investments and didn't touch them at all for 10 years, we could project they'd be worth approximately $180k at the end of those ten years. If you continued to earn an average of 6% after that (which, again, is a conservative estimate over time) but took that profit as income to you rather than reinvesting it, you'd spin off approximately $10k in income per year from that investment. If we bump those estimated returns up to 10% (so the middle of the average estimates for those kinds of investments), that would mean you'd have $270k after 10 years, and could spin off approx. $25k in income per year. How does that compare to the rental income you receive each month, less vacancy periods, property taxes/insurance, maintenance, etc.?

Obviously these are really back-of-the-envelope calculations, and don't take into account tax considerations, but it's at least a starting point for figuring out whether your townhouse is a sensible investment in the long run.[/quote]

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