Anonymous wrote:First of all, 10% is not a reasonable annual rate of return to assume for SPY over a 20-year horizon.

In addition to diversification and leverage (nobody is going to lend you money to buy stocks; lots of people will lend you money to buy housing) some people want to be landlords. I did. Right now, I haven't found the numbers to work to buy more, but I'm glad to have an investment property as part of my portfolio. I think the rental market works better if it's not all owned by venture capital companies and Jared Kushner's family.

10% isn’t guaranteed and we could see underperformance over the next 20, but the long term average is about 10.5%. Obviously before you factor inflation.

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:We live in a TH with a rock bottom mortgage rate in a good school zone and are torn between selling it or keeping as a rental when moving up. We would get about 225k equity out of it if we sold and it would rent for around $3500/month based on comps.

The monthly cost for the house (PITI + HOA) before any maintenance is $2200. Best case scenario after dealing with upkeep and vacancies we would cash flow maybe $1000/month, but would also benefit from $850/mo principal pay down and a few % appreciation per year on a 600k TH. This looks like ~40k/yr in gains putting those three together if we assume 3% appreciation. Over 20 years time frame if we assume rent and house value grow at 3%, and all cash flow is reinvested into the SPY, the total value we are left with in the end is about $1.5M if we combine the stocks and TH equity.

On the flip side if we just sold and invested the 225k equity up front in the SPY then averaging 10% would yield $1.5M in 20 years, so pretty much the same as renting the house but with zero hassle.

It seems like this math holds true for most situations where someone has at least 30-40% equity in their house, it’s almost always better to sell the house and invest the equity in stocks. Not only do you get better returns but there’s no headache involved. Only in situations where you’re highly leveraged with very small amounts of equity is it more ideal to turn it into a rental.

So my question for the people here with lots of rental properties that are at least 1/3 of the way paid off: what keeps you from just selling and investing the proceeds in stocks? Even with all the tax deductions available for landlords I still can’t get the math to make sense.

It's this simple. My spouse is a spendthrift. I had investment properties before we married that I bought in the Great Recession. I've 1031'd into some better properties. I keep them in a separate entity to protect myself (and now our kids) from my spendthrift spouse. If it were in a brokerage account, he would have already spent it. I also max out other accounts, such as a 401 (k) and 529 plans (that he can't access to spend).

PP if you see this, can you elaborate on the 1031 process?

I'm not that PP, but Internal Revenue Code section 1031 allows for "like kind exchanges," which is a way of sheltering gains from taxation. If I own an investment property I rent out, and selling it would result in a tax obligation because there is gain, I can avoid that tax by using the money to buy another property to rent out. So ... I had one piece of real property, and used the gain from the sale of it to right away invest in another property of like kind.

This is the basic gist: If I own a house (that is not my residence) that I rent out, and it is worth $100, and I have a basis of $50, and I sell it, I owe tax on $50 of gain. If I have that same house and I sell it and then use that $50 to buy a new rental property to rent out, I can avoid the taxation on that $50 of gain.

Here's the IRS info sheet: https://www.irs.gov/pub/irs-news/fs-08-18.pdf

This is why we've always been 100% in stocks that we hand-picked. Mostly Apple and other high tech that morphed into the Magnificent Seven (I shorted Tesla recently). It's gone spectacularly.

My BILs are 100% in rental properties because they don't understand the stock market. It works well for them because they know how to be landlords.

So really you should know what you're doing, OP, regardless of what you choose.

Anonymous wrote:First, assuming a 10% SPY return is optimistic. Long run it’s more like 7.5%.

But to answer your question…leverage.

You can borrow 80% of the purchase price of a rental property, so your equity return is much higher from rent, plus the increase in purchase price.

Sure, you could buy stocks on margin…but that’s a risky thing to do and most won’t do it.

Also, RE provides a hedge against stock market volatility. If you owned the SPY in 1999, it went down and didn’t come back to even until 2011. In theory, an investment property would have earned a nice return of er that time period (assuming you didn’t lose it in theory financial crisis).

Leverage. And when interest rates were low, it really was a chance for ordinary people to invest with Other People's Money. If you bought a 4-plex you could get a 30-year fixed rate loan. When interest rates were low the cash-on-cash return was often very favorable. A nice window in time that's closing now.

We are in this position. It's very hard to decide what to do. There are a lot of things to consider.

We have a house in NoVA (2.5% mortgage on only about 1/3 of the value of the home) that we moved out of (didn't love the new neighbors and their noise, sigh) a little over a year ago, and we rented it out and we have just allowed the tenants to renew for another year. If they hadn't renewed we were going to sell it. The big consideration for us has been the tax ramifications -- there is a lot of appreciation and if we don't sell the home within three years, we will get a big tax hit. That's assuming the value does not go down, which is a reason we considered selling it now and not renewing the lease.

It is in a great location and should always be easy to rent. I like the idea of being diversified and having some money in real estate. But we've been really lucky with the tenants we have now and as everyone knows, being a landlord can go south quickly with one bad tenant. It's a risk. I'll add that we found the tenants and manage the property ourselves. We used Zillow to find the tenant and it was a bigger pita than we had imagined. Day to day is fine, the tenants are reasonable and my DH is handy. We did just have to replace the AC and it was like 6k, sigh. But it was time to replace it anyway -- there will be maintenance costs, some of them bigger. But we have the cash for that kind of thing.

We will probably sell next year, and have told the tenants that. We've also told them we are happy to let them out of the one-year lease with 60 days notice since we would be happy to just sell it. They have expressed interest in buying, so we might end up just selling it to them.

But given all of the volatility in the world in general these days, I kind of like the idea of having some investment real property.

Anonymous wrote:

Anonymous wrote:1) Our rental properties aren't instead of stocks, they're in addition to stocks. Diversification.
2) Rentals can provide income without having to sell any assets;
3) Rental income is much less affected by economic downturns than stocks - this can vary by the type of rentals you have (commercial/high end/apartment) but we have units that are geared toward LMC families.

That said, it's much more hassle than just throwing a couple hundred K into stocks; you're right on that point. We have a good property management company now but it was ugly for a while there.

Correct. I would add that you can avoid a tax hit if you rent it for up to five years and sell. Otherwise taxes will eat your profit.

Long-term gains in stock and real estate are taxed the same (aside from the owner occupancy exclusion).

Anonymous wrote:

Anonymous wrote:We live in a TH with a rock bottom mortgage rate in a good school zone and are torn between selling it or keeping as a rental when moving up. We would get about 225k equity out of it if we sold and it would rent for around $3500/month based on comps.

The monthly cost for the house (PITI + HOA) before any maintenance is $2200. Best case scenario after dealing with upkeep and vacancies we would cash flow maybe $1000/month, but would also benefit from $850/mo principal pay down and a few % appreciation per year on a 600k TH. This looks like ~40k/yr in gains putting those three together if we assume 3% appreciation. Over 20 years time frame if we assume rent and house value grow at 3%, and all cash flow is reinvested into the SPY, the total value we are left with in the end is about $1.5M if we combine the stocks and TH equity.

On the flip side if we just sold and invested the 225k equity up front in the SPY then averaging 10% would yield $1.5M in 20 years, so pretty much the same as renting the house but with zero hassle.

It seems like this math holds true for most situations where someone has at least 30-40% equity in their house, it’s almost always better to sell the house and invest the equity in stocks. Not only do you get better returns but there’s no headache involved. Only in situations where you’re highly leveraged with very small amounts of equity is it more ideal to turn it into a rental.

So my question for the people here with lots of rental properties that are at least 1/3 of the way paid off: what keeps you from just selling and investing the proceeds in stocks? Even with all the tax deductions available for landlords I still can’t get the math to make sense.

It's this simple. My spouse is a spendthrift. I had investment properties before we married that I bought in the Great Recession. I've 1031'd into some better properties. I keep them in a separate entity to protect myself (and now our kids) from my spendthrift spouse. If it were in a brokerage account, he would have already spent it. I also max out other accounts, such as a 401 (k) and 529 plans (that he can't access to spend).

PP if you see this, can you elaborate on the 1031 process?

First of all, 10% is not a reasonable annual rate of return to assume for SPY over a 20-year horizon.

In addition to diversification and leverage (nobody is going to lend you money to buy stocks; lots of people will lend you money to buy housing) some people want to be landlords. I did. Right now, I haven't found the numbers to work to buy more, but I'm glad to have an investment property as part of my portfolio. I think the rental market works better if it's not all owned by venture capital companies and Jared Kushner's family.

First, assuming a 10% SPY return is optimistic. Long run it’s more like 7.5%.

But to answer your question…leverage.

You can borrow 80% of the purchase price of a rental property, so your equity return is much higher from rent, plus the increase in purchase price.

Sure, you could buy stocks on margin…but that’s a risky thing to do and most won’t do it.

Also, RE provides a hedge against stock market volatility. If you owned the SPY in 1999, it went down and didn’t come back to even until 2011. In theory, an investment property would have earned a nice return of er that time period (assuming you didn’t lose it in theory financial crisis).

I’ve owned various rental/vacation rental properties over the years and they’ve been nothing but a PITA. I’ve done far better just investing in index funds and letting the money sit there. I’d never trouble myself with a rental again.

Anonymous wrote:We live in a TH with a rock bottom mortgage rate in a good school zone and are torn between selling it or keeping as a rental when moving up. We would get about 225k equity out of it if we sold and it would rent for around $3500/month based on comps.

The monthly cost for the house (PITI + HOA) before any maintenance is $2200. Best case scenario after dealing with upkeep and vacancies we would cash flow maybe $1000/month, but would also benefit from $850/mo principal pay down and a few % appreciation per year on a 600k TH. This looks like ~40k/yr in gains putting those three together if we assume 3% appreciation. Over 20 years time frame if we assume rent and house value grow at 3%, and all cash flow is reinvested into the SPY, the total value we are left with in the end is about $1.5M if we combine the stocks and TH equity.

On the flip side if we just sold and invested the 225k equity up front in the SPY then averaging 10% would yield $1.5M in 20 years, so pretty much the same as renting the house but with zero hassle.

It seems like this math holds true for most situations where someone has at least 30-40% equity in their house, it’s almost always better to sell the house and invest the equity in stocks. Not only do you get better returns but there’s no headache involved. Only in situations where you’re highly leveraged with very small amounts of equity is it more ideal to turn it into a rental.

So my question for the people here with lots of rental properties that are at least 1/3 of the way paid off: what keeps you from just selling and investing the proceeds in stocks? Even with all the tax deductions available for landlords I still can’t get the math to make sense.

It's this simple. My spouse is a spendthrift. I had investment properties before we married that I bought in the Great Recession. I've 1031'd into some better properties. I keep them in a separate entity to protect myself (and now our kids) from my spendthrift spouse. If it were in a brokerage account, he would have already spent it. I also max out other accounts, such as a 401 (k) and 529 plans (that he can't access to spend).

Anonymous wrote:1) Our rental properties aren't instead of stocks, they're in addition to stocks. Diversification.
2) Rentals can provide income without having to sell any assets;
3) Rental income is much less affected by economic downturns than stocks - this can vary by the type of rentals you have (commercial/high end/apartment) but we have units that are geared toward LMC families.

That said, it's much more hassle than just throwing a couple hundred K into stocks; you're right on that point. We have a good property management company now but it was ugly for a while there.

Agree that stocks in general have more volatility, but you can do a bond split to mitigate this or go with defensive/value oriented stocks that are less susceptible to the boom and bust cycles of growth stocks. You also do get some cash flow with dividends. Diversification… you are diversifying away from equities but now you’re more concentrated into a handful of buildings and localities, so it’s a double edged sword.

Anonymous wrote:1) Our rental properties aren't instead of stocks, they're in addition to stocks. Diversification.
2) Rentals can provide income without having to sell any assets;
3) Rental income is much less affected by economic downturns than stocks - this can vary by the type of rentals you have (commercial/high end/apartment) but we have units that are geared toward LMC families.

That said, it's much more hassle than just throwing a couple hundred K into stocks; you're right on that point. We have a good property management company now but it was ugly for a while there.

Correct. I would add that you can avoid a tax hit if you rent it for up to five years and sell. Otherwise taxes will eat your profit.

1) Our rental properties aren't instead of stocks, they're in addition to stocks. Diversification.
2) Rentals can provide income without having to sell any assets;
3) Rental income is much less affected by economic downturns than stocks - this can vary by the type of rentals you have (commercial/high end/apartment) but we have units that are geared toward LMC families.

That said, it's much more hassle than just throwing a couple hundred K into stocks; you're right on that point. We have a good property management company now but it was ugly for a while there.

We live in a TH with a rock bottom mortgage rate in a good school zone and are torn between selling it or keeping as a rental when moving up. We would get about 225k equity out of it if we sold and it would rent for around $3500/month based on comps.

The monthly cost for the house (PITI + HOA) before any maintenance is $2200. Best case scenario after dealing with upkeep and vacancies we would cash flow maybe $1000/month, but would also benefit from $850/mo principal pay down and a few % appreciation per year on a 600k TH. This looks like ~40k/yr in gains putting those three together if we assume 3% appreciation. Over 20 years time frame if we assume rent and house value grow at 3%, and all cash flow is reinvested into the SPY, the total value we are left with in the end is about $1.5M if we combine the stocks and TH equity.

On the flip side if we just sold and invested the 225k equity up front in the SPY then averaging 10% would yield $1.5M in 20 years, so pretty much the same as renting the house but with zero hassle.

It seems like this math holds true for most situations where someone has at least 30-40% equity in their house, it’s almost always better to sell the house and invest the equity in stocks. Not only do you get better returns but there’s no headache involved. Only in situations where you’re highly leveraged with very small amounts of equity is it more ideal to turn it into a rental.

So my question for the people here with lots of rental properties that are at least 1/3 of the way paid off: what keeps you from just selling and investing the proceeds in stocks? Even with all the tax deductions available for landlords I still can’t get the math to make sense.