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You'd get 3.12% gross, and 1.2% net before income taxes
Owning a house is a very bad deal around here, except for the potential appreciation. I'm not saying it can't continue appreciating, but personally I'm not about to make that bet.
However, you seem to be considering doubling down in this market, by investing in a second property. A potential double loss in a RE downturn will be tempered by the equity in your current home. The unknowns include future trends in the RE market, but for sure, RE only goes up in the long term.
Build an ADU, move into it, rent out main house
Why are there any rentals in the bay area and why would anyone own one? There has to be some reason but I can't figure it out.
If you're really willing to downsize quite a bit, you could sell and buy a place for 800K-1MM and use the rest to buy a very small rental all cash. You'd still get $1500-$2000 minimum on a studio/1 bedroom rental, be debt free and the rent would pay your property taxes on both places, Everything is owned buy you, you could sell the rental if something unforeseen happens and everything you make you can spend. Plus smaller units lose much less value when the market turns down. Of course everything you buy is overpriced right now, so the alternative would be to sell and rent and use all the extra cash for other investments, stocks/dividends/funds/bonds, also debt free. Or leave the bay area and live like a king elsewhere.
But yeah, I need to think if the second place I buy should be in bay area or somewhere else. Buying the second place in bay area would provide more personal flexibility since I live here, but it wouldn't be bad to buy in some of the other places as well.
My house will probably rent for $5500 tops, so not sure how these new apartment complexes are gouging customers for 5580
The latter would look something like this: refinance and cash out $400K with a current rate of 4.375 %; with a $4000 mortgage payment. Rent it, which will generate a rental income of $0 (and $1100 principal payment). You're looking for whatever amounts give you near $0 net rental income. Take the $400K cash and buy a townhouse (and put more $ in retirement accounts).
The "Debt is Slavery" rhetoric can mislead you here. All you need to consider is that it's better to have a mortgage balance on your rental than on your primary residence. That's because mortgage interest on rentals is 100% tax deductible from rental income, whereas mortgage interest on your primary home is only deductible up to a limit and only above your standard deduction.
If you don't have yet the downpayment for the townhouse, you may be better off with just one roommate and save up the downpayment.
I would consider renting or owning in a state with no income tax when you finally decide to quit working. When I take my retirement assets and start to spend them down, I don't want to be a California resident.
alpo saysif I rent out this house, all the expenses (mortgage + property tax + etc) will be paid by the renter + I will make 2000 on top that I can use to offset mortgage on my new townhouse.
Only the interest on the mortage is deductable as a business expense. Any principle part of the mortgage payment will be taxable income. The 2k income above expenses is taxable income. You need to allow for that. At 220k it's 33% so if 1500 is principle and 2k profit uncle sam is going to be taking 1200. That's a pretty big chunk out of your offset. You will have deprecation deduction, but you give that back when you do sell. Depreciation recapture at sale is taxed as ordinary income. So essentially you are simply borrowing interest free from from the IRS to be repaid on sale.
I am basically more closely tying my economic future to bay area's economic future and I think that is a good bet to make in the long term as bay area isn't about to become a Detroit any time soon.
All of this is wrong. Saving $5K a month with a 7% compounding rate of return would save you over $33K more in 5 years compared to pre-paying $5K per month towards your mortgage. In 5 years saving $5K a month would grow to $358K, which would yield a return of $2090 per month which would cover your interest plus principal cost.
If you have $1.6M liquid assets ($1.8M with current savings) plus a house that can pay for itself if you want it, you have very little risk my friend except by putting all eggs in one basket.
Your idea of paying off the 1st house, then saving 5 years, then getting into more debt 10 years from now, sounds both super conservative for the first 10 years and then risky as heck for the following 5 years.
How did you manage to get where you are with such a small 401k? Did you prioritize paying off the mortgage before maxing your 401k contributions? I would max my tax advantaged accounts before prepaying another cent of the mortgage.
I am willing to downsize, but not willing to sell this house. If in future my needs change I won't be able to buy this house back at $2M+. My salary hasn't kept pace with housing market appreciation here in bay area. Plus I get the advantage of having low property taxes courtesy of prop 13 if I continue with this house. My property tax is lower than property tax that people are paying for some of the townhouses around here. I still see a strong economic future for bay area and I think having a house here that is fully paid off offers a lot of personal freedom and flexibility and peace of mind with respect to job loss, etc.
I don't think that's quite right. If you deduct annually based on the linear formula over 27.5 years, you pay a flat 25% rate on recapture. If you use accelerated recapture, that is depreciate faster than the linear formula then the excess recapture over the linear formula is taxed as ordinary income.
Why does anyone own a rental in the bay area?
Now, let me say this.. What I say above is only opinions/options, I'm not trying to tell you what to do. I'm just laying out some scenarios in debate style fashion, I don't mean to sound pushy. Good work, you've done well, very well.
3. 40K - from liquidating money lying in last employers 401K plan.
You might want to make sure your rental numbers are correct for the house. 5K might not be anywhere near the right amount, it might be 7-10K, or more.
Ummm... I hope you didn't cash out your 401k to pay down the mortgage. That's investment-advantaged account that doesn't pay incremental capital gains on each stock transaction. Also, you'll owe penalties if you aren't of retirement age.
I've been thinking of selling the whole thing and fleeing the state. But, there are a bunch of painful costs:
• real-estate cartel will try to grab their 6% (even if they grab 3 or 4% that's a big chunk because it is on the whole thing, not just the appreciation)
• federal and state capital gains taxes. My capital gains will be $2M - $0.8M, so I'm looking at 0.4M in capital gains. (That includes the Obamacare and other extras on high capital gains.)
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The main issue I am dealing with is whether I should pay down the remaining mortgage ($400K) on the current house, save for a downpayment for new townhouse and move into the new townhouse, etc. Trying to figure out what to do?