Sell or Rent: Los Angeles Mustachians

[Spondulix]

We have a 3 br/3 bath home in north Los Angeles that we've outgrown, so looking to buy something else in the area and considering renting our existing house. We're a couple in our 40s (with a young child), enjoy our jobs, and we live well below our means.

House Market Value: 1 million
Original Purchase price: $400k
Existing mortgage: $240k, 19 years left of a 20-year loan at 3.125%
P&I: $1400/month
T&I: $800/month
Deferred maintenance notes: We would need to put in $20-50k of work whether we sell or rent (and have the cash for it)
Potential rent: 2 scenarios. Renting whole house ~$5k month; Or, we could easily split one room into an EDU and rent as two units (guessing ~$4k + $1,500), but would need to add a kitchen to the EDU.

I can get into the numbers of what we're looking to buy if needed, but PITI would be $5k/month at worst and probably $3k at best, and in both scenarios we can continue our one-salary lifestyle. I'm already leaning towards selling vs renting for a few reasons: 1. the idea of owning two properties ($2 million+ in value) in an earthquake-prone area is a lot of risk. Earthquake damage deductible is 10%, and our total assets are probably $1.5 million (with $1 million from the house). 2. If I were to consider an investment property at this point in my life (as someone new to it), I'm not sure holding a $1 million property would be the best way to go about it (thoughts?)

We're not keen to spend our time being landlords, finding tenants, etc, and I wouldn't be surprised if property management here is pricier. I'm wondering if another investment opportunity would be a better vehicle for the money - maybe taking $400k from the sale and buying property somewhere else (and have it managed), or just $100k into index funds and the rest into the new loan. From an investment standpoint, I'm not sure if the best use of the money is to put all of it into a single new loan, but I'm not really sure how to do the math to figure out the most advantageous solution.

[Mustache ride]

Easy decision, sell.

[franklin4]

It really depends on what you think will happen in your market. If prices continue to shoot up it would be wise to keep it as a rental that someone else manages for you. At $5k a month you should be get someone who won't cause much trouble. And you should be able to refi at little or no cost and get a lower rate on a 20 or 30 year loan which would give you even more cash flow if you were to rent it out. After you move out you'd have 3 years to sell and be able to sell and get big tax benefits from living there.

There are certainly good arguments to be made about selling though.

[Dicey]

I'm Fat FIRE now, thanks to my love of real estate. I'm also from SoCal and still own property there. In retrospect, VTSAX would have been so, so much easier. IMO, you just don't need the stress in your life. Sell it now while the getting is good. You're flirting with the edge of your tax-free limit. Who knows how long that will be around? I'd sell, pocket a cool tax-free $500k, invest it a la JL Collins and never look back.

And don't be so sure that it needs that much work. There is so little inventory that people are literally fighting to buy almost anything that comes on the market.

Take the money and run!

Oh, and in case it isn't obvious, put 20% down on the new (but still affordable, right?) house, get a cheap, fixed 30-year mortgage and never prepay it. The coming inflation is your friend. Well, almost. At least a shiny new mortgage will be an excellent buffer.

[affordablehousing]

Sell, easiest decision anyone posted about. Put it on the market today and let some ding dong park their cash in your home while you find something you can live in that works for you.

[Spondulix]

Thank you! This is all really helpful.

[Jon Bon]

Thank you! This is all really helpful.

I of course agree with all the other posters but here is a little bit of the why. It is just a little bit of math that almost everyone forgets.

You have roughly 700k in equity so lets assume you keep 600k if you sell.

So if you put it all into the market and you get 6% which I feel is very reasonable. $600,000*.06 = $36,000

Now say your rent for 5,000 a month and have 3,000 in expenses. You make $24,000 if nothing ever goes wrong! Throw in a nice 10k repair every few years and you are making very little AND you get to be someone's landlord!

[Spondulix]

Thank you! This is all really helpful.

I of course agree with all the other posters but here is a little bit of the why. It is just a little bit of math that almost everyone forgets.

You have roughly 700k in equity so lets assume you keep 600k if you sell.

So if you put it all into the market and you get 6% which I feel is very reasonable. $600,000*.06 = $36,000

Now say your rent for 5,000 a month and have 3,000 in expenses. You make $24,000 if nothing ever goes wrong! Throw in a nice 10k repair every few years and you are making very little AND you get to be someone's landlord!

This is exactly what I was looking for - thank you! I've been running some numbers if I put the money in index funds, $650k (earning ~10% for 5 years) would be $1 million. That's with no effort.

[Dicey]

Thank you! This is all really helpful.

I of course agree with all the other posters but here is a little bit of the why. It is just a little bit of math that almost everyone forgets.

You have roughly 700k in equity so lets assume you keep 600k if you sell.

So if you put it all into the market and you get 6% which I feel is very reasonable. $600,000*.06 = $36,000

Now say your rent for 5,000 a month and have 3,000 in expenses. You make $24,000 if nothing ever goes wrong! Throw in a nice 10k repair every few years and you are making very little AND you get to be someone's landlord!

This is exactly what I was looking for - thank you! I've been running some numbers if I put the money in index funds, $650k (earning ~10% for 5 years) would be $1 million. That's with no effort.

Exactly.

[Dicey]

I just noticed the locked journal and said hmmm, this sounds familiar...and connected the dots. Wow, you have made great progress since you joined! Congratulations!

[Spondulix]

I just noticed the locked journal and said hmmm, this sounds familiar...and connected the dots. Wow, you have made great progress since you joined! Congratulations!

Thank you!! :) Yeah I’m still amazed myself sometimes, but this forum has been indispensable. Without your response above I’d probably still be talking to my realtor and her lender about investment properties. Half the battle is just knowing what your options are.

[Dicey]

I just noticed the locked journal and said hmmm, this sounds familiar...and connected the dots. Wow, you have made great progress since you joined! Congratulations!

Thank you!! :) Yeah I’m still amazed myself sometimes, but this forum has been indispensable. Without your response above I’d probably still be talking to my realtor and her lender about investment properties. Half the battle is just knowing what your options are.

Squeeeee!