Anonymous wrote:

Anonymous wrote:

Anonymous wrote:First of all, it’s not wise to have half of your net worth tied up in such an illiquid investment. In the best of times, it takes months to liquidate a house, and if the market slows down, it could take years.

Also, make sure you look at all the tax implications of renting, including how depreciation recapture works. Also the impact of losing the capital gains tax exemption, if the house has appreciated since you purchased it.

FWIW, I inherited several rental properties in a hot real estate market and, after doing the math on all the expenses (maintenance, taxes, insurance, management fees, business license, etc), and then add in the loss of tax basis through depreciation, it didn’t pencil out as investment vs. the stock market. You can buy a CD now that has over 5% interest, and you don’t have to hassle with renters.

It looked to me like rental real estate is a good investment IF you are highly leveraged AND in a market that is appreciating, and could cover all of your expenses, including mortgage, with the rent. That worked much better when you could get a sub 3% interest rate.

A CD has a limit on how much you can invest. If her house is paid off she will be way over FDIC ins limits and will have to maintain multiple accounts in multiple institutions and roll them over when they mature, and they may not mature into high rate environment years later. Rates for high yield saving accts also fluctuate. If she buys long term CD her money isn't liquid either, in fact if she needs it, she will have to wait many months to get access just the same as if she puts RE for sale. Yes, it's a good idea if you don't have hundreds of thousands to invest and you really do not need this money. It's one of the diversification vehicles if you invest elsewhere too. But it's not necessarily *better* in an of itself

So you spread the CDs across a few different banks to get FDIC insurance. Easy to do---been doing it for 15+ years.
To access a CD you typically only pay 2-3 months interest as a penalty. So it is essentially liquid. I highly recommend putting money into 10 (single acct) or 20 (joint acct) $25K CDs at each bank, that way if you need to access some extra cash, you only cash in the CDs that you need, not a full $250K or $500K (on a joint account). Sure it may not mature into the same current 5%, but it could be higher.
Fact is the market largely will do better over time with less hassle than majority of real estate market. My MD home (Ellicott City, top schools) might have finally doubled in value in 21 years, and that is after a new kitchen ($90K), new roof, new hardwood floors/ripping out carpet, new HVAC, 3 new H2O heaters, etc. So take away the maintenance costs/imporvements of almost $200K and it has not actually doubled.
That money would have about tripled in value over the last 20 years in the S&P500 index....with a lot less stress/work required.

You don't realize that market riding up in the last 20 years does not guarantee this will continue? Everything went up last 20 years and we have inflation eat up most of our "appreciation" in RE and also a lot of what steady low risk funds had provided. I had been allocating my 401 rather conservatively and still lost some years. There were periods I had allocated everything to cash or MM because market wasn't performing as well. I don't see my investments in the market doubling, or I really suck at it, which is much more common for majority of people vs. being good at it. RE doesn't double necessarily either depending on the area. In some areas prices shot up 3x while in others they remained the same if only barely keeping up with inflation. There is no guarantee investing one way or another, it's really up to what you are comfortable doing. With OPs situation it is also about whether relocation is permanent or not. Diff decision depending on future plans.

Anonymous wrote:

Anonymous wrote:I've read some retirement forum comments that say real estate is the way to grow your net worth and is always a good investment. I disagree for the reasons that PPs have mentioned, but maybe that's why I'm not rich.

Well, just do the math. In today's dollars (inflation adjusted), OP can expect to get $2k/month rental income (assuming management co) and retain the property, or 4% return in the market on $600k from sale. Over 25 years, that's $1.2M rental income plus retained property value, vs about $1.2M in the stock market. It's about even either way.

$2k/month rental income in Reston for a SFH seems low, more like $2700-$3100/month depending on the size and lot. You have a few years to rent it out before you lose the capital gains benefit. But first you need to purge the house and then fix it up to be rentable and served by a management firm. If you are not willing to do that, just sell the house. I like a diversified portfolio so I would be inclined to keep the house esp if the lot was good and in a nice neighborhood. The house is an appreciating asset, get a positive monthly cash flow, easy to do with no mortgage, hope for roughly 4% annual price appreciation.

Anonymous wrote:I no longer live in VA but still own my SFH (in Reston) worth about 650K. The house is fully paid off, but it needs some work.
It’s been sitting for almost six months now since I moved away. I thought I was going to sell, but I just can’t bring myself to list it. Now I’m considering renting it out.
We’re not extremely wealthy and this house is about half of our total net worth.
Should we sell this house or rent it out? Were currently on the west coast and if we moved back to Reston it wouldn’t be for 15-20 years. This decision has me paralyzed! Please advise.

I was a landlord for many years. It was OK when I lived near my rental property. But after moving a mere 20 miles away, it turned into a huge hassle.

Sell NOW while you can take advantage of the right to protect your capital gains on the property from taxation. If you wait too long, you may face a hefty tax. This is what happened to me, and it was a foolish mistake.

I'd rent it out if:

1) it doesn't need a lot of work now
2) you dont anticipate needing a lot of money in the next 5 years (eg college or retirement)
3) the location is sufficiently desirable that you will easily find quality renters and you can charge enough to make at least the same return as you would investing 650 k (minus transaction fees) in the market. What's the current rental estimate?

We are renting out a parent's house across the country. The rent is 9500. Mortgage (small) tax and insurance is about 3k. We pay 500/mo in management fees, plus the maintenance aint cheap. Probably bring in an average of 5800/month in profit.

a few things: insurance is higher (esp fire insurance....maybe because its california) and additional renter insurance that covers stuff we didn't have when it was owner occupied. we have to pay taxes on rental income but can deduct a lot of expenses from it. the capital gains exclusion wont really come into play because we plan to keep this until parent passes away and until then the monthly rent covers all expenses for the home and most of the care parent needs. We probably could have sold, invested those funds and probably come out the same but parent wasn't ready to see it sold and to be honest inheriting the house at step up basis saves around 450k in capital gains tax when we do sell it . However, we also put 165k into renovations to make it rentable for this particular market, otherwise we would have sold as is which was most likely a tear down--older ranch home in a neighborhood of mostly renovated 4-8 million dollar homes).

I found an online rent vs sell calculator which is worth looking for. It takes into account a lot of factors.

Anonymous wrote:

Anonymous wrote:First of all, it’s not wise to have half of your net worth tied up in such an illiquid investment. In the best of times, it takes months to liquidate a house, and if the market slows down, it could take years.

Also, make sure you look at all the tax implications of renting, including how depreciation recapture works. Also the impact of losing the capital gains tax exemption, if the house has appreciated since you purchased it.

FWIW, I inherited several rental properties in a hot real estate market and, after doing the math on all the expenses (maintenance, taxes, insurance, management fees, business license, etc), and then add in the loss of tax basis through depreciation, it didn’t pencil out as investment vs. the stock market. You can buy a CD now that has over 5% interest, and you don’t have to hassle with renters.

It looked to me like rental real estate is a good investment IF you are highly leveraged AND in a market that is appreciating, and could cover all of your expenses, including mortgage, with the rent. That worked much better when you could get a sub 3% interest rate.

A CD has a limit on how much you can invest. If her house is paid off she will be way over FDIC ins limits and will have to maintain multiple accounts in multiple institutions and roll them over when they mature, and they may not mature into high rate environment years later. Rates for high yield saving accts also fluctuate. If she buys long term CD her money isn't liquid either, in fact if she needs it, she will have to wait many months to get access just the same as if she puts RE for sale. Yes, it's a good idea if you don't have hundreds of thousands to invest and you really do not need this money. It's one of the diversification vehicles if you invest elsewhere too. But it's not necessarily *better* in an of itself

So you spread the CDs across a few different banks to get FDIC insurance. Easy to do---been doing it for 15+ years.
To access a CD you typically only pay 2-3 months interest as a penalty. So it is essentially liquid. I highly recommend putting money into 10 (single acct) or 20 (joint acct) $25K CDs at each bank, that way if you need to access some extra cash, you only cash in the CDs that you need, not a full $250K or $500K (on a joint account). Sure it may not mature into the same current 5%, but it could be higher.
Fact is the market largely will do better over time with less hassle than majority of real estate market. My MD home (Ellicott City, top schools) might have finally doubled in value in 21 years, and that is after a new kitchen ($90K), new roof, new hardwood floors/ripping out carpet, new HVAC, 3 new H2O heaters, etc. So take away the maintenance costs/imporvements of almost $200K and it has not actually doubled.
That money would have about tripled in value over the last 20 years in the S&P500 index....with a lot less stress/work required.

Anonymous wrote:Given how low inventory it, I'd list it now before prices fall in the future.

Wow, this is some cataclysmic thinking. You think if prices keep falling down and down stock market will remain stable and keep growing?

Interesting to observe that those who had a good experience renting their houses advise to rent and those who advise against renting don't have any experience in being a LL at all, just the fear of it.

We used to live in one of the low COL states, we moved out of state 2 decades ago and kept our starter home as a rental which doubled in value since. We hired a maintenance company that takes care of everything and do nothing but receive a check. Sometimes there are repair costs that are deducted from our payment and breakdown of expenses. It could be that maintenance co overcharges us, but at least we didn't have to deal with headaches all these years and we are ok with the rents we are getting even if they might be higher had we managed the property ourselves. If we sold the house back when we moved out we would have lost all the appreciation. Even if we have to pay tax on it and even if it goes down in value with market correction, we still come out ahead vs. getting literally nothing by selling it immediately after we moved out. With this said, we kept it for a very long time, and it wasn't an expensive property and didn't constitute so much of our NW to feel like our money was buried. But overall I think if the area is good you cannot go wrong unless something cataclysmic happens. I have a family member who also kept their FL home as a rental when it was cheap there and now they got crazy appreciation and glad they kept it. It was tough t have to afford to buy a new home in their new state without cashing out their older home, but they glad they didn't sell then.

Given how low inventory it, I'd list it now before prices fall in the future.

A lot of posters here complaining about dealing with renters from that far away have no idea how property managers work. You literally pay them to deal with the renters. That's their job. They go out of business if they don't do that well.

One thing I like about having so much of my NW tied up in my rental properties equity is that it's harder to get it out. If I instead had the money in stocks or cash, it would be too easy for me to spend it. Buy that vacation house, put in a pool, let's get a new car, etc.

With houses, I am forced to live within my means because, especially in the current market, it's too expensive to do a cash out refi or even get a HEL or HELOC.

But I realize that others with more discipline don't have this problem.

Anonymous wrote:First of all, it’s not wise to have half of your net worth tied up in such an illiquid investment. In the best of times, it takes months to liquidate a house, and if the market slows down, it could take years.

Also, make sure you look at all the tax implications of renting, including how depreciation recapture works. Also the impact of losing the capital gains tax exemption, if the house has appreciated since you purchased it.

FWIW, I inherited several rental properties in a hot real estate market and, after doing the math on all the expenses (maintenance, taxes, insurance, management fees, business license, etc), and then add in the loss of tax basis through depreciation, it didn’t pencil out as investment vs. the stock market. You can buy a CD now that has over 5% interest, and you don’t have to hassle with renters.

It looked to me like rental real estate is a good investment IF you are highly leveraged AND in a market that is appreciating, and could cover all of your expenses, including mortgage, with the rent. That worked much better when you could get a sub 3% interest rate.

A CD has a limit on how much you can invest. If her house is paid off she will be way over FDIC ins limits and will have to maintain multiple accounts in multiple institutions and roll them over when they mature, and they may not mature into high rate environment years later. Rates for high yield saving accts also fluctuate. If she buys long term CD her money isn't liquid either, in fact if she needs it, she will have to wait many months to get access just the same as if she puts RE for sale. Yes, it's a good idea if you don't have hundreds of thousands to invest and you really do not need this money. It's one of the diversification vehicles if you invest elsewhere too. But it's not necessarily *better* in an of itself

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I've read some retirement forum comments that say real estate is the way to grow your net worth and is always a good investment. I disagree for the reasons that PPs have mentioned, but maybe that's why I'm not rich.

Well, just do the math. In today's dollars (inflation adjusted), OP can expect to get $2k/month rental income (assuming management co) and retain the property, or 4% return in the market on $600k from sale. Over 25 years, that's $1.2M rental income plus retained property value, vs about $1.2M in the stock market. It's about even either way.

It is not. The property will need work. And over 25 years, the needed repairs/improvements will be substantial. Then, there will be times when the property is not rented, etc. Also, where are the property taxes and the home owners insurance (for landlords), which is much higher than owner occupied.

OP, you don’t have to be a financial guru or pay anyone to manage your money. Just buy a diversified index fund and be done.

What makes you believe that in tough economic times when RE plummets and OP loses her value stock market will remain stable and not tank and even produce returns? Stocks depend on consumer confidence just as much as RE market, and if RE tanks and people feel poorer they don't spend and your diversified funds stagnate or go down too. Great depression was not a one sided thing and market crashes happened long term more times than we care to admit. Profits from diversified funds work because generally most non risky investments keep with inflation. Stock prices are inflated too.

Anonymous wrote:

Anonymous wrote:Sell it before you lose your capital gains exclusion.

This^^^

You can do a conversion, sell it and buy another rental within a certain number of days (60 I think..) this way you roll your appreciation and don't pay tax. You will then continue depreciating a new property. If you want to get out, you can sell the new rental property in a year or two and keep the proceeds from the 1st property appreciation as long as this second property sale is not at loss. Tell me I am wrong, I don't know, but this has been mentioned here before and I heard about conversion sale/purchase multiple times.

Anonymous wrote:

Anonymous wrote:It's so easy to rent it out with a management company. They will find a renter and take care of all repairs. Even after the repairs and their fees, you will make net prob more than a low interest mortgage payment on it. In Reston you'll get good renters. A lot of military and other people who don't plan to settle in this area need sfh rentals near good schools. Talk to a management company, and you'll be surprised at how profitable it can be.

Yes, Reston is a nice area. And no doubt it's a prime location for good renters. But rentals in the DC area rarely have cash flow of more than a couple hundred bucks a month, even if purchased 20 years ago. I know because I own several. And management companies border on being useless. Nobody knows your property better than you, and nobody will care for your property better than you.

THIS^^^
When I live in a property, I notice small issues before they become big issues. Rarely will your renters do this. That means the minor plumbing issue that I would have fixed for $1K before there was any extra damages will likely be over $5K with drywall, painting and other damages besides the plumbing because it became a major issue.

I know too many people who have regretted renting and lost money. DOn't know anyone who actually made more money than they would have by investing.

Also, you loose the capital gains deduction if you dont sell within the time frame. Not worth it IMO

Anonymous wrote:

Anonymous wrote:I've read some retirement forum comments that say real estate is the way to grow your net worth and is always a good investment. I disagree for the reasons that PPs have mentioned, but maybe that's why I'm not rich.

Well, just do the math. In today's dollars (inflation adjusted), OP can expect to get $2k/month rental income (assuming management co) and retain the property, or 4% return in the market on $600k from sale. Over 25 years, that's $1.2M rental income plus retained property value, vs about $1.2M in the stock market. It's about even either way.

But with the house they have to put on a new roof ($15K), fix leaky pipes and the damages it caused since it's an older home ($10K), paint the exterior/new siding ($10-12k), all new plumbing fixtures every 10-15 years ($10K), new furnance/AC ($10K), new fridge, new dishwasher, etc....with renters you have to pay a premium and have them done immediately---you can't wait a month to fix the AC to get a better price.