I own a rental property that I purchased in late 2021 in California at $400,000 with a 2.75% interest rate. I lived in the property until Nov 2024 and started renting it out. I am charging $2500 in rent, which is already over market for the area since last year. Mortgage is $1800, HOA fees $400, and homeowners insurance is $111. I’ve already had to hemorrhage $15,000 in repairs and the property is in an HOA, which has been a pain.
The property has already gained value since I purchased it, and I am still in the window where I could sell my it to avoid capital gains tax. If I sell my property now, I could roughly pocket about $150,000. I’m trying to figure out what my investment options are or if it’s even worth to sell. One of my biggest reasons for wanting to sell is the stress associated with it, especially since I intend on starting a family within the next year.
Is it better to sell a rental and invest in index funds long-term?
byu/Double-Warning-444 inpersonalfinance
Posted by Double-Warning-444
25 Comments
I’m doing the same thing. I’m going to sell and put it in an index fund. I learned that I’m not a people person and dealing with HOA is too stressful. Best wishes for your future family!
Being a landlord is a lifestyle choice as much as it is a financial choice. If it doesn’t align with your future then you know what to do. Index fund will still make you money without all the hoops to jump through.
If you can’t rent out a property for at least 1% of the purchase price per month, it’s a waste of time. Follow that rule next time you try to buy an investment property.
It all depends on the final profit from rent less any remaining mortgage payments, HOA, taxes, insurance, repairs, etc. it’s harder to make money owning a rental property than people realize.
Frankly, if you have $2500 per month coming in vs $1800 + $400 + $110 ($2300 total monthly expenses) I would say the math does not favor you actually making money. You’re just barely making any money per month, and any repairs or missed months of rental income due to a move means you’re in the red.
If you sell and invest the $150k in an index fund you would profit $5k-$10k per year from market growth even in a fairly anemic year.
Personally, I would sell and invest in your situation.
Good luck!
Renting out just one single family home underperforms the S&P500 by a lot. If you want to maximize net worth, sell and invest in stocks
Your cash return is basically $200/month, your principle return is probably a couple hundred dollars. So total return is probably closer to $1,000 on your networth/month.
You mention the repairs – was it something you didn’t plan well for or something that has a freak accident / storm?
But you also said you hate being a landlord, if that’s true then get rid of it. There’s plenty of passive investing options.
Did you use property management at your rental?
Depends on what happens long term to housing values and stock markets. Who knows?
If you invest in index funds can you “set it and forget it” or will you be constantly watching stock prices and worrying?
Its market dependant.
Whats the market going to do?
<shrug>
Ultimately its just a matter of preferance. Do you want to be a landlord? No? Then dont be.
Consider the value of your time too.
I was in a similar situation as you. I sold in 2021 and I’m so much happier. All that home equity has been in index funds ever since and has done quite well.
You should model out a return on equity calculation that factors in value gain, principal pay down, depreciation (and recapture), and also the cost of selling. But as someone who just went through this and sold a rental condo in CA, I feel great about the lowered stress, getting cash out tax free, and getting out of the condo market here.
Sell it move on. Best bet, especially in CA.
For me the question is will the net gain from selling provide me the net monthly income from the rental.
Looks like your monthly net is like $200 from the rental. You could easily put 150k into something that pays you 3%, will grow, and be less of a headache. Me, in this situation, would sell.
This is not factoring any tax implications
You are well below the 1% rule (a $400k house needs to rent for $4000/month to reliably be profitable) and you are experiencing why it is so much more than the mortgage because those big ticket items always happen. The only way this makes sense is if the home value is expected to increase enormously. If you do hold this house for thirty years and gradually increase the rent you may break even waaayy down the road but compare that to what you could do with the same money in the stock market, or even just in bonds with none of the headache of being a landlord.
In my time with investment properties it seemed that for all my trouble I’d be lucky to net $10k/year in the best year and often I was struggling even to break even. I asked myself once if I’d accept a job that paid so little and the answer was obvious. So I sold the properties
Hire a property manager.
Last time I had one, they charged about 10%.
They handle everything, even vetting tenants, collecting rent, all repairs, everything.
Just get a good manager that is referenced.
“I’ve already had to hemorrhage $15,000 in repairs”
I feel like you answered your own question here. Even if the stress wasn’t so bad, landlord-ing is effin’ expensive. Houses are always going to be an ongoing eternal expense.
Meanwhile you got VTSAX over here just chilling with no more than a .09% expense ratio or whatever it is now. In the long run, regular investing in a fund will win out over a rental way more often.
For the love of god good sir please do not sell your real estate for any index fund with bonds in it. Selling physical property land/housing for paper of a country who has 120% debt to gdp and 4% yield on a 10 yr note is about the poorest decision one can make.
Your finance rate is already 3.5% less than current rates. Keeping this real estate as an investment is definitely less risky than a S&P500 index fund over 20-30 years but no one knows the future.
I used to be all in on real estate, my career and my investments. Then I discovered closed end funds. I will never have another rental.
Here is one CEF I own as an example. Pdi, pimco bond company. They pay monthly dividends at $0.2205 per share which equates to $12.50 per $1000 invested. So that $150,000 translates to $12.50 x 150 =$1875 monthly. No mortgage payment, no hoa, no repairs, no taxes, no late payments and if you don’t like the fund no cost to sell it next day. Now of that $1875 or $22500 annual income, it’s not all taxable. The year end 1099 will show around $11k in taxable income. In a Roth it’s all tax free. The price fluctuates, it’s not meant for growth, but for income it’s a great fund, reinvest and it starts the magic of compounding returns. I am up to $3k in monthly dividends after owning for the start of my 3rd year.
Nobody is factoring in the increasing equity of the house. Not sure what you put down but after 30 years you own that house. If you did 20% down you borrowed 320k. Even if you break even on rent you made 320k over that 30 years (10,666/yr). That’s 13k/yr with the profit on rent. Your property value will continue to increase on top of that as it already has. Rent should also continue to increase.
You’ll have bad years and bad tenants. If you don’t have capital to get yourself through repairs and such then you’ll be better off selling. Being a landlord isn’t the passive income YouTube makes it out to be but you can certainly make money. I don’t know if I’d want to be a landlord in CA though
Cashflow isn’t great, I would sell and invest into index
Since you had as primary you can still save on taxes
It all depends on appreciation of the property versus market gains which obviously you can’t predict.
Just follow your heart and do whatever you feel like doing. Cuz no one can tell the future. Obviously.
Index funds would be my choice. The rental asset value might not be that impressive when you factor in all the transaction fees involved to sell it (5-6% realtor fees, repairs, capital gains taxes, city transfer fees, etc.)
For 400,000 purchase price, you are looking at needing to get something over $4,000/month for the numbers to get even close to working out, with the exception being if there is some serious increase in property value. The market is cooling off though.
With your current rent, you are looking at maybe about a 25 year payback/break even for the property, so the rental value won’t be profitable for 25 years. The appreciation value will gain some, but probably not enough to offset what you are missing out from 25yrs in ETF (over a million $ interest).
Sell it.
I had a similar situation with a condo I lived in, then moved out of. I had carefully calculated all the scenarios. In the end I sold it before I would be stuck with the capital gains taxes. What I didn’t plan well for 1) how much the dang HOA fees went up each year, 2) how terrible a “good renter” could turn. From paying on time consistently to turning my condo into a literal meth joint. I had to pay $9500 for the eviction , was owed 11,000 by the tenants who disappeared. The positives 1) write-offs for everything and depreciation (which I think is the biggest tax cheat ever, like sure my property is depreciating to zero dollar in 18.5 years)!
Im happy I sold. I invest in some real estate ETFs and storage units ETFs instead. Zero headaches and lower risks.