All Forum Posts by: Rich Chen

Appreciation for the advice. It appears logical not to sell the primary residence once it's fully paid off, considering the associated taxes and fees. Instead, leveraging it to invest in rental properties seems more advantageous. However, I remain skeptical about purchasing property as a primary residence being a sound investment. From my perspective, homeownership primarily serves as a hedge against inflation. It represents a passive investment option for individuals seeking to save money beyond traditional savings accounts, without delving into more complex investment strategies.

You are right, it would be $4.3 milion after 30 yrs. My appreciation estimate is wrong. Yes, factoring in inflation 2%, the profit is -$100,000. 

Adding the maintenance roughly 1-2% annual costs, 30 years would probably cost around $400,000. So now the total profit is -$500,000 after 30 years of owning the house. Not so good. 

In my view, tax benefits are almost negligible ($10,000 max annual deductible), the tax on capital gain in $2.8 million would be around $850,000 (federal + state tax), total profit is -$1,350,000. 

Yes, renting is much worse, I'm in agreement with you. But still, why would anyone want to invest on sth that destined to loseas much as $1.3 million after 30 years of investment??

Let's say one just wanted to live in a house and start a family, and then what's the point of owning from financial perspective? Equity will take time to build.

By the time one has paid off the loan, the house would worth, say, 2 million dollars after 30 years. With the interest and tax occurred at 1 million total, and 1 million principle paid, the ROI is ZERO.

Just a simple math:

Let's say I buy a home for a million dollars, with 20% down and 30-year term

    interest rate = 5% 
    +
    property tax = 1%
    +
    maintenance = 1%
    -------------------------------------------------
    = Total 7% annual costs of owning a house 

Now, during the 30 years of owning the house

    Average homes in American appreciate 5% annually
    - 
    Inflation runs 3% annually
    ----------------------------------------------------------
    = 2% gain annually


Those are just rough numbers. In real life, of course interest rates and inflations are much higher. For the sake of this exercise, let's keep it simple. 

Also don't forgot there is tax on capital gain for over $500,000 when house is sold, andclosing costs typical goes around 5%-6%.

So unless home appreciates A LOT, it doesn't seem to make sense to own a property as long as you are paying mortgage with interest, unless one can pay it all back in much shorter term (10 years or less). The only upside I see is that family get to live in it for "free". 

Even the house is fully paid off, the 1% property tax + 1% maintenance offsets 2% annual gain. It only about makes even. At current rate of inflation (7% roughly), it loses money owning real estate properties.

In 30 years, one would be paying over 1 million dollars for just interest and tax, let alone other costs such as maintenance. 

Calculator link: https://www.mortgagecalculator.org/?q=cy8pc-1KW

Am I missing anything?

@John Erlanger

Thanks. Actually I was thinking if 1% rule is realistic rule of thumb? In Southern California it's unlikely to find any prop to yield that return e.g. $3K rent from a $300k prop unless there is ADU one can also tent out. Perhaps it's diff in other states

Folks, thanks for all the kinda advice! Just to follow up, after overwhelming replies of this thread, we took anther 3 days to work out all sorts of scenarios, mind exercises, and number crunches, and finally reached the decision NOT to sell the condo. Yuhoo! We will keep it as rental prop, albeit not the greatest return according to 1% rule. Our next move is to cont to rent for while look into neighboring cities with great school for a bigger house. We are also convinced that it's not the best time to buy giving the current market situation and potential political turmoil amidst election. Thanks for all the help from everyone in BP.

Wow, I didn't expect so many generous advice. Thanks all! Only wish I discovered BP sooner.

@Joe Splitrock appreciate for bringing a different view to the discussion. I need to hear that too.

Unfortunately we will have to pay capital gain tax if we sell since we did not live there for the past 5 years. I might be exaggerating living 20 years in the new house, but def at least 10 years until after both kids are in college, not saying if it would make a difference. I too think in the long-run house would come out on top, at least equal, thru equity. 

A common argument against rent, so was mine, where I'm also not totally convinced yet. 

Assuming living in the rental for another 10 years with $5K rent/mth.  That's $60,000 a year which equals to $600,000 in 10 years. The counter is that, while renting, we invest another rental by leveraging the paid-off-condo thru home equity loan, that would otherwise not be available if we sell, to generates more income to make up the rent.  Hopefully we can make even, or even better, have additional cashflow after paying the rent. Plus, as @Stone Jin said, being renters are also liability free, considering paying for a service. 

@Stone Jin may I ask does your rental increase over time? For mortgage, in the contrary, that monthly payment is always fixed.

@Douglas Holden Thanks! It is true that we wouldn't be able to do any property investment at all if we decide to finance the bigger house as primary resident, but why it would be going backwards if we still on the path of paying off the mortgage and building equity over time for the new house, albeit slowly?

Lets say after 15 years of the homeownership, which would come out on top comparing against owning two rentals while also having the cost renting for ourselves? 

Thank you @Stone Jin 

@Stone Jin Yeah that helps a lot! Thanks so much. "Rent is throwing money away" is a myth. I also read Kiyosaki's book, but I guess it didn't really stick. 

To recap, we can take out equity from the condo and use that for investment to generate cashflow. Moving into the uncharted territory, what would be a good rate of ROI for real estate, given the rate is super low?