**reposting here since it was deleted from r/realestateinvesting
Have had a rental home operating for a little under 10 years. It is a 2 bed/1bath at 1200 square feet in what I would call a B- neighborhood. The home had a 15 year mortgage taken out in 2012 and has about $15k in principle left. Rental income is currently at $1495/month.
averaging the various online real estate sites and looking at recent sales I'd estimate the current sales value at around $225k. The roof, HVAC, and fence are all less than 5 years old, so if we do continue to rent, we should be clear of any large CAPEX items for several years.
When we pay off the home in 2027, assuming we are still at $1495 per month, after taxes and insurance it comes out to $977 (again, assuming T&I doesnt keep rising at a ridiculous rate). Accounting for management, vacancy, repairs and future CAPEX I am calculating around $560 per month. Assuming 2% annual appreciation, that adds another $375/month (first year) for a total of $960/month.
If I were to sell the home today at the $225k, after realtor fees, depreciation recapture, taxes, mortgage pay off, capital gains, minor repairs etc, I am coming up with around $175k in cash.
Now for my theory:
say I take this $175k and add some savings to get to $203k so I can buy 300 shares of SPY at its current trading price of $677. Tracking this for a bit, I can sell 0.25 delta covered calls that are one week out for around $1.75 each. This would put the gross income at $525/week, not accounting for any appreciation. I don't need to show the math to prove that this comes out to higher than the $960/month from my rental.
two outcomes of this weekly position:
- SPY increases past my strike. I roll the option into the following week, profit is locked up in the sell/buy but still a net increase.
- SPY trades below my strike by whatever amount and I just keep the premium.
There are of course pros and cons to both options. An obvious risk to point out with the CC option is that the market could plummet at any point and my $200k could fall to $100k or lower. If, in theory, I do not plan to cash out this position and spend it anytime within the next couple decades (similar to holding the cash in the rental equity) I'm not concerned over that other than the income from the premiums would shrink as well.
There are also obvious cons to the rental that are not captured in the $960 above as well. A bad tenant, liability, extended vacancy, reduction in rent (probably tied to the market 'crash' scenario above) all could impact the profitability.
I have also looked into selling this property or pulling a HELOC to buy other rentals. At the current values and interest rates I just can't get any properties I come across to make sense at all.
I am open to other suggestions or pointing out of pitfalls or other details I am not considering. Thanks
Help me understand why I shouldn't sell my long term rental and just sell covered calls on SPY
byu/Flrg808 ininvesting
Posted by Flrg808
20 Comments
I hate dealing with renters and rent house and just started doing the exact same thing. QQQ and VGT brings in even more than SPY.
Ditch the money pit rent house and start selling the covered calls.
Do it no balls.
Yeah if you value your time at all you put everything in the market and let other people work for you.
Rolling calls can be expensive but I don’t necessarily disagree with your reasoning. I’ve lost money writing calls on individual equities in this market but SPY rarely moves that quickly. You can try a test based on the past month but looking at the weekly price movement to estimate if you could have had the equity called away. I’m probably overly cautious, but it’s a cautioned I learned the hard way.
You’re going to regret it when a trade doesn’t go your way and you lose most if not all of that money in a blink AND it’s going to sting even worse when you see the value of that property in 5-10 years.
Or you just put some money into spy and not sell cc’s and buy covered call etf’s like jepq or qqqi and let them do the call selling for you
I agree with selling to buy stocks, dumping it into an AI bubble is unwise I’d say. Maybe do IJH/VEU instead?
Since you only asked for one reason I will only give you one reason. It’s the one asset that you can increase the rent and therefore giving yourself a raise.
It’s a risk thing and a peace of mind thing.
Peace of mind: managing renters vs managing your stock portfolio. Your renters could be pleasant or shitty. Your portfolio strategy could require very little of your time or it could be a full time job.
Risk: house destruction (covered by insurance) vs likelihood of market crash or trades not going your way (not covered by insurance). It seems to me the house is a less risky investment, but maybe you are ok with higher risk levels.
Also, why not do both? You can start your stock portfolio with your savings and give it an initial trial. It’s possible that if you jump in with both feet there will be no turning back. What if you hate selling covered calls or it doesn’t work? Find out before you fuck around.
I know an older CPA and he gave us some of the best advice investment I have ever heard. He said, “if you don’t need to take the risk, don’t” Being a landlord has risks and potential liabilities that can exceed your net worth. CC options have expenses and multiply market risk. If you can live with an 8-10% rate of return, with Spy, and some bond proxies, etc., then just do that.
I sold mine and just bought SPY. better return without the headache
You’re making about 5% return with the property and would make around 8% with SPY. You’d have to adjust those numbers with the risk of each investment, and the effort of maintenance.
Another option is to buy and hold until the stocks are long term, and selling. Less volatile, and you only pay capital gains. What kind of benefit this adds depends on your total income and circumstances of course.
I would recommend seeing a fee-only fiduciary. Your personal circumstances might tip this small of a margin one way or the other.
There is nothing better than trading/investing in anything electronically tradeable from anywhere, anytime through your cell phone even, realestate investing included. You can even invest/trade in realestate too if you want through realestate etf’s and reit’s.
To me it seems like you have something good and relatively safe seeing as it will be paid off soon. I wouldn’t personally trade that for a riskier better payoff. I would consider taking a portion of the rental income and building positions for income. I’d consider either a covered call ETF portfolio that pays regular distributions or changing your strategy for options to the wheel strategy so you are selling calls or puts on an underlying of your choice. You would want an underlying you would want to hold but the premiums from these if they don’t get assigned would also be sufficient and in my opinion less risky than your own strategy
At this price on SPY (check the 6 month chart)?
People cycle through assets and equities have been the way to go this year. If you can see that property value fall, sell and buy the ccs. Also, remember you’ll be paying a capital gains tax on the sale of the home.
Since you’re planning to hold for the next decades, the SPY is the priority and you’re just giving up the “real estate” part of the diverse portfolio.
I’m wondering why don’t people do this more often?
Math aside, you are very not factoring in the Pain In The Ass factor. Even if you can stress free make the $1000 in the markets, that equivalent $1000 with the rental is way way more risky, more aggravating. Heck even if you went from 1,000 to 800 in a set and forget situation your time and stress makes up for way more than the couple hundred. Ask me how I know lol.
May I introduce you to SPYI which is likely more tax efficient and requires less management/oversight.
Put your rental property under a business, borrow against the equity, invest the borrowed money into covered calls, write off the interest on the borrowed money, use the rent to make the loan payments.
You shouldn’t sell covered calls
Over time, covered calls will underperform simply holding the underlying. So you should just buy SPY or VOO or whatever instead
Sell it to someone who will own and live in it, give someone a chance to build home equity.