Author Topic: Sell house-invest equity in index-coastfire and rent?  (Read 2074 times)

LanzWiler

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Sell house-invest equity in index-coastfire and rent?
« on: April 02, 2023, 02:48:08 PM »
I’m 32, we own our home. Market value is 700k, we own 375k at 2% with 28 years left. Original purchase price was 472k. PITI is $1921+300/m maintenance expenses. If we sell, we take 343k and invest in the index. We have about 70k already invested. Then, we rent a home for 2500 for the next ten years, adding $2000 monthly to our investments until FIRE in 10 years. How does that look?

clifp

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #1 on: April 02, 2023, 03:55:55 PM »
I’m 32, we own our home. Market value is 700k, we own 375k at 2% with 28 years left. Original purchase price was 472k. PITI is $1921+300/m maintenance expenses. If we sell, we take 343k and invest in the index. We have about 70k already invested. Then, we rent a home for 2500 for the next ten years, adding $2000 monthly to our investments until FIRE in 10 years. How does that look?

I think it is an awful idea  The 375K 2% loan is an amazing gift, do not pay it off.  We have made some progress but we have not killed inflation.  I can't guarantee anything in investing, but I can almost certainly tell you that in 10 years you won't still be paying $2,500 to rent a house. A house I bought 10 1/2 years ago was renting for $850, I'm now renting it for $1,600 and it is still a bit below the market.  This was during a time of low inflation.  If inflation remains at 6% like it was for the past 12 months, your rent will be $4,500, I'm forecasting a 4% rental increase on my properties, which would mean a rent of $3,750 at the end of ten years.

Second, you've neglected selling costs.  Traditional they've averaged about 7% for the house, and the seller buys the huge majority of the cost. Even if you want to sell it by yourself not recommended,or using a discount real estate broker, worth considering. You are looking at a minimum of 25K and more like $35K to sell the property.  Meaning you'll be invest closer to 300K than 340K

Next, we need to consider the stock market appreciation. Traditionally stocks have appreciated at 9% per year over ten year period, but there are a lot of smart people thinking the next decade will be worse, in part because the market went up too much too fast, and also because inflation is bad for the market.

But your house price is not likely to remain static. Yes, housing prices like all asset classes became overvalued.  So it is likely they will pause, and even go down in the hottest markets.  But over the next ten years, they will almost certainly go up, probably at a rate near inflation say 3-4%.

I'd highly recommend sitting down with a spreadsheet and experimenting with different assumptions, of inflation, stock market, and housing gains. I think you'll find with all but the most optimistic stock market assumption, you are better off not selling.

Finally, as somebody who retired at 39 and I'm now in my 24th year of being retired. I'd say one of the keys to a financially successful retirement is to minimize the number of unknowns.  Having a fixed mortgage or paid-off house, is just one less thing you need to worry about, and makes it easier to sleep at night.
« Last Edit: April 02, 2023, 04:03:32 PM by clifp »

Telecaster

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #2 on: April 02, 2023, 04:01:01 PM »
I’m 32, we own our home. Market value is 700k, we own 375k at 2% with 28 years left. Original purchase price was 472k. PITI is $1921+300/m maintenance expenses. If we sell, we take 343k and invest in the index. We have about 70k already invested. Then, we rent a home for 2500 for the next ten years, adding $2000 monthly to our investments until FIRE in 10 years. How does that look?

Looks terrible.  Your monthly expenses will actually go up.   Isn't that the exact opposite of what you want?   You can invest more if you don't sell.  And you can reasonably expect rent to increase at roughly the rate of inflation, but your mortgage payment is fixed.   So you just keep screwing yourself harder as time passes. 


LanzWiler

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #3 on: April 02, 2023, 04:43:56 PM »
But even if we don’t invest anything else, we still retire. The extra investment amount brings us even closer to retirement faster. The point of selling is that there is nothing currently sitting and compounding in the VTSAX. If I came here and said, “hey guys I’m currently $350k invested in the index and am renting, should I keep investing or sell all my shares and buy a house with a 375k mortgage?” What would you say to do? What would the OG Stache tell me to do? I would think that would be really bad advice according to his model.

Villanelle

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #4 on: April 02, 2023, 05:00:27 PM »
But even if we don’t invest anything else, we still retire. The extra investment amount brings us even closer to retirement faster. The point of selling is that there is nothing currently sitting and compounding in the VTSAX. If I came here and said, “hey guys I’m currently $350k invested in the index and am renting, should I keep investing or sell all my shares and buy a house with a 375k mortgage?” What would you say to do? What would the OG Stache tell me to do? I would think that would be really bad advice according to his model.

How does it bring you closer to retirement?  You've locked in need to pay rent for forever so while you are investing more, you'll need more in retirement.   And yeah, doing something to bring your monthly expenses up is exactly what you don't want, especially since it sound like you are already in a crap financial situation where you aren't investing anything.  So where would the extra dollars come from?  And why aren't you doing what that is right now, and putting that $300 per month into investments?

And if you asked if you should buy a house for $375k with a 2% interest mortgage right now, when the alternative was paying $2500 in rent?  Many people would say yes, or would look very closely at the numbers. 

You are really currently investing nothing at all, and you have nothing at all invested?  If so you have much larger problems than fine-tuning your housing situation.  If that't the case, then yes, maybe sell your home but only if you are going then just rent a room in someones house or a very cheap studio. 

LanzWiler

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #5 on: April 02, 2023, 05:13:27 PM »
We just discovered FIRE got to the point of investing and we’ve put away $5000/month for 8 months, we are also sitting on all of the equity so the point is, do we keep just putting the surplus into the index and keep the house or put it all in the index and rent. The question is not, “help im screwed what bad decision should I make next!?” Since one single house that has the bulk of our net worth tied up in it could tank, I’m saying why isn’t it a better idea to ‘decouple’ from a single volatile asset and put the equity in the index? Whether we buy a house with money we save or rent in the future isn’t relevant to the, “what should we do now to get the maximum return in ten years when we want to retire.” Question.



LanzWiler

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #6 on: April 02, 2023, 05:21:07 PM »
35k invested with no additional contribution means we retire in 21 years. Any additional amount that we contribute will bring us closer to retirement. Our current home costs $2800/month to own, $2500 rent frees us up $300 in cash flow, plus travel costs because we’d be renting closer to work and school AND we would have the equity in the index. I get the part about the rent going up but we are in a field that our income keeps pace with inflation, and our taxes and insurance have both gone up $250+ since we bought so it’s not exactly static either.

LanzWiler

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #7 on: April 02, 2023, 05:22:15 PM »
350k invested**

Dicey

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #8 on: April 02, 2023, 05:35:17 PM »
2% interest on the mortgage changes everything. Now the heck did you grab a rate so low?

In your shoes, I'd keep the house, and look for ways to goose my income to get more to invest. At the same time, I'd work hard at optimizing every dollar of spending and diverting all of those dollars into equities as well. Your future self is waiting the wings to congratulate you. She'll be throwing a party in the very house you live in right now....

So jealous of that interest rate!

Cue Joni Mitchell, " They don't know what they've got 'til it's gone..."

uniwelder

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #9 on: April 02, 2023, 07:11:49 PM »
PITI is $1921+300/m maintenance expenses...
...rent a home for 2500 for the next ten years, adding $2000 monthly to our investments...

...we’ve put away $5000/month for 8 months...

Our current home costs $2800/month to own, $2500 rent frees us up $300 in cash flow...

Your numbers are confusing, so it would be best to clarify.  Whether your current home costs $2,220 or $2,800 per month, comparing that to $2,500 per month renting, isn't really going to affect the amount you can save in investments.  It sounds like you can put away $2,000 per month reliably and have managed to save as much as $5,000 per month for 8 months (40k is quite a chunk.  Congrats!), so it would be great to focus more on that aspect. 

clifp

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #10 on: April 03, 2023, 02:20:20 AM »
We just discovered FIRE got to the point of investing and we’ve put away $5000/month for 8 months, we are also sitting on all of the equity so the point is, do we keep just putting the surplus into the index and keep the house or put it all in the index and rent. The question is not, “help im screwed what bad decision should I make next!?” Since one single house that has the bulk of our net worth tied up in it could tank, I’m saying why isn’t it a better idea to ‘decouple’ from a single volatile asset and put the equity in the index? Whether we buy a house with money we save or rent in the future isn’t relevant to the, “what should we do now to get the maximum return in ten years when we want to retire.” Question.

This is the point, why I said you need to take create a spreadsheet, of if you prefer a rent vs buy calculator and see which one results in more money based on your assumption, and you certainly can get reasonable feedback from the board, on the factors I laid out how much is the stock market going to appreciation vs housing vs rental price increase and housing expenses like property taxes and insurance.   If house goes from $700K to $800k in ten years and VTI (Vanguard total stock market) goes from $200 to $1,000 then yes you do what you are proposing. If on the other hand the house goes from $700k to $2 million and VTI goes from $200 to $300 than you'll be very happy that you didn't sale the house.  Either scenario is possible and neither is very likely to occur.

Your house is an investment, every month some of your payments go to paying down the principal and after 28 years you'll owe nothing.  It is worth noting last year the stock market was 20%, which is down a lot more than houses were last year.  If you told me you had 5-6% mortgage my advice would be a lot more nuanced, and things like commute distance, lifestyle could factor into my advice
However, you have a $375K mortage at 2%, if you were to replace that your mortgage would be 6.5-7%.  That $17,000 in additional interest expense that you or your landlord would have pay.  I can tell you as a landlord, I pass those additional expenses on to my tenants when I can.

Yes, in an ideal world, you would be more diversified, but for a huge percentage Americans their house is by far their biggest investment. You have to live somewhere, the American economy and tax system is designed around encouraging people to be homeowners.  You did it at age 30, congratulations.  It is great you are in careers that are likely to keep up or outpace inflation.  Since your mortgage payments are fixed you are in an ideal situation to invest at least 1/2 of your raises in the stock market.  If you do that diligently soon your stock market investment will be worth more than your house.

Simplifying my wall of text.

You have $700K in asset that is going to increase at X% per year.
Or you can sell it and invest $300K in the market growing at Y% per year.

Even though stock market growth Y is likely to be higher than X for housing, Y needs to be more than twice as much as X, because you have twice as much invested.

SeattleCPA

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #11 on: April 03, 2023, 05:02:42 AM »
35k invested with no additional contribution means we retire in 21 years. Any additional amount that we contribute will bring us closer to retirement. Our current home costs $2800/month to own, $2500 rent frees us up $300 in cash flow, plus travel costs because we’d be renting closer to work and school AND we would have the equity in the index. I get the part about the rent going up but we are in a field that our income keeps pace with inflation, and our taxes and insurance have both gone up $250+ since we bought so it’s not exactly static either.

@LadyDove77 I think the above analysis misses two realities which is what @clifp is trying to point out to you. Seems like his words aren't making sense. So I'm going to try another approach.

First, know that your house is an investment. No, it doesn't pay a dividend. But it provides you with imputed rental income. Which is the same thing. (Short version of logic: Whatever your could earn from renting your house to someone else is your rental income.)

Second, know that 2% mortgage is hugely valuable and I estimate worth about $150K to you. Sell the house and you'd be giving that up. So basically burning up $150K.

BTW I know a number of people in this forum argue that owning a home isn't an investment. Those people are wrong. They don't understand how the accounting works. They don't understand how the economics works. And if you follow their logic, you'll probably delay financial independence.

Pleases don't compound your earlier mistake (of not starting to save earlier) with another maybe larger mistake of walking away from a 2% mortgage and ignoring a bunch of imputed rental income.


uniwelder

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #12 on: April 03, 2023, 06:51:02 AM »
2% interest on the mortgage changes everything. Now the heck did you grab a rate so low?

I think the rate is actually 2.88%, which is still fantastic.  OP has another ongoing case study thread that lays out the family situation in more detail.  After reading both, I'm even more confused.  One clearly laid out posting with accurate numbers would be most helpful.

Dicey

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #13 on: April 03, 2023, 10:43:28 AM »
2% interest on the mortgage changes everything. Now the heck did you grab a rate so low?

I think the rate is actually 2.88%, which is still fantastic.  OP has another ongoing case study thread that lays out the family situation in more detail.  After reading both, I'm even more confused.  One clearly laid out posting with accurate numbers would be most helpful.
We can only work with the data OP gives us, which I agree is confusing. It doesn't change my answer, but it does make this FIRE person less inclined to lean in to help.

Edited to add: I looked at the case study. It's 2.87%. OP's a SAHM and husband is self employed. No fucking way would I give up that mortgage. They are not likely to replicate that deal again. Hang on to that sucker for every one of the ~10,000 days it has left. Focus on other savings and investments and let the mortgage run quietly in the background.
« Last Edit: April 03, 2023, 10:55:47 AM by Dicey »

clifp

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #14 on: April 03, 2023, 03:36:54 PM »
2% interest on the mortgage changes everything. Now the heck did you grab a rate so low?

I think the rate is actually 2.88%, which is still fantastic.  OP has another ongoing case study thread that lays out the family situation in more detail.  After reading both, I'm even more confused.  One clearly laid out posting with accurate numbers would be most helpful.

Upon reading the other thread. Her situation is even more complicated, 6 kids home schooled.  My niece homeschooled her 3, and now is adopting/fostering 5 more.  A 5 bedroom house is a luxury for most families, but a necessity for the OP, and really will limit her rental choices.  Realistically the time for them to retire is when all the kids are out of house, and if not through college, and least launched.   Then they can downsize to a 3/2.

Villanelle

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #15 on: April 03, 2023, 07:30:22 PM »
2% interest on the mortgage changes everything. Now the heck did you grab a rate so low?

I think the rate is actually 2.88%, which is still fantastic.  OP has another ongoing case study thread that lays out the family situation in more detail.  After reading both, I'm even more confused.  One clearly laid out posting with accurate numbers would be most helpful.

Upon reading the other thread. Her situation is even more complicated, 6 kids home schooled.  My niece homeschooled her 3, and now is adopting/fostering 5 more. A 5 bedroom house is a luxury for most families, but a necessity for the OP, and really will limit her rental choices.  Realistically the time for them to retire is when all the kids are out of house, and if not through college, and least launched.   Then they can downsize to a 3/2.

Nah.  I had a friend who was one of 10 kids and grew up in a 4 or 5 bed home.  A normal suburban-sized bedroom can pretty easily accommodate a triple bunkbed.  You could probably even comfortably fit 4 kids into most primary bedrooms (with the parents sleeping in one of the smaller rooms).  Sure, it would require creativity and sacrifice, but OP says they are pretty desperate to change their financial picture, so I think a 4 bedroom home, or maybe even 3 (especially if there is some secondary living space that could be used as the schoolhouse) could work.  Sure, it would be tight quarters, but if their current situation is as desperate as she says in the other thread (which most definitely doesn't include the $5k/mo savings mentioned in this thread), they could make it work if they wanted to. 

beekayworld

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Re: Sell house-invest equity in index-coastfire and rent?
« Reply #16 on: April 11, 2023, 08:47:40 AM »
A couple of extra points that lead to keeping the mortgage being the best route:

* You won't pay taxes on $500k of capital gains when you eventually sell.  Versus gains in the stock market which will likely have Long Term Capital Gains.

* The mortgage interest on your loan is tax deductible.

*If stocks tank and you need the money, you could take a large (say 50% as happened in 2007) loss on your money by having to sell stocks while they are down. Whereas if you own your home and need money, you can take out a home equity loan which will certainly not be in the 50% range.