Should I rent in retirement?

Question

My partner and I are hoping to move back to San Francisco in the next year after living in the east bay for 10 years. We don't really have enough money to buy a house in San Francisco, but have bought three properties in the east bay in the past ten years. If we rent out all three properties, we will probably have enough to rent in the city. Is this a good idea? Are there any negatives? I am 60 years old and hope to retire by the time I am 66.

Jon Holdman · Answer

This is really a personal finance question rather than a real estate question. And it all comes down to income. I see you're new to the site, @David Henderson. Welcome! You might want to post an intro in the new member intro forum. My first question would be are you realistically evaluating the true income from your rentals? Newer rental investors often use "rent - PITI" or just "rent - taxes and insurance" if the property is free and clear. I call that "phoney cash flow" because you have a lot more expenses than that. If you're in this for the long haul you will have expenses like roofs, sewer lines, nasty evictions and major tenant damage. If you're counting on the net income from the rentals to fund your life going forward you have to be realistic. Otherwise, one of these major hiccups because a big disruption in your entire life. So, if you now have a realistic value for rental income, then look at all your other income and expenses. Can you afford to rent in San Francisco? IDK what rents are there, but I suspect they're not cheap. IMHO a property you live in is an expensive doo-dad, like a car or boat. Its not an investment. So you choose housing that fits your needs and your budget. That's often a compromise. I think owning a house free and clear is a big step toward balancing your budget for retirement (i.e., when the income is significantly reduced.) Renting means you have a monthly nut that you have to continue to cover. Now I think renting does have an advantage in a high priced area like SF. Rents are often very low compared to prices. If the rent is, for example, 1/2% of the purchase price, the landlord is significantly cash flow negative. Effectively the landlord is subsidizing your living choices. They are hoping for appreciation and may well get it. In the mean time, you get a housing unit cheaper than if you were buying it.

David Henderson · Answer

Bill- You are so right - that is why I will be renting a house and not an apartment! Saxophones are noisy!

David Henderson · Answer

Jon - Thanks so much. I am relatively new to being a landlord, so I agree with you that I need to figure out exactly what is my positive cash flow after all the expenses, etc. As you say, from what I have seen so far in my rental search, even as high as rents are in SF, they will be lower than a mortgage would be. I will have my residence in the east bay paid off by the time I retire, so I won't have a mortgage on that property.

J. Martin · Answer

Hi David, I have long told myself that if ever want to move back to SF, I would buy income properties in the EB, and rent in SF. Rents are pretty low relative to prices, although they are very high at a nominal level. Median for a 1br is $3k in a decent area, I believe. But this might be on a $800k condo. Make sure you get a rent controlled unit (look at sftu.org to determine). Also, Michaela, I don't know if you can make agreements that circumvent the housing laws (regarding getting someone to move..) I think it is like employment benefits. You can sign an agreement saying you waive your right to sick days, but I don't believe they would be enforceable. Tenancies last longer than bad marraiges in Berkeley, Oakland, and SF.

Jon Holdman · Answer

A rule of thumb for retirement is that you can spend about 4-5% of the value of your nest egg each year. The value of rentals for your nest egg is the equity. Or, really, I think its the value of the property less all selling costs (typically at least 8%) less any debt. Now I think that calculation is conservative if you have an asset that is appreciation and is spinning off cash.

Bill Gulley · Answer

Anyone who plays an alto sax should have some space around them, unless it's a commune of musicians! That may not be hard to find there. :) See how life is as a tenant, there are advantages, especially if you plan to travel. Start planning now, but I don't like the idea of selling performing and appreciating assets and then living off the money. Reinvest it, yes. :)

Michaela G. · Answer

Personally, I wouldn't want to live in the city. Not just because the enormous rents, but also the temperature, which is always much lower than in the East Bay. But, whenever I read an article in SFgate.com about the ellis act etc, there are people commenting that they own a house in SF and they'd rather keep it empty than take the risk of putting a tenant in. So, I'm always thinking, if I wanted to live in SF, I would approach them and offer for them a lien against one of my houses or some other guarantee, that will give them security that I'd move out when they want me to. And they'd get some income - which should be less than standard market rates. Just an idea ;-)

David Henderson · Answer

Thanks, Michaela. Good suggestion. I think we may want to rent for a year first just to make sure we still want to live in the city, but after that, if we still like it, we would definitely consider selling the house.

Michaela G. · Answer

Why not sell your primary residence before you do, so that you can take the tax free benefit for up to 500K for a couple? If there's profit, you might be able to utilize that in the city