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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: neo von retorch on July 07, 2014, 01:31:52 PM

Title: Killing the commute: Renting out bedrooms/house
Post by: neo von retorch on July 07, 2014, 01:31:52 PM
Housing Costs / month
Average maintenance to date: $330
Average utilities: $330 (includes internet / tv for roommate)
Mortgage: $1225 (currently $300 escrow, $300 interest, the rest is principal)
Commuting: $160
Roommate: -$500
Total: $1545
Total net worth shift: $920

Renting Costs
Utility estimate: $200
Rent: $810
Commuting: $20 (or less with biking)
Total: $1030

Maintenance is actually a "decreasing" number that gets better over time. Roof, HVAC, water heater were all replaced - that and other home ownership costs were totaled and averaged over length of home ownership. Removing them from the equation shifts the numbers down to $1215 cost ($590 net worth cost). In this case, staying put seems better than  selling the house and renting an apartment close to work. (Though future maintenance costs are variable, and time otherwise used for home care is precious, and biking to work is healthy! I'd think a maintenance estimate somewhere between $0 and the past average is a fair guess. 1% of home cost is $1600 annually or $125/month. Overall that puts me at $715 / month total net cost of owning home. Likely future maintenance costs - driveway, landscape/drainage, rear deck, unexpected...)

Home value: $160-175k
Mortgage balance: 108k @ 3.375%
Equity in home: $45k-60k

The numbers are there as a backdrop to the main question: If I sell the home, I can invest the equity elsewhere -- I consider that an opportunity cost. Would it be better to sell the house, rent and invest the new cash in the stock market?

Asset Allocation
$13,500 Cash
$25,000 Equities

Other Details
Age: 35
Status: single but dating and hoping to start a family in a couple years (would want mobility to move near girlfriend/family)
Commute: 14.3 miles -> 143 miles / 5+ hours weekly
Title: Re: Opportunity cost of home equity?
Post by: gimp on July 07, 2014, 01:58:47 PM
I think your numbers make sense to keep. Looks like around $400 a month less to own; $50k at 7% returns around $300 a month... in a much more volatile manner, too.
Title: Re: Opportunity cost of home equity?
Post by: frugaliknowit on July 07, 2014, 02:20:43 PM
It depends on what you would rent and whether you would have a room mate.  $330 per month in utilities sounds pretty steep.  Over time, maintenance goes up, not down. 

Personally, I think if you do eventually get married, it is healthier to buy a place together rather than move into your or your spouse's (just an opinion...better for bonding:)).
Title: Re: Opportunity cost of home equity?
Post by: neo von retorch on July 07, 2014, 02:31:37 PM
One rent option is listed in the original post. It's a 1br/1ba so I would not get a roommate. But I might consider 2br/1ba options and look for one down the road. That'd save ~$400/month if I could get a regular roommate.

Utility breakdown is:
$140 average electric (includes heat)
$50 trash + sewer
$130 tv/internet (would gladly slash this way down but agreed to keep certain channels for roommate in initial agreement)
Title: Re: Opportunity cost of home equity?
Post by: Grant Q on July 07, 2014, 03:10:04 PM
I'm currently debating the same thing and I'm considering leasing out the place I have now and becoming a renter myself.  No idea what the housing market is like in your area but if you could rent the place out for $1600 or so you could slash your costs and generate some passive income simultaneously.
Title: Re: Opportunity cost of home equity?
Post by: ampersand on July 08, 2014, 06:38:55 PM
I'm inclined to tell you to keep it. Two reasons that haven't been brought up: mortgage interest tax deduction and as an inflation hedge. If inflation is one percent it means you see an ROI of > 3% on your 50 k equity.

With such a low interest rate you can invest more in the market, and not pay down the house. And then there is your thoughts on current stock evaluations.

Sent from my iPad using Tapatalk
Title: Re: Opportunity cost of home equity?
Post by: neo von retorch on July 08, 2014, 07:38:35 PM
Well I was debating this and I've decided to do this:

I own a 3 bedroom, and a year ago, in a very anti-mustachian move, when a roommate moved out, I didn't look for a replacement. I created a fancy-pants office. But since I've been reading MMM, I've felt pretty dumb about the missed income opportunity, so I re-listed the room. My first potential new roommate is coming on Thursday to check it out. I guess I should get off my computer and find a new place for it... as well as all this other STUFF.

(This will decrease my home owning costs by nearly $500/month.)
Title: Re: Opportunity cost of home equity?
Post by: CaptainFrugal on July 09, 2014, 12:02:28 AM
mortgage interest tax deduction

At his level of interest/taxes it's almost zero unless he happens to pay a ton of state income tax. The standard deduction is almost the same as his deductible items. This deduction is only a major factor for those with huge mortgages. Once he gets married it will be 100% useless as well.

Unless the OP plans to live with either a roommate or future spouse/partner in the house the rental is a better deal. It's close to a wash with someone else in the house, so I'd do whatever makes you happier.
Title: Re: Killing the commute: Renting out bedrooms/house
Post by: neo von retorch on July 18, 2014, 08:16:59 AM
I'm reviving this thread since I just learned more about how to use rental properties to your advantage in tax time.
(Though I'd love someone with experience or knowledge to review my estimates and provide feedback or suggestions!)

If I can get 3 tenants to each rent a bedroom, for a total of $1650/month, the net tax effect looks like this:

Income: $19,800
Expenses: ($7,260)  - taxes, insurance, operating costs
Mortgage Interest: ($3600)  - 3.375% on ~$107,000 - will decrease over time, obviously
Depreciation: ($5820) - Home value of $160,000 spread over 27.5 years

Total Income/Loss: $3140
Total Tax Increase: $ 785

(With 2 tenants, I still live at home and am not currently reporting tax income. But I wonder if I should. Using the above calculations but with $1000/mo as my guide, I actually show a negative $4660 net tax effect, which should save me $1165 in taxes each year.)

3 tenant plus apartment vs 2 tenant with commute
Rental Income: $19,800 vs $12,000
Taxes: $785 vs ($1165)
Commute: <= $240 vs $1920 ($160/mo based on 28 miles, cpm for 2008 Honda Fit at $0.27)
Utilities: $2160 vs $0 (Estimate for apartment, already pay/include utilities in flat rent at my house)
Rent Cost: $8700 vs $0 ($725/mo)

Total: $7915 vs. $11,245 (positive income)
Or total: $7915 vs $10,080 (since I don't currently get the tax advantage with 2 tenants renting)
Cheaper to stay put and commute unless I can find a place to rent closer to $400, or charge more rent. (Or perhaps I could find a beater of a house for <= $60k to buy and pay just $400/mo in mortgage. Let's start internet searching...)

I found a house near me that's around $40k to purchase. If I take out a 3% 15 year mortgage, I'll pay about $270/month. That'd make renting out my whole house a worthwhile endeavor, especially with the reduced commuting costs.
Title: Re: Killing the commute: Renting out bedrooms/house
Post by: electriceagle on July 18, 2014, 07:35:15 PM
Depreciation: ($5820) - Home value of $160,000 spread over 27.5 years

Keep in mind that depreciation is taken on the structure, not the value of the entire property. Have a look at your property tax statement to figure out what percentage of the purchase price is for the structure and what percentage is for the land.

Also, keep in mind that you can deduct a portion of maintenance, supplies and repairs when you have renters. Most (but not all) people use square footage to split up costs. If you pay $100 to fix a broken window that benefits the entire house and 50% of the house is rented, you have a $50 tax deduction.

Edit: A portion of your property taxes can be directly deducted from your rental income as well. This helps a lot if your interest & taxes are not otherwise big enough to cause you to itemize.