Sell paid off house, invest proceeds and rent

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Meaty
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Sell paid off house, invest proceeds and rent

Post by Meaty » Tue Jul 23, 2019 1:17 pm

The subject line says it all. I have a paid off house values around $400k. I could rent something a little nicer for $2500/month.

From a purely financial perspective, wouldn’t I be better off to sell the house, invest the proceeds, and rent? Here’s my thinking

Year 1 rent = 30k
Current home taxes/maintenance = $9900
Difference between HO insurance and rental insurance = $1000

As a result, the net rent is $19,100. Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1

Thoughts?
"Discipline equals Freedom" - Jocko Willink

ponyboy
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Re: Sell paid off house, invest proceeds and rent

Post by ponyboy » Tue Jul 23, 2019 1:21 pm

Assuming 6% return? lol...I wouldnt assume anything, especially not 6% return every single year.

adamthesmythe
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Re: Sell paid off house, invest proceeds and rent

Post by adamthesmythe » Tue Jul 23, 2019 1:40 pm

I will take a while to recoup transaction and moving costs.

You are assuming house price remains constant. Like stocks, it could increase but then again it could also decrease.

There will be maintenance on the house, but then again rent will increase.

Personally I wouldn't do it, but I buy a house because I like it and I want to live in it.

mhalley
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Re: Sell paid off house, invest proceeds and rent

Post by mhalley » Tue Jul 23, 2019 1:46 pm

The main advantage of owning is that your housing cost and location is fixed. If you rent, most likely your rent will increase yearly, plus you might have to move when your lease is up. Renting has lots of pluses, (no repair bills, yard work, etc), so you have to decide of the trade off is worth it. Selling and downsizing to a cheaper rental would make more financial sense.

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FIREchief
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Re: Sell paid off house, invest proceeds and rent

Post by FIREchief » Tue Jul 23, 2019 1:58 pm

Meaty wrote:
Tue Jul 23, 2019 1:17 pm
The subject line says it all. I have a paid off house values around $400k. I could rent something a little nicer for $2500/month.

From a purely financial perspective, wouldn’t I be better off to sell the house, invest the proceeds, and rent? Here’s my thinking

Year 1 rent = 30k
Current home taxes/maintenance = $9900
Difference between HO insurance and rental insurance = $1000

As a result, the net rent is $19,100. Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1

Thoughts?
We recently downsized in a similar situation. Ballpark numbers:
Paid off house: $300K
Taxes/maintenance: $6000 minimum
Annual rent: $18000
Insurance savings: $500
Freedom from home maintenance and upgrading: Priceless

I don't live life from a "purely financial perspective," so this was not a financial decision. That said, despite what all the experts tell us (a different discussion), I've used 6% real return for the stock market for years and have been consistently wrong (on the low side). If I use that number, then my sales proceeds cover my rent and anything else is just gravy.

We were at the empty nest point and had twice as much house as we needed. The house was also at the point where one bathroom was clearly in need of upgrading, and the others and kitchen were approaching that point. If you need help with your decision, just meet with a couple of home remodelers and solicit the horror stories from your friends who have ventured down that path... :twisted:
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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JoeRetire
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Re: Sell paid off house, invest proceeds and rent

Post by JoeRetire » Tue Jul 23, 2019 2:07 pm

Meaty wrote:
Tue Jul 23, 2019 1:17 pm
The subject line says it all. I have a paid off house values around $400k. I could rent something a little nicer for $2500/month.

From a purely financial perspective, wouldn’t I be better off to sell the house, invest the proceeds, and rent?
Possibly.

It would be even better if you rented something just as nice for less than $2500/month.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

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Meaty
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Re: Sell paid off house, invest proceeds and rent

Post by Meaty » Tue Jul 23, 2019 2:14 pm

ponyboy wrote:
Tue Jul 23, 2019 1:21 pm
Assuming 6% return? lol...I wouldnt assume anything, especially not 6% return every single year.
I know a lot of people don’t think returns will be near the historical norm over the next 10 years, but it seems overly pessimistic to me. I choose to use the last 100 years as a fair baseline for my assumption; and 6% real is less than historical norms
"Discipline equals Freedom" - Jocko Willink

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Meaty
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Re: Sell paid off house, invest proceeds and rent

Post by Meaty » Tue Jul 23, 2019 2:15 pm

FIREchief wrote:
Tue Jul 23, 2019 1:58 pm
Meaty wrote:
Tue Jul 23, 2019 1:17 pm
The subject line says it all. I have a paid off house values around $400k. I could rent something a little nicer for $2500/month.

From a purely financial perspective, wouldn’t I be better off to sell the house, invest the proceeds, and rent? Here’s my thinking

Year 1 rent = 30k
Current home taxes/maintenance = $9900
Difference between HO insurance and rental insurance = $1000

As a result, the net rent is $19,100. Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1

Thoughts?
We recently downsized in a similar situation. Ballpark numbers:
Paid off house: $300K
Taxes/maintenance: $6000 minimum
Annual rent: $18000
Insurance savings: $500
Freedom from home maintenance and upgrading: Priceless

I don't live life from a "purely financial perspective," so this was not a financial decision. That said, despite what all the experts tell us (a different discussion), I've used 6% real return for the stock market for years and have been consistently wrong (on the low side). If I use that number, then my sales proceeds cover my rent and anything else is just gravy.

We were at the empty nest point and had twice as much house as we needed. The house was also at the point where one bathroom was clearly in need of upgrading, and the others and kitchen were approaching that point. If you need help with your decision, just meet with a couple of home remodelers and solicit the horror stories from your friends who have ventured down that path... :twisted:
Thanks. Our house is similarly dated. Remodeling would be a substantial cost, headache, etc. of course I don’t have to do it, but it will eventually impact our ability to sell if we don’t
"Discipline equals Freedom" - Jocko Willink

bloom2708
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Re: Sell paid off house, invest proceeds and rent

Post by bloom2708 » Tue Jul 23, 2019 2:28 pm

I think you can certainly do this. Many (some) certainly do what you are thinking.

As we head towards kids leaving the nest, I can tell you the "grass is greener" for me as a 20+ year home owner.

I am close to "finishing" lawn mowing, weed pulling, landscaping, snowblowing, shoveling, fixing, upgrading, updating, etc.

It isn't that I can't do these things. I'm good at them. I just don't want to take the time (or spend the gobs of money) any longer to do them or be good at them. I'd rather do other things with my time.

I think a person could try renting and if it just doesn't take, return to owning. Maybe more of a condo/townhouse where you lose some of the outside activities. I'd rather go for a walk, run, bike ride, hike than mow. I'd rather do most anything compared to snowblowing or shoveling snow. :oops:

"Finishing" things, even if only temporary is part of the fun of the journey. Checked the box. Marked it off. Variety is the spice of life and course correct as needed.

It may indeed be trading property taxes, insurance and upgrades/updates/maintenance for rising rent. As your years left shorten up, that is probably not a bad trade-off.
Last edited by bloom2708 on Tue Jul 23, 2019 2:49 pm, edited 1 time in total.
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MoneyMarathon
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Re: Sell paid off house, invest proceeds and rent

Post by MoneyMarathon » Tue Jul 23, 2019 2:44 pm

Meaty wrote:
Tue Jul 23, 2019 1:17 pm
The subject line says it all. I have a paid off house values around $400k. I could rent something a little nicer for $2500/month.

From a purely financial perspective, wouldn’t I be better off to sell the house, invest the proceeds, and rent? Here’s my thinking

Year 1 rent = 30k
Current home taxes/maintenance = $9900
Difference between HO insurance and rental insurance = $1000

As a result, the net rent is $19,100. Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1

Thoughts?
Taxes complicate the subject a little. For example, when you own, you're both landowner and tenant, and you're getting "imputed rent" tax free. The comparison should include the taxes on the investment, compared to the lack of taxes on imputed rent. For example, if the taxes were 20% on the investment income of $24,000, then that's $4800 in taxes.

Appreciation on the home should also be considered. If the home appreciates 2% a year (which is about as reasonable as expecting 6% by investing), that's $8000 in the first year. That's tax-free income up to a certain limit for taking capital gains tax free in your own primary residence, so it's equivalent to a much larger amount of return on investment in pre-tax terms.

Rent should go up up a little more over time, in absolute terms, than paying just taxes / maintenance / insurance.

You also may really enjoy the nicer place, so maybe none of this matters.

SovereignInvestor
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Re: Sell paid off house, invest proceeds and rent

Post by SovereignInvestor » Tue Jul 23, 2019 3:01 pm

Not worth it. The rent is too high so it requires you to get around 7% return to be breakeven if you assume 2% house appreciation.

If you want to invest that badly you can always remortgage house to leverage up. Most BH won't approve.

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Re: Sell paid off house, invest proceeds and rent

Post by FIREchief » Tue Jul 23, 2019 3:07 pm

Meaty wrote:
Tue Jul 23, 2019 2:15 pm
The house was also at the point where one bathroom was clearly in need of upgrading, and the others and kitchen were approaching that point. If you need help with your decision, just meet with a couple of home remodelers and solicit the horror stories from your friends who have ventured down that path... :twisted:
Thanks. Our house is similarly dated. Remodeling would be a substantial cost, headache, etc. of course I don’t have to do it, but it will eventually impact our ability to sell if we don’t
[/quote]

We couldn't even get an honest quote for a simple bathroom remodel. In our area, there are two basic options:
a) pay a "turn key" remodeler (does it all themselves with a well defined process and their own crew) three times what it should cost
b) pay a general contractor who farms everything out to low bidders who may never show up

We actually got a quote of $36K (?!) to pull out a tub and stand-alone shower stall, install a new larger shower and replace a vanity. That was for a stone product. Skip the vanity and the price drops $8K. Use acrylic instead of stone and the price drops another $8K. So that's $20K for a plastic shower plus a bit of demo and remediation. Yikes!! A second turn-key contractor refused to give me a quote because I had all the material prices already and they didn't want to formally admit how ridiculous their profits were. A third refused to give me a quote because he knew I had talked to the second and said that he "refused to try to compete with that company." Two others wouldn't even return emails. Our recent-construction apartment has two modern bathrooms with zero maintenance work or costs (I don't consider putting in an on-line work order to constitute "work"). :beer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

rebellovw
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Re: Sell paid off house, invest proceeds and rent

Post by rebellovw » Tue Jul 23, 2019 3:23 pm

It seems like a good plan. If this was the Bay Area 10 years ago - probably a bad idea. All my houses (2 - bay area) appreciated substantially.

I do consider this now living in a LCOL area - my house is also at 400K (just slightly over) and I only paid 230K for it. My tax is only 1500 per year. We will keep this house since it is so cheap and so comfortable and likely rent in different states as a way of traveling in 6 month intervals.

I like the idea.

Best of luck.

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FIREchief
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Re: Sell paid off house, invest proceeds and rent

Post by FIREchief » Tue Jul 23, 2019 3:33 pm

SovereignInvestor wrote:
Tue Jul 23, 2019 3:01 pm
If you want to invest that badly you can always remortgage house to leverage up. Most BH won't approve.
If we stick with the OP qualification that the question is "purely from a financial perspective," then I agree. There is risk, but unless the house winds up on a sink hole, chemical dump, earthquake fault, flood zone, etc. then the long term financial advantage likely leans towards "own."

OTOH, if it's sell now or sell in five years, the question can become more cloudy. Near term home maintenance costs are unknowable. There are hundreds of components that can fail at any time. Just because the roof was replaced five years and one month ago (with a five year warranty), doesn't mean there isn't trouble brewing. Foundations and structures never fail, right? HVAC systems and appliances are good for their warranty periods. Plumbing??? :annoyed
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Meaty
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Re: Sell paid off house, invest proceeds and rent

Post by Meaty » Tue Jul 23, 2019 3:35 pm

MoneyMarathon wrote:
Tue Jul 23, 2019 2:44 pm
Meaty wrote:
Tue Jul 23, 2019 1:17 pm
The subject line says it all. I have a paid off house values around $400k. I could rent something a little nicer for $2500/month.

From a purely financial perspective, wouldn’t I be better off to sell the house, invest the proceeds, and rent? Here’s my thinking

Year 1 rent = 30k
Current home taxes/maintenance = $9900
Difference between HO insurance and rental insurance = $1000

As a result, the net rent is $19,100. Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1

Thoughts?
Taxes complicate the subject a little. For example, when you own, you're both landowner and tenant, and you're getting "imputed rent" tax free. The comparison should include the taxes on the investment, compared to the lack of taxes on imputed rent. For example, if the taxes were 20% on the investment income of $24,000, then that's $4800 in taxes.

Appreciation on the home should also be considered. If the home appreciates 2% a year (which is about as reasonable as expecting 6% by investing), that's $8000 in the first year. That's tax-free income up to a certain limit for taking capital gains tax free in your own primary residence, so it's equivalent to a much larger amount of return on investment in pre-tax terms.

Rent should go up up a little more over time, in absolute terms, than paying just taxes / maintenance / insurance.

You also may really enjoy the nicer place, so maybe none of this matters.
Thanks. I hadn’t thought about the taxation on capital gains vs the free (up to 500k) appreciation on home values
"Discipline equals Freedom" - Jocko Willink

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Re: Sell paid off house, invest proceeds and rent

Post by Sandtrap » Tue Jul 23, 2019 3:37 pm

This might be more a matter of preferring to rent over home ownership. If you think that investing the proceeds fits your financial strategy, then great, but don't depend on return projections.

j
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Re: Sell paid off house, invest proceeds and rent

Post by neilpilot » Tue Jul 23, 2019 3:55 pm

A lot of intangibles can be involved, and that can't easily be assigned a monetary value. Just one example is the "value" of capital liquidity. The OP might put a higher value on 400k invested in relatively liquid index funds than on the same amount of capital in real estate.

We maybe facing a similar decision, since our current home is well located and comfortable but is deficient in 2 respects: no master bedroom downstairs, and way too large (4800 sq ft) for us two. So our choice maybe buy or rent.

lostdog
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Re: Sell paid off house, invest proceeds and rent

Post by lostdog » Tue Jul 23, 2019 5:12 pm

FIREchief wrote:
Tue Jul 23, 2019 1:58 pm
Meaty wrote:
Tue Jul 23, 2019 1:17 pm
The subject line says it all. I have a paid off house values around $400k. I could rent something a little nicer for $2500/month.

From a purely financial perspective, wouldn’t I be better off to sell the house, invest the proceeds, and rent? Here’s my thinking

Year 1 rent = 30k
Current home taxes/maintenance = $9900
Difference between HO insurance and rental insurance = $1000

As a result, the net rent is $19,100. Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1

Thoughts?
We recently downsized in a similar situation. Ballpark numbers:
Paid off house: $300K
Taxes/maintenance: $6000 minimum
Annual rent: $18000
Insurance savings: $500
Freedom from home maintenance and upgrading: Priceless

I don't live life from a "purely financial perspective," so this was not a financial decision. That said, despite what all the experts tell us (a different discussion), I've used 6% real return for the stock market for years and have been consistently wrong (on the low side). If I use that number, then my sales proceeds cover my rent and anything else is just gravy.

We were at the empty nest point and had twice as much house as we needed. The house was also at the point where one bathroom was clearly in need of upgrading, and the others and kitchen were approaching that point. If you need help with your decision, just meet with a couple of home remodelers and solicit the horror stories from your friends who have ventured down that path... :twisted:
Hi Firecheif,

My wife and I are wanting to do the same thing and our kitchen will need an upgrade soon. We want to sell before we consider maintenance. Did you upgrade your kitchen and bathroom before you sold?
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FIREchief
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Re: Sell paid off house, invest proceeds and rent

Post by FIREchief » Tue Jul 23, 2019 5:26 pm

lostdog wrote:
Tue Jul 23, 2019 5:12 pm
FIREchief wrote:
Tue Jul 23, 2019 1:58 pm
The house was also at the point where one bathroom was clearly in need of upgrading, and the others and kitchen were approaching that point. If you need help with your decision, just meet with a couple of home remodelers and solicit the horror stories from your friends who have ventured down that path... :twisted:
Hi Firecheif,

My wife and I are wanting to do the same thing and our kitchen will need an upgrade soon. We want to sell before we consider maintenance. Did you upgrade your kitchen and bathroom before you sold?
Absolutely not. We stepped back from that cliff just in time. 8-)

We interviewed several successful realtors, and only one suggested that we should upgrade anything (she wanted us to paint the Oak kitchen cabinets white). :oops: That's this strange thing that people are apparently seeing on TV these days. I've seen real estate listings where this was done and paint is literally pealing off the cabinets. Hardly a marketing feature! :P
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

SantaClaraSurfer
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Re: Sell paid off house, invest proceeds and rent

Post by SantaClaraSurfer » Wed Jul 24, 2019 11:14 am

Here's some perspective from the reverse scenario:

I'm 50, my wife is 40. We are "almost empty nesters" with two kids going through college over the next six years.

We've decided to rent for our remaining career years and invest the savings in a taxable account. Folks who feel like renting is tossing money away maybe don't realize how it feels to see your brokerage account grow every month with the savings.

As long as we keep on track, in 20 years we should have the flexibility to be able to either rent in perpetuity or buy outright, our choice, as we enter our senior years. Esp. as we won't need to live so close to work.

With this confidence, we can also do tons of fun stuff NOW (provided we budget for it and don't cannibalize our investments). It's really easy to travel (short/long trips) when you live in an apartment building.

It's also much easier to face college years / post college years for our kids knowing that have we have substantial liquidity in addition to our college fund.

Our footprint, both mentally and physically, is much lighter, and that makes a difference, too.

For us, getting out of a townhouse and into an apartment has been liberating. We've seriously downsized our "stuff." We've gone to one car, for example. We don't have to store immense amounts of typical seasonal house decoration. (Done with that!)

Yes, we may have to, or choose to, move or change apartments some day. You can also frame it that we have the flexibility to move as it suits us.

I think the most realistic concerns/issues are mostly perceptual...ie. on the level of "How will we handle being grandparents in an apartment complex?" and "Is there a psychological trade off where our kids won't perceive our apartment as home, the place they grew up, where all sorts of stuff is stored?"

On the grandparent front, it's a non issue, an apartment may even be better.

On the "feels like home" front, it's more real. That is probably the biggest trade off. I am fully aware that there is a real comfort in thinking of a house as a home: holidays, the old neighborhood, a place to stay in your 20's. This scenario offers something real to both parents and kids, and the alternative may be a bit scary.

I guess my counterpoint to the above would be this. Knowing what I know now, and being a parent myself, what would I want for my parents to have chosen as I hit my 20s? Hands down in my situation, I'd say sell the house and move on. For others, my advice would be that the parents should simply do what is in their best interests personally and financially and reflects their wishes and desired lifestyle.

Best of luck to all!

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Re: Sell paid off house, invest proceeds and rent

Post by Golf maniac » Wed Jul 24, 2019 3:54 pm

Sandtrap wrote:
Tue Jul 23, 2019 3:37 pm
This might be more a matter of preferring to rent over home ownership. If you think that investing the proceeds fits your financial strategy, then great, but don't depend on return projections.

j
Agree it is a preference. We sold about 2 years ago and rented for 2 years until we moved to our final retirement area. The rental was kind of a hassle in what we could and couldn’t do and getting things repaired. I am glad to be out of the rental and into my own home again.

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Re: Sell paid off house, invest proceeds and rent

Post by FIREchief » Wed Jul 24, 2019 5:34 pm

SantaClaraSurfer wrote:
Wed Jul 24, 2019 11:14 am
"How will we handle being grandparents in an apartment complex?"

On the grandparent front, it's a non issue, an apartment may even be better.
It is better. Grandkids love a big heated pool plus jacuzzi. Grandpa loves to be able to just use it and let somebody else fix/clean/maintain. No more stairs, well kept grounds with wide sidewalks away from traffic, plus large grassy oasis in an otherwise desert climate. We didn't have any of this in the old boat anchor house.
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hoops777
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Re: Sell paid off house, invest proceeds and rent

Post by hoops777 » Wed Jul 24, 2019 5:53 pm

Meaty wrote:
Tue Jul 23, 2019 1:17 pm
The subject line says it all. I have a paid off house values around $400k. I could rent something a little nicer for $2500/month.

From a purely financial perspective, wouldn’t I be better off to sell the house, invest the proceeds, and rent? Here’s my thinking

Year 1 rent = 30k
Current home taxes/maintenance = $9900
Difference between HO insurance and rental insurance = $1000

As a result, the net rent is $19,100. Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1

Thoughts?
The problem is ASSUMING JUST a 6 pct return.I would only do it if I just really wanted to and I could do it with a zero return.What happens to the plan if that rent becomes 3000 and your stocks go south.
K.I.S.S........so easy to say so difficult to do.

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Re: Sell paid off house, invest proceeds and rent

Post by bertilak » Wed Jul 24, 2019 5:55 pm

Meaty wrote:
Tue Jul 23, 2019 1:17 pm
The subject line says it all. I have a paid off house values around $400k. I could rent something a little nicer for $2500/month.

From a purely financial perspective, wouldn’t I be better off to sell the house, invest the proceeds, and rent? Here’s my thinking

Year 1 rent = 30k
Current home taxes/maintenance = $9900
Difference between HO insurance and rental insurance = $1000

As a result, the net rent is $19,100. Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1

Thoughts?
Sounds like a perfectly reasonable thing to do. It depends on how well you like where you live.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

hoops777
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Re: Sell paid off house, invest proceeds and rent

Post by hoops777 » Wed Jul 24, 2019 5:56 pm

hoops777 wrote:
Wed Jul 24, 2019 5:53 pm
Meaty wrote:
Tue Jul 23, 2019 1:17 pm
The subject line says it all. I have a paid off house values around $400k. I could rent something a little nicer for $2500/month.

From a purely financial perspective, wouldn’t I be better off to sell the house, invest the proceeds, and rent? Here’s my thinking

Year 1 rent = 30k
Current home taxes/maintenance = $9900
Difference between HO insurance and rental insurance = $1000

As a result, the net rent is $19,100. Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1

Thoughts?
The problem is ASSUMING JUST a 6 pct return.I would only do it if I just really wanted to and I could do it with a zero return.What happens to the plan if that rent becomes 3000 and your stocks go south.Think it can’t happen?My current home would have rented for 2000 several years ago and it would bring in 3000 easily today.
K.I.S.S........so easy to say so difficult to do.

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Re: Sell paid off house, invest proceeds and rent

Post by Gnirk » Wed Jul 24, 2019 9:06 pm

If, at some point, I am widowed, I will sell the house and rent.

For several reasons:
Our yard requires a lot of maintenance and must be maintained according to HOA guidelines. We have 8,000 SF of lawn to water, fertilize, mow and edge. (our water-sewer bill runs $300-$400 per month in the summer). We also have a lot of the yard in garden beds, which require weeding, trimming bushes and trees...you get the picture. Two story house, extra-tall roofline, gutters and roof need periodic (expensive) cleaning.

I've been trying to convince DH to downsize to either a smaller house/yard or nice condo. He says he won't leave the house unless it's in a pine box!
Yet, logically at our ages (75 and 80) with some health issues, we should be in a smaller place. Selling our paid-off house and renting makes sense to me, but not to him. Or buying a nice condo. Even with pricey HOA dues, it would be less annual cost than living in our current home, and a lot less work.

If you don't want the responsibility of maintenance, then by all means, sell and rent.

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Re: Sell paid off house, invest proceeds and rent

Post by LilyFleur » Wed Jul 24, 2019 9:26 pm

SantaClaraSurfer wrote:
Wed Jul 24, 2019 11:14 am
Here's some perspective from the reverse scenario:

I'm 50, my wife is 40. We are "almost empty nesters" with two kids going through college over the next six years.

We've decided to rent for our remaining career years and invest the savings in a taxable account. Folks who feel like renting is tossing money away maybe don't realize how it feels to see your brokerage account grow every month with the savings.

As long as we keep on track, in 20 years we should have the flexibility to be able to either rent in perpetuity or buy outright, our choice, as we enter our senior years. Esp. as we won't need to live so close to work.

With this confidence, we can also do tons of fun stuff NOW (provided we budget for it and don't cannibalize our investments). It's really easy to travel (short/long trips) when you live in an apartment building.

It's also much easier to face college years / post college years for our kids knowing that have we have substantial liquidity in addition to our college fund.

Our footprint, both mentally and physically, is much lighter, and that makes a difference, too.

For us, getting out of a townhouse and into an apartment has been liberating. We've seriously downsized our "stuff." We've gone to one car, for example. We don't have to store immense amounts of typical seasonal house decoration. (Done with that!)

Yes, we may have to, or choose to, move or change apartments some day. You can also frame it that we have the flexibility to move as it suits us.

I think the most realistic concerns/issues are mostly perceptual...ie. on the level of "How will we handle being grandparents in an apartment complex?" and "Is there a psychological trade off where our kids won't perceive our apartment as home, the place they grew up, where all sorts of stuff is stored?"

On the grandparent front, it's a non issue, an apartment may even be better.

On the "feels like home" front, it's more real. That is probably the biggest trade off. I am fully aware that there is a real comfort in thinking of a house as a home: holidays, the old neighborhood, a place to stay in your 20's. This scenario offers something real to both parents and kids, and the alternative may be a bit scary.

I guess my counterpoint to the above would be this. Knowing what I know now, and being a parent myself, what would I want for my parents to have chosen as I hit my 20s? Hands down in my situation, I'd say sell the house and move on. For others, my advice would be that the parents should simply do what is in their best interests personally and financially and reflects their wishes and desired lifestyle.

Best of luck to all!
Home is where your family is. Also, your kids will be quite grateful if they don't have to clean out a house full of possessions and sell that house after you die. It's much easier to inherit bank accounts and a 401k than a house.

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Re: Sell paid off house, invest proceeds and rent

Post by Sam1 » Wed Jul 24, 2019 9:55 pm

No. I would NOT give up a fixed housing expense of less than $10k per year.

If you wanted to rent you should have sold years ago and then invested the difference (assuming rent was less). Now you need to stay and reap the benefit of your investment. The benefit being a low fixed housing expense in retirement.

The remodeling work is a PIA. So is moving again if your landlord raises the rent or decides to sell the property. Life is hard in general.

If you move then you’ll probably really enjoy renting the first few years. Then down the road you’ll realize you wish you could have your $10k fixed housing expense back warts and all.

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Re: Sell paid off house, invest proceeds and rent

Post by Sam1 » Wed Jul 24, 2019 9:56 pm

SantaClaraSurfer wrote:
Wed Jul 24, 2019 11:14 am
Here's some perspective from the reverse scenario:

I'm 50, my wife is 40. We are "almost empty nesters" with two kids going through college over the next six years.

We've decided to rent for our remaining career years and invest the savings in a taxable account. Folks who feel like renting is tossing money away maybe don't realize how it feels to see your brokerage account grow every month with the savings.

As long as we keep on track, in 20 years we should have the flexibility to be able to either rent in perpetuity or buy outright, our choice, as we enter our senior years. Esp. as we won't need to live so close to work.

With this confidence, we can also do tons of fun stuff NOW (provided we budget for it and don't cannibalize our investments). It's really easy to travel (short/long trips) when you live in an apartment building.

It's also much easier to face college years / post college years for our kids knowing that have we have substantial liquidity in addition to our college fund.

Our footprint, both mentally and physically, is much lighter, and that makes a difference, too.

For us, getting out of a townhouse and into an apartment has been liberating. We've seriously downsized our "stuff." We've gone to one car, for example. We don't have to store immense amounts of typical seasonal house decoration. (Done with that!)

Yes, we may have to, or choose to, move or change apartments some day. You can also frame it that we have the flexibility to move as it suits us.

I think the most realistic concerns/issues are mostly perceptual...ie. on the level of "How will we handle being grandparents in an apartment complex?" and "Is there a psychological trade off where our kids won't perceive our apartment as home, the place they grew up, where all sorts of stuff is stored?"

On the grandparent front, it's a non issue, an apartment may even be better.

On the "feels like home" front, it's more real. That is probably the biggest trade off. I am fully aware that there is a real comfort in thinking of a house as a home: holidays, the old neighborhood, a place to stay in your 20's. This scenario offers something real to both parents and kids, and the alternative may be a bit scary.

I guess my counterpoint to the above would be this. Knowing what I know now, and being a parent myself, what would I want for my parents to have chosen as I hit my 20s? Hands down in my situation, I'd say sell the house and move on. For others, my advice would be that the parents should simply do what is in their best interests personally and financially and reflects their wishes and desired lifestyle.

Best of luck to all!
Very little of what you wrote is specific to renting.

I own and only have one car. Don’t hoard belongings. Mostly walk or take public transportation.

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BolderBoy
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Re: Sell paid off house, invest proceeds and rent

Post by BolderBoy » Wed Jul 24, 2019 10:07 pm

Meaty wrote:
Tue Jul 23, 2019 1:17 pm
Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1.
You are assuming a 100% equity investment of your $400k, right?

How old are you?
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

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Re: Sell paid off house, invest proceeds and rent

Post by michaeljc70 » Wed Jul 24, 2019 10:15 pm

Meaty wrote:
Tue Jul 23, 2019 1:17 pm
The subject line says it all. I have a paid off house values around $400k. I could rent something a little nicer for $2500/month.

From a purely financial perspective, wouldn’t I be better off to sell the house, invest the proceeds, and rent? Here’s my thinking

Year 1 rent = 30k
Current home taxes/maintenance = $9900
Difference between HO insurance and rental insurance = $1000

As a result, the net rent is $19,100. Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1

Thoughts?
So, your investment of the proceeds will go up, but keeping the money in the house wouldn't?

Do you think the new landlord made a bad investment?

Frankly, there are so many moving parts and assumptions, you can make a case either way a lot of the time. As others pointed out, there are intangibles associated with owning (and renting).

I prefer to have a relatively fixed housing expense. I also like doing what I want to do in terms of decor/renovations/customizations. Of course, property taxes and insurance can go up, but generally at a slower pace than rents.

Are these places really comparable? You say it is nicer. Is it the same size or bigger? Same location?

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Meaty
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Re: Sell paid off house, invest proceeds and rent

Post by Meaty » Thu Jul 25, 2019 5:26 am

BolderBoy wrote:
Wed Jul 24, 2019 10:07 pm
Meaty wrote:
Tue Jul 23, 2019 1:17 pm
Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1.
You are assuming a 100% equity investment of your $400k, right?

How old are you?
Yes, 100% stock. 35
"Discipline equals Freedom" - Jocko Willink

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Meaty
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Re: Sell paid off house, invest proceeds and rent

Post by Meaty » Thu Jul 25, 2019 5:28 am

michaeljc70 wrote:
Wed Jul 24, 2019 10:15 pm
Meaty wrote:
Tue Jul 23, 2019 1:17 pm
The subject line says it all. I have a paid off house values around $400k. I could rent something a little nicer for $2500/month.

From a purely financial perspective, wouldn’t I be better off to sell the house, invest the proceeds, and rent? Here’s my thinking

Year 1 rent = 30k
Current home taxes/maintenance = $9900
Difference between HO insurance and rental insurance = $1000

As a result, the net rent is $19,100. Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1

Thoughts?
So, your investment of the proceeds will go up, but keeping the money in the house wouldn't?

Do you think the new landlord made a bad investment?

Frankly, there are so many moving parts and assumptions, you can make a case either way a lot of the time. As others pointed out, there are intangibles associated with owning (and renting).

I prefer to have a relatively fixed housing expense. I also like doing what I want to do in terms of decor/renovations/customizations. Of course, property taxes and insurance can go up, but generally at a slower pace than rents.

Are these places really comparable? You say it is nicer. Is it the same size or bigger? Same location?
Yea, they’re in the same town a few miles apart. The rental would be nicer on the inside.

I appreciate all of the responses. Housing isn’t a purely financial decision like I started my OP with, but this thread has given me good insight
"Discipline equals Freedom" - Jocko Willink

liberty53
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Re: Sell paid off house, invest proceeds and rent

Post by liberty53 » Thu Jul 25, 2019 5:42 am

Use the NY Times Rent vs Buy calculator. Assume you have $380 or so to put into a house and set the mortgage to 100% down payment.

I looked at a scenario with your numbers and it looks like keeping your house would save you a few hundred per month over renting depending on all assumptions on rent growth, house appreciation, maintenance and insurance, etc. The calculator is a great tool for these kind of what if questions.

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Re: Sell paid off house, invest proceeds and rent

Post by Tamarind » Thu Jul 25, 2019 5:50 am

I think this may make the most sense for someone later in life who is sick of the maintenance tasks and can cash out a few decades of appreciation. My parents (60s) just did this and seem to love it their new (but modestly priced) apartment. They didn't really net that much in gains for the holding period, but the extra $200k in cash was really helpful to cement a secure bridge to delay SS.

Makes less sense for a younger person to do so purely to play on the difference in rent. Rent has a long time to increase for OP, whereas that paid off house is a solid reducer of expenses.

I'd suggest either making modest updates so you can stay in the paid-off house indefinitely, or seeing if you can buy a house that suits you better for very near the cost of your own.

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Re: Sell paid off house, invest proceeds and rent

Post by ponyboy » Thu Jul 25, 2019 6:02 am

Meaty wrote:
Tue Jul 23, 2019 2:14 pm
ponyboy wrote:
Tue Jul 23, 2019 1:21 pm
Assuming 6% return? lol...I wouldnt assume anything, especially not 6% return every single year.
I know a lot of people don’t think returns will be near the historical norm over the next 10 years, but it seems overly pessimistic to me. I choose to use the last 100 years as a fair baseline for my assumption; and 6% real is less than historical norms

I never said returns will not be near historic levels over the next decade. Im not being optimistic or pessimistic. Im completely neutral. I myself cannot predict the future so I have no idea what returns we're going to see.

Feel free to use whatever baseline you want. None of us have a crystal ball. We shouldn't assume anything, let alone what the markets are going to do moving forward. This is the reason why asset allocation is so important.

Im one of those fools who does calculations based on what online savings account are paying. Right now, mine is around 2%. If I put money in that account I know I will get 2%. I dont assume my money in my index fund is going to increase by 4%, 6%, 8%, etc etc.

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Re: Sell paid off house, invest proceeds and rent

Post by michaeljc70 » Thu Jul 25, 2019 7:35 am

Did you pay off this mortgage or inherit the home? Since you are 35, that is pretty young to have a paid off mortgage. If you'd rather have most of the money in the stock market rather than in the home, why did you pay it off so fast? You could always remortgage it, but I am not recommending that.

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Re: Sell paid off house, invest proceeds and rent

Post by Meaty » Wed Jul 31, 2019 8:46 am

michaeljc70 wrote:
Thu Jul 25, 2019 7:35 am
Did you pay off this mortgage or inherit the home? Since you are 35, that is pretty young to have a paid off mortgage. If you'd rather have most of the money in the stock market rather than in the home, why did you pay it off so fast? You could always remortgage it, but I am not recommending that.
I paid it off. I’ve thought about re-mortgage if but that doesn’t really get me there. Rent is the max you pay in a month. A mortgage payment is the minimum
"Discipline equals Freedom" - Jocko Willink

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Re: Sell paid off house, invest proceeds and rent

Post by michaeljc70 » Wed Jul 31, 2019 8:47 am

Meaty wrote:
Wed Jul 31, 2019 8:46 am
michaeljc70 wrote:
Thu Jul 25, 2019 7:35 am
Did you pay off this mortgage or inherit the home? Since you are 35, that is pretty young to have a paid off mortgage. If you'd rather have most of the money in the stock market rather than in the home, why did you pay it off so fast? You could always remortgage it, but I am not recommending that.
I paid it off. I’ve thought about re-mortgage if but that doesn’t really get me there. Rent is the max you pay in a month. A mortgage payment is the minimum
For the term of the lease.....

I'm living in an area where rents are really jumping and people are being forced to move it is in the news and community all the time. Luckily, that doesn't happen everywhere.
Last edited by michaeljc70 on Wed Jul 31, 2019 9:12 am, edited 1 time in total.

Admiral
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Re: Sell paid off house, invest proceeds and rent

Post by Admiral » Wed Jul 31, 2019 8:56 am

What are your financial goals? What is your number? A paid off house is extremely valuable in retirement (and before retirement) because it allows you to control (and minimize) what for most people is their biggest expense. It can also reduce your sequence of returns risk because it reduces the amount you need to pull from your portfolio if the market is tanking. Would you be comfortable taking $3500/mo or more from retirement accounts to pay your rent if the market tanks and stays down for years on the day you retire? Or would you rather have less saved but no rent to pay?

Could 400k invested become $1m in 10 years? Yes. It could also be $400k. Or less. Gains will be taxed. If your home is paid off, you could do very well by simply directing your previous mortgage payment into retirement accounts (or even taxable accounts) for 10-20 years. You'll likely end up with a sizable portfolio AND a paid off home, instead of one but not the other.

If nothing else, your rent will rise with inflation.

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Re: Sell paid off house, invest proceeds and rent

Post by kd2008 » Wed Jul 31, 2019 9:06 am

My parents who are 70+ did some thing simliar. 650k netted from home sale and rented a place of similar square footage with new construction for 27k. They can call the landlord and have all the maintenance done. At their age it is understandable. They do not live in the US. The interest earnings in their country of residence is expected to cover the rent.

I am skeptical as the rent increase year-over-year is rather steep in the area. But still given their timeframe (max 30 years; more God willing) and even if they spend down the capital, it is managable.

Given your young age, I would say give it a try. Have a back up plan. You won't know for sure until you experience it. Don't anchor you calculations on the premise of the paid-off home vs renting. Base it on the net value received after all cost paid for the sale transaction of the home. Is this capital enough and can be deployed for what you would like to receive in return (rented place)?

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Re: Sell paid off house, invest proceeds and rent

Post by cherijoh » Wed Jul 31, 2019 9:10 am

Meaty wrote:
Tue Jul 23, 2019 1:17 pm
The subject line says it all. I have a paid off house values around $400k. I could rent something a little nicer for $2500/month.

From a purely financial perspective, wouldn’t I be better off to sell the house, invest the proceeds, and rent? Here’s my thinking

Year 1 rent = 30k
Current home taxes/maintenance = $9900
Difference between HO insurance and rental insurance = $1000

As a result, the net rent is $19,100. Assuming just 6% on my $400k lump sum investment, I’d be up about $5,000 in year 1

Thoughts?
Have you factored in rent increases? Where I live they are going up by more than 6%/yr as there is an apartment shortage in desirable locations.

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Re: Sell paid off house, invest proceeds and rent

Post by mikemikemike » Wed Jul 31, 2019 12:17 pm

Your house cost / rent ratio is not favorable for renting. (With only 160 months' rent paying the house value).

I recently sold my house and started renting. To buy the house I'm renting would cost 300 months' rent, so it's a situation that favors renting.

These situations are complicated, but I'd say if purchase cost is about 250 months' rent, then rent, and otherwise buy (or in your case, keep owning).

RandomPointer
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Re: Sell paid off house, invest proceeds and rent

Post by RandomPointer » Wed Jul 31, 2019 12:21 pm

How about the worst case scenario? Recession hits, you are out of job, and you are renting. The stock market may take eight years to recover to where it was.

The upside is that you can move to a different place where there are jobs. A possible downside is that you don't have a place to live.

Which lifestyle do you want? I live in a single family home, and I enjoy good relationship with people around me. Living in an apartment with people above and below is not something that I like.

When everything is well, it seems like a good idea. What is your thought when nothing goes right?

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Re: Sell paid off house, invest proceeds and rent

Post by michaeljc70 » Wed Jul 31, 2019 12:52 pm

mikemikemike wrote:
Wed Jul 31, 2019 12:17 pm
Your house cost / rent ratio is not favorable for renting. (With only 160 months' rent paying the house value).

I recently sold my house and started renting. To buy the house I'm renting would cost 300 months' rent, so it's a situation that favors renting.

These situations are complicated, but I'd say if purchase cost is about 250 months' rent, then rent, and otherwise buy (or in your case, keep owning).
I've never heard of this metric. My Uncle who owned a lot of rentals used to say that if you can get 1% of the sales price for a months rent it may be a good rental property. I think most of these guidelines/"rules" of thumb, etc. fall short depending on the market, property taxes, if there are HOA fees, condition of property (aka maintenance required), disparities between size/quality of rentals, etc.

Using your metric, my neighbor just rented the unit for $3k. Can they purchase it for 250x which is $750k? Yes. They go for around $400k, so sounds like screaming case for buying at only 130 months rent. The owner, assuming they paid $400k, 20% down would have costs of $1500 P&I, $500 property taxes, $160 HOA fees, and say $100 insurance. That totals $2260. Then you have maintenance and management. It sat empty for the month of June so you have to account for vacancies too. So, based on what it would cost to own and what else you could rent in the area, $3k/mo seems reasonable even though totally out of line with your metric.

mikemikemike
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Re: Sell paid off house, invest proceeds and rent

Post by mikemikemike » Wed Jul 31, 2019 12:58 pm

You make a good point. My 250 month's cut-off value could be too high. Maybe 200 is a better number. Still just a rule of thumb of course.

I agree with your uncle, of course: if it's only 100 months' rent to buy the place (1% incoming in rent per month), buy it. And rent it out for profit.

cherijoh
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Re: Sell paid off house, invest proceeds and rent

Post by cherijoh » Wed Jul 31, 2019 1:25 pm

michaeljc70 wrote:
Wed Jul 31, 2019 12:52 pm
mikemikemike wrote:
Wed Jul 31, 2019 12:17 pm
Your house cost / rent ratio is not favorable for renting. (With only 160 months' rent paying the house value).

I recently sold my house and started renting. To buy the house I'm renting would cost 300 months' rent, so it's a situation that favors renting.

These situations are complicated, but I'd say if purchase cost is about 250 months' rent, then rent, and otherwise buy (or in your case, keep owning).
I've never heard of this metric. My Uncle who owned a lot of rentals used to say that if you can get 1% of the sales price for a months rent it may be a good rental property. I think most of these guidelines/"rules" of thumb, etc. fall short depending on the market, property taxes, if there are HOA fees, condition of property (aka maintenance required), disparities between size/quality of rentals, etc.

Using your metric, my neighbor just rented the unit for $3k. Can they purchase it for 250x which is $750k? Yes. They go for around $400k, so sounds like screaming case for buying at only 130 months rent. The owner, assuming they paid $400k, 20% down would have costs of $1500 P&I, $500 property taxes, $160 HOA fees, and say $100 insurance. That totals $2260. Then you have maintenance and management. It sat empty for the month of June so you have to account for vacancies too. So, based on what it would cost to own and what else you could rent in the area, $3k/mo seems reasonable even though totally out of line with your metric.
Your uncle is on the other side of the transaction. He gets to pay back the mortgage with depreciating dollars while charging his tenants increasing rent every year (or lease renewal period). The OP would be paying the rent out of funds that may not be keeping up with rent increases. If the stock market tanks in the next couple of years, he'll be sucking out more than 1/160 of his kitty to pay each months rent.

In addition, the OP may be okay with 100% stock at 35, but at some point as a retiree (or near retiree) he likely will be at a more conservative AA that won't keep up with rent increases. Also moving gets to more of a PITA as you get older.

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Re: Sell paid off house, invest proceeds and rent

Post by surfstar » Wed Jul 31, 2019 1:32 pm

Get a roommate - invest the rental income.

Rent out house, live somewhere with lessor monthly cost, invest the difference.

etc

Many options. Housing is something that comes with many personal preferences, much more so than simple economics. We love having a driveway to park in, right next to our storage/garage, for easily loading up weekend trip gear. Living in a cheaper apartment/similar, meant hauling stuff a long ways. Its nice to wax my car in the shade of our carport and perform oil changes, etc at home. Etc, etc.

Figure our your priorities/preferences, then make the best, informed decision.

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