Monday, October 20, 2014

Do I Rent or Do I Sell?

A fascinating case study just came up: I was recently speaking with someone who was asking me – should I continue to rent my former home, or sell it outright?

Now there are many facets towards this decision beyond making “financial sense,” like convenience, time and specific goals – but I’ll show how to at least make sense of the numbers. Numbers don’t explain everything, but they sure help when a justification is trying to appeal to reason.

Here was the scenario:

They paid $925,000 for their residential property, put 20% down to avoid PMI, got a great rate at 3.85%, and just completed their 14th year of a 30 year mortgage. We had a conversation as to what their estimate of property value and we agreed that for the time being we would leave that number at cost, the $925,000. The scenario looks like this:

The nitty-gritty surrounding the rental numbers look like this:  

So the immediate thought is: What!? How does this make any sense? I’m losing $4,000 per year; it’s costing me money to rent this home out?

But like most things in life, it’s never quite so simple. Based on the mortgage contract—year 15 looks like this:

It boils down to the fact that people don’t think through just how much equity is created on the back end of the mortgage! Even though there is a negative annual cash flow, the actual equity had increased by nearly $23,000 (The $267k less the $245k equity from last year). The net appreciation when one considers this equity growth less the annual cost to rent is a net appreciation of ~$18,940. 

Obviously nobody is making life altering changes over $18,940, but we left out the most important point of all: what if the value of the home appreciates? Selling the property meant that the upside potential is eliminated; it was determined in this case that the cost of waiting wasn’t so bad: and that they could afford the modest annual expense. As far as tax-planning goes, they were looking at the best case scenario: negative income (write off) + appreciating assets. People that are buying bonds today, for example, are getting the exact opposite: income + losing value. That conversation is for another day.

Anyhow, I have taken the liberty of creating a model for this. If you are interested, please give me a call.

Tuesday, October 14, 2014

Inspiration: Honeymoon in Paris

When you travel internationally, you have a chance to discover things you never thought about your home.  For example: you might not think about how young San Francisco is until you find yourself standing on a Paris street.  Sure, the Spanish settled here in 1776, but Paris was around for the Roman Empire!  The Eiffel Tower may have been a modern wonder, a hymn to industrialism at the 1889 World's Fair, but that still makes it a good 50 years older than San Francisco's marvel of engineering, the Golden Gate Bridge.

When my wife and I traveled to Paris, the comparisons came naturally.  These are both cosmopolitan cities, centers of culture with great international renown.  Both are married to water: San Francisco has the Bay, and Paris has the Seine.  And foodie culture in Paris may have a longer history than San Francisco's own, but San Francisco is no less in love with its food, infusing it with international inspiration and entrepreneurial creativity.  And you can see the French-born Art Deco movement stamped in many of San Francisco's buildings, from the Rincon Center to Coit Tower.  And art deco is just scratching the surface of Paris' exquisite art and architecture – just as it doesn't sum up our proud and varied history of buildings here.

It may be 5,500 miles from San Francisco to Paris, but it turns out that's not that far, in the grand scheme of things.

Paris also gave us a chance to see San Francisco’s housing market in a new light.  While the $1,000-per-square-foot real estate prices here might give some people sticker shock, consider this: in 2011, according to Credit Sesame, a square foot in Paris would cost you over $3,000. Whew!  You can't get a better baguette here, but you can still dig into some San Francisco sourdough, and have a place to call your own at under a third of the cost.

Paris is a lovely city to visit, crammed to the gills with history, with monuments, with beautiful food and beautiful people – especially if you happen to bring your beautiful wife along for the trip!  But while I encourage everyone to visit if they get the chance, I still choose to live in its younger (but just as cosmopolitan!) cousin.  San Francisco may look back to the Gold Rush and the 1906 earthquake for its history while the foundations of the Louvre were laid in the 12th century, but when I come home to the house I'm building my family in, I love my younger city that much more.