Sell rental house with 3% int rate to put equity in the market?

[homeforhealth]

I have a house I bought in St Petersburg FL in 2018 for 215k and refied during covid for 3% interest. Currently renting it out the last few years since I PCS’d making about $450 a month after everything. I currently owe 180k on the house and it’s valued around 380k.

I have 9 years left on AD but don’t plan to move back there/retire in florida. It’s also a hurricane area, flood zone, and the HOA there has been a pain/doesn’t like or want renters.

I started running the numbers and if I sold the house with the equity it has after selling fees I’d have around 165k that I could either put towards a house where I am now, or put it in the market- the calc is showing me that 165k in the market for 9 years at a market average of 12% would be roughly worth 457k

Vs my house equity plus profit/mortgage pay down over the next 9 years would be worth 364k

So, In 9 years I’m seeing the equity in the house invested being roughly worth 100k more (with some risk) but not having to deal with risk or hassle of renters, HOA, or maintenance.

(Capital gains tax would not apply since I’m AD and lived in it 2 of the last 15 years)

Thoughts?

 

[kiwisalad]

@homeforhealth Your assumptions about 12% market gain over 9 years are very optimistic; I'd plan for more like 8%. This drops your expected gains to something like $330K, which is in the ballpark of your real estate returns/equity growth. As I see it, there's not a lot difference in the gains you can reasonably expect for either approach. So let's consider other factors:

Risk of loss: You're an absentee landlord, so unless your tenants can fix/maintain/upgrade the property at low cost/free, it will be hard to mitigate damage from hurricanes/floods/HOA crap, let alone from a bad tenant. And every rental is one bad tenant away from financial loss.

Invested in an S&P 500 fund, you may lose money over 9 years, but it's not likely, and even with a downswing, you likely won't lose as much value as you can with a real estate loss. Risk-wise, selling and investing seems more promising. As I see it, this is an advantage: selling/investing

Liquidity and Control

There's really no comparison here. Your house is a hard thing to sell, whereas selling S&P 500 mutual fund shares takes a few clicks, allowing you to move your money quickly and adapt to opportunities as they come up. Unless you have an already-large value of assets in a brokerage account, this is a clear advantage: sell&invest.

Hassle: Renting can be a pain, or it can be very low-maintenance. Much depends on your tenants and neighbors/HOA there, as well as the house itself.

Owning a buy-and-hold asset like an S&P 500 mutual fund is easy, so once you sell/invest, you can chill and come back to it in 9 years or more. However, there is the challenge of selling the place. The housing market is weird these days; prices are high, but houses aren't selling fast. You also have to deal with the issue of trying to sell your property whilst you're renting it; your tenants won't care about trying to help you sell it, and in fact they will likely prefer that you not sell. Selling a rented home is difficult and stressful when you're in the area. Doing that on an absentee basis will be even more so. I see no clear Hassle advantage to either choice here; it depends on whether you prefer the steadier-state stress you have now or the massive stress of selling the house.

Tax Burden: When you're renting a house, itemizing your deductions makes a lot of sense, and you can catch all kinds of tax breaks. However, you're also getting property taxes, and you may have to worry about capital gains taxes once you go longer than 15 years (9 years from now) since you lived there.

If you sell and then buy into the S&P 500, you'll have to eventually pay capital gains on what you make, though you could find ways to shelter much of it in a Roth TSP/IRA if you max out your contributions and live off the home sale money for a few years. You could also put this into 529 accounts for your kids if you want to pay for their college or kick-start their own Roth IRAs in 15 years. I see no clear tax advantage to either choice here; it depends on when your house capital gains exemption expires, whether/how much you use deductions to lower your tax burden, and how much of a difference this might make to your TSP/IRA contributions.

Overall, I think you're fine with either approach, but I think selling/reinvesting is likely to be less risky and provide you with more opportunities.

 

[kloverated]

@kiwisalad I’d say 11% stock market and maybe 8% after one assume historic inflation around 3.3%. Thing is, the house is also going to have its profit diminished by inflation. So might has well ignore it for comparisons. I assume OP is factoring in tax benefits due to property depreciation? Seems like your reply thinks it washes out.

I suppose you could leverage equity to buy a second rental property but that doesn’t seem likely.

Personally, I would find the future market to be better too risky in Florida, particularly if you buy into rising sea levels and projections for more hurricanes. The insurance companies seem to.

 

[kiwisalad]

@kloverated The 8% planning factor was more based on short term volatility and risk management than inflation, which would affect both asset choices.

I mention the tax factor because I didn't see that specifically mentioned, and it's a factor I've seen many people forget about making these kinds of decisions.

If the OP loves working real estate, a cash-out refinancing to buy more properties might make sense, but OP doesn't seem keen on building a rental empire.

Personally, I agree with you, and I'm very leery of renting property in absentia, but I know lots of people who do it and make good money doing so.

 

[kloverated]

@kiwisalad Yeah, there’s a stomach for a particular risk for that. Meanwhile this post suggest Florida real estate is shifting at the moment: https://www.reddit.com/r/RealReBubble/s/4fy0JuS9xC

 

[tlmonty]

@kiwisalad You love to hear yourself talk.

TLDR, sell and invest OP.

 

[kiwisalad]

@tlmonty There are too many unknowns for me to give a more definitive TL;DR-style yes/no answer than the bottom line. Hopefully OP finds the discussion useful, even if I was a little long-winded.

May God protect you and bless all your endeavors, sailor.

 

[lapeavey]

@homeforhealth Had a home in W Lafayette 5 minutes from Purdue from 2010-2022. House was paid off by 2015 (under 130k). Our decision to sell was that the property manager sucked and there weren't acceptable alternatives, the return was less than just putting the money into 30 year T Bills as a relatively risk free consistent return, and that we weren't going to return. We dropped the money into SPY QQQ and VYM. No regrets even though the values there in Indiana continue to rise as Purdue expands. Far less risk/potential stress.

 

[mcr774]

@homeforhealth I’m selling my Florida rental. Insurance tripled. I’ll net a good amount. I’m also placing some in index funds and the remainder using to recast my primary which is a higher interest rate.

 

[homeforhealth]

@mcr774 What do you mean by re cast?

 

[mcr774]

@homeforhealth Some companies and mortgage types will let you apply principal payments then “recast” the mortgage back out to 15 or 30 years with the same rate to drop the principal payment. Usually very little fees, no additional closing costs. If you have a lower mortgage rate than now and need more cash flow but don’t want to refinance to a higher rate it’s a good idea to consider. It’s definitely not make sense in all scenarios.

 

[homeforhealth]

@mcr774 Ah I see sounds similar to porting a mortgage ?

 

[airbusman]

@homeforhealth Another thing to consider is capital gains. If I remember correctly military gets an extension in the tax law. If you have lived in the house 2 of the last 10 years, you do not have to pay taxes on the gains. Normal (non military) is 2 out of 5 years.

Verify what I said, and weigh that in to your decisions.

 

[homeforhealth]

@airbusman It’s 2 of the last 15, I addressed that in the bottom of my post, thanks though

 

[mrsneko]

@homeforhealth I was in a similar position like you. I sold the property and invested the profits. The property is now valued higher than when I sold it. However; the investment account I have is valued higher than the property.

For your example, $165K placed into an investment account earning as little as 4% will give you $550 per month. Your net will depend on your tax obligations.

 

[chotkisteve]

@homeforhealth A common thought method for windfalls and real estate is to view it as a cash investment.

Would you invest 165k today to net $450/ month (3% net return this year) by purchasing a rental in saint Petersburg with the risk of a poor tenant making it a negative return? Or would you prefer to lump sum invest it in the market?

 

[sloanep]

@chotkisteve This discounts other potential upside. Appreciation on the house. Tax benefit from depreciation. Contributions to the mortgage every month.

Might be more. Might not. I run my rentals every year through a return on equity calculation. Not sure 450 monthly over 165k is the right way to calculate it for OP.

 

[chotkisteve]

@sloanep It’s why I said just this year, and did not ask OP to provide a DCF for a 5 year horizon.

If OP assumes they can collectively beat their next investment opportunity of choice by investing in real estate, they should invest in real estate by continuing to hold.

 

[kloverated]

@sloanep Ah. Yeah. I forgot leverage. The home is appreciating value based off of the whole value, not the small amount that is being put in monthly