[Monica]

Curious…why would one choose to keep a rental property that’s paid off and has $500k in equity?
5% Interest in HYSA = $25k annually

10% in a Mutual Fund = $50k without tenant headaches or house repairs.

So why keep the rental?

[Robert]

Why keep the rental? The same reason I’m keeping my rentals until I’m practicing law up in that big courtroom in the sky.

Once the rental is paid off, it provides a stream of income that you and your heirs, and their heirs cannot outlive.

Residential rental real estate is one of the strongest ways to create and maintain generational wealth.

[David]

As you pointed out, paid off rental properties don’t really perform that well. However, rental properties make for some pretty safe leverage.

Yes, you can leverage almost any investment, but real estate is some of the easiest, cheapest, and safest debt.

There is also diversification, tax advantages, depreciation, and appreciation to consider.

Real estate is also an area where you can increase returns using sweat equity. You can’t increase your returns in the s and p by doing some of the work yourself.

You are at the mercy of the market. In real estate you can also use your individual knowledge and connections to increase your returns.

Maybe you know more about a specific up and coming local market, maybe you are an electrician for your day job and can rewire that hundred year old house yourself saving thousands, maybe you have connections to excellent trusted contractors, maybe you have really strong project management skills and can run the subs yourself, problem solving skills, people skills, etc, etc… none of that matters if you are buying mutual funds but can really make a difference in real estate.

[Scott]

A few reasons.
1. Cashflow
2. Appreciation
3. Depreciation on your tax return.

4. It’s a store of value that is less volatile compared to stocks.
Whether those reasons are sufficient depends on your specific tax situation and net cashflow compared to the market.

You won’t be getting 5% on your hysa moving forward, and the market probably will struggle to do 10% over the next couple of years.

[Curtis]

I can tell way too many people have not experienced a prolonged bear market in stocks like a market that takes 6 years to recover From 2000-2010 if you bought 500,000 worth of s&p 500 shares you were flat at the end of the decade because the price you pay is what matters most and right now the US market is relatively expensive.

You’re going to sell a cash flowing asset that is paid off to buy into an overvalued stock market with a 1.3% dividend, and lose your tax benefits owning the rental?

-Why not keep the rental and use the monthly cash flow to buy s&p 500 index shares?

On a 500,000 property your rental income should be close to what 30,000-50,000 yearly?

[Sunny]

You can loose value in your stocks.
No matter bad the stock market crashes, people will always need a place to live.

[Olivia]

For me, it’s so I can eventually give my children the rentals, either to live in themselves or to use as relatively passive income.

House prices are insane where I live and unless I give my kids some real estate, they might never be able to afford it.

[Jessica]

Cash flow (should be high if paid off)
Depreciation (means cash flow will likely be tax free, not the case for dividends or interest in hysa)

Appreciation in home value and in rents.
Tax deductions (everything is deductible)

When you add all of these up, it may be a higher percentage of ROI/roe than you think.

And if it’s not then you can sell through a 1031 exchange and scale up and increase you leverage to a number than makes more sense.

That’s what I just did. Scaled from a paid off 2 family to two 35% paid off 4 families.

Tax deferred. Rinse and repeat. It’s like playing Monopoly!!

[Bryon]

Some can actually receive more than a 10% total return in real estate. Depends on the market and what the property was purchased for, etc.

However, those that cannot, a good argument can be made to reduce the headaches and cash out.

[David]

Take 400k out tax free and put that in the market and let a tenet pay back the mortgage

[Tehmin]

It depends on your state and local laws and the type of property. California has some of the most pro tenant laws and there are professional scammers out there that will take advantage of those laws.

Also rising costs of insurance, maintenance and HOA costs without significant home appreciation and rent control makes much less appealing to keep the rental

[Bruce]

You’d keep it if it’s producing for you what you want.
It may be worth $500k, but how much did you pay for it? Like principal, interest, Capex, and annual profit/loss?

Now, what is your annual net profit compared to that.

That’s your annual rate of return on invested capital – does that return match your goals? Does it meet your safety requirements?

What does the future of the market value look like? Monthly cashflow?

Borrowing from your equity obviously skyrockets you’re ROI as a % – but now you have debt and obligation.

If my properties were paid off I’d be collecting over $100k per month on no debt – why would I ever sell??

[Alvis]

It’s an asset that’s making you money every month. Depreciation, appreciation, tax write offs.

Also, you can keep the income producing asset and leverage the equity into other investments.

Real estate is the best shield against taxes. Keep it.

[Sean]

How much appreciation is the property getting annually? How much is the rental income? What about depreciation offsetting taxes on the income?

What about capital gains tax if you sell it?

[Ramzi]

The price appreciation of the real property is the main difference. Taxes and cash flow will pretty much end up being equal to a 3 month treasury bill rolling investment.

But price appreciation will at least keep up with inflation.

On the flip side is the management efforts necessary to maintain the property and the need, in most cases, to be physically close to it.

[Brian]

While keeping the rental has its own risks, what you described is far from guaranteed. Saving accounts are not going to be pushing 5% after the last Fed actions, mutual funds in no way are guaranteed to return 10%.

But another idea may be to spread risk from just one rental to multiple which could increase cash flow, and also lower risk if buying solid properties that shouldn’t need maintenance soon.

Or there are other vehicles that do offer guarantees AND enable you to do multiple things with your money.

[Shawn]

How much is the net income on the $500k property? I would think you could net about $45k plus some appreciation and tax benefits.

[Jason]

You’re only considering one aspect of owning real estate, cash flow. If you bring in leverage and appreciation, the math often skews towards real estate.

Additionally, the tax advantages are also significant and can help show how powerful real estate can be.

Just a few of the many reasons someone might keep a property with lots of equity

[Jonathan]

If the rental properties I own weren’t immediately next to me on a cul-de-sac I would get rid of them now for several different reasons.

[MT]

Well, for starters, the OP doesn’t mention anything about cash flow.
What’s the rental income? Property taxes? Insurance? Maintenance?

A $500k property in a HCOL area like SF Bay Area has much higher rental income vs. a LCOL area, for same equity level.

[David]

As other have said, cash-out refinance (50%) and purchase another property worth 500k and rent it out. Now your getting 5% appreciation on $1M (50k/year) so that’s 10% on the 500k equity.

From there you’re going to have cash flow from the rents, depreciation, tax breaks, and probably enough write offs to protect some of your W2 income.

Your total return will likely be 15-20% or higher in year one using this strategy. Real estate is much safer than thebstock markets and can easily have higher returns.

Turn the 4% average annual appreciation to 10-20% like we have seen the past 5 or so years and you could easily be seeing 30% returns in deployed capital.

It’s an easy choice for me.

[Michael]

In the last 20 years you have only been able to earn 5% in a hysa for the last several months.

I wouldn’t use that as a long term investment strategy

[John]

I sold mine in Florida and I live in New England. My state forces me to pay tax on the sale. It’s criminal.

After it was all said and done and everyone had their hands in my pockets I was barely in the black.

I intended to live there but if not just staying in the market would have crushed those “gains”

[Laura]

Do a cash out refi and the gain is tax free. It’s a tax free piggy bank where the tenants pay the mortgage and you keep the cash.

[Author]

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