Options? Locked into real estate in expensive city

[psyclotr0n]

Hello MMM community. Having just read MMM's latest blog post about rent vs buy I thought I'd query the community for some additional options brainstorms. I bought a condo in San Francisco in 2012. It's been working out nicely because even though housing prices are ridiculous, rental prices have continued to get even more extreme. I get to bike to work and quite enjoy my neighborhood. For a condo it has a lot of privacy and charm too, being in a 2-unit building (a converted 1910 Victorian that's in pretty good shape inside and out). Overhead is low because I'm the HOA president and keep the expenses to a level that are even lower per unit than equivalent expenses on a single family home.

That all said, having only discovered MMM recently and realizing that FIRE is my goal, I do have the slight dilemma of that I won't be able to maintain my 30-year 4% mortgage unless I work for another 10-ish years (I'm 36 and I have a moderately enjoyable office job that I don't mind milking for as long as I can, but there's no way I can see myself in any 40-hr office job for 10 years). Only an hour and a half north is beautiful Sonoma County where housing costs in places can be 50% less than SF! By my math, I could foreseeably 'retire' in 3 years if I either sell or if I rent out the condo.

Although SF is a tenant-favoring town to almost an extreme and I've never been enthusiastic with the prospect of being a landlord, it would seem a shame to have to sell so soon given how nice of a unit and neighborhood it's in (i.e. stable/conservative investment which is nice given that after 'retiring' I wouldn't keep more than 50% of investments in equities.). One other long term perk favoring ownership in California is 'Prop 13' which locks in property taxes to the original purchase price, only going up with T-bills (~2% a year)

So, I figure that unless I decide to move out of state or out of the country to get even more 'extreme' on low cost (something I'm still drawn to), leasing it out is a good option because I can hold on to the investment and get a moderate net cash flow  (especially if rents keep skyrocketing in SF due to the tech boom) and continue to benefit from leveraging a low-interest loan for appreciation on the whole unit.

One obvious downside though is missing out on the $250k cap-gains exemption for owner-occupied property sales so I'd probably have to know that I'm in it for the long haul and committed to staying in the Bay Area (don't get me wrong, I love it here, but housing costs are nuts almost everywhere and I'm not tied down by any family, kids, etc.).

The biggest uncertainty variable is that I'm still single and that having a partner in this equation could dramatically shift the parameters, but I feel I owe it to myself to just assume that I'll remain single so that I don't pick a partner for the wrong reasons.

Thanks for your thoughts!

[srob]

If you rented it out could you cover the mortgage and produce a decent cash flow? You might compare that return to what your equity (after selling costs, which are not trivial) would bring in the stock market and choose whatever is best. Some numbers might be helpful. Are you otherwise diversified or does this property make up most of your net worth? It sounds like you bought at the right time in a great location, so if you can stomach being a landlord it might work out very well for you over the years. If the returns are favorable even after accounting for property management expenses then you could certainly keep it and still travel the world. You could keep it, rent it out, move to a cheaper location all the while keeping your job on a trial basis to see how things would shake out being a landlord. Once you sell you may have a hard time getting back into a rising market if you had second thoughts. I am of the opinion that SF will see high rents for a long time and I like having rentals, so there are my biases. Good luck!

[psyclotr0n]

Thanks srob. I'm about 60/40 in home equity vs retirement/investments (about $250k vs 150k). Yes, I could cover mortgage with a small extra cash flow if I rent out in (today I could rent it for maybe $3,800, and if it keeps going up at current rates, I could expect at least $4500 in 2-3 years). Mortgage payments are $2576/mo, tax about $700/mo, and everything else avg ~$400/mo. One downside is that as FIRE I wouldn't get itemized deductions on interest/tax. So if I no longer could deduct taxes I could net about $800/mo cash flow.

According to http://michaelbluejay.com/house/rentvsbuy.html if I cash out at year 5, I could likely net about $300k after commissions. Using the 4% rule http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ this yields $12k/year or $1k/mo of safe withdrawal.

So this is all very back-of-a-napkin, but looks like cashing out produces the better cash flow at year 5. On the other hand, being pretty new to the 4% rule, the question is in the long run could we expect rental cash flow to increase more than the $300k invested cash flow?

On a side note, how much does property management cost you think?

[srob]

So right now cash flow would be 9600/yr managing it yourself on an equity of 250k (minus transaction costs?)I would keep the condo for as long as you keep your job. Then maybe sell if the cash flow doesn't improve significantly by then and move to a less expensive area. Property management in my neck of the woods runs at 8% or so of gross rent, which would take out a big chunk in your case. That way the bulk of your retirement is not tied up in one property and at the whims of the real estate market, which can be very cyclical. just my 2 cents

[psyclotr0n]

Interesting, looks like this really could go in either direction. I'm wondering if the subject of cash out vs renting out has been discussed here. If you still own you get further appreciation and equity, but if you cash out and invest your principal can grow. Can you just compare cash flows or do you need to look at any other aspects to compare net worth? Presuming all average appreciation and inflation rates...

[sammybiker]

You're cashflow negative every month after including management, maintenance/repairs short term, long term maintenance/repairs, HOA, vacancy, etc...this is an appreciation play only.  You can make arguments that vacancy will be at or near 0 or that you're managing yourself but...ideally, those numbers should still be included.