I was talking to a buddy of mine, and we are both pretty interested in finance, 401k, investments, etc.

We were discussing our houses that we both own (kinda). We were trying to determine how it would be more beneficial to sell our homes instead of renting it. I own a home that I paid $180k for, with a 3.5 percent interest rate. I owe maybe 140k on it still. I just recently paid off all of my debt (student loans, truck, cards, etc.) and was dumping into a 401k at match and a roth IRA to max.

I was considering dumping the remainder into my home loan instead of maxing my 401k. I really want to get it paid off so I can start saving for a down payment on another house. I want to save around 100k, buy a 500k house, and rent this house out. I would charge under what is considered average for my area. My roof, patio, deck, water heater, and carpet are all new and paid off. I'll likely have to drop 10k on new HVAC soon, so it will all basically be new.

Anyways, there was some discussion that it would be better to sell the house for its worth (valued at $350k), and invest any profit. I don't see how this is possible if I sell my house for 350k, maybe net 100k profit, and invest at an average of say 7% when I could be making way more in rent.

What makes selling a house and investing (instead of renting your paid off house) a better choice?

There are a lot of assumptions and unknowns here.

To answer your question: from a pure financial perspective, simply put, if you're able to generate more return investing vs. renting your house (or vice versa), then that's right answer. However, make sure you factor in transaction costs of the sale and the costs/energy/time it would take to rent/manage your house.

You can make assumptions around the return on the net proceeds of the house vs. the yield on renting (net proceeds from rent after maintenance, interest, etc. divided by your equity in the home) - but at the end of the day, it's all assumptions. I'd weigh how much rent you realistically can get in your market vs. what the assumption you'd have to make on your investment returns to breakeven.

Lastly, in general, it's smart to max out your 401k especially if there's a match.

Also, a 3.5% mortgage is basically free money - I wouldn't actually be in a rush to pay this off.

There are tax advantages to owning a mortgage. However, there are also more risks.
Also, there is an advantage to putting a small amount of capital down on a house and getting a mortgage on the rest because you will have more working capital available. You can buy more assets that appreciate this way.
It all comes down to your risk tolerance.
You can put money in your 401k, sure, but I like to see people invest outside of their 401k because who wants to wait until they are 59.5 to access their money?

I agree with Etnie here. I have recently made the decision to pay down my mortgage but my rate is 5.6%. I know its likely I would still get a better return in the stock market the thought of being bad dept free next year and having a guaranteed 5.6% saving is worth it more for me. I already have 2 x rentals that give me decent cash flow so I am happy playing it cautious. That being said if the UK's interest rates for buy to let mortgages was 3.5% I would be buying more rentals personally.

Agree with others don’t rush to pay off mortgage at 3.5%

Would be very hard pressed to sell this 3.5% property in place of buying a new property. Doubling your mortgage just based on rates for a lateral move

Would definitely not sell a 3.5% to rent. if rates come down which it’s looking we are closer to rate hike cycle being finished ( at least closer to the end than the beginning or middle) then house values are set to resume upward trend

I’m a strong advocate for money in different baskets. There’s home equity net worth and unrealized stock gain net worth, retirement , insurance , etc. don’t put all your eggs in one basket. It’s unlikely you will see 3.5% again in the next decade and properties are a stable appreciating asset over time

A lot of these questions depends on other variables such as free cash flow, what other assets or equity you have in other places , etc, the zip code of your property and historical trend of house value these, etc. hard to know what’s best unless you have some of these answers. I would argue free cash flow is the most important box to have checked

This post was edited by Bazi on Jun 20 2024 09:01am

How can you increase your income so you can keep the house at %3.5, buy stocks and buy a rental property?

Money market /short term treasuries you can currently year an yield of 5+% and is risk free

Paying off your home at 3.5% you would essentially be giving up a free 1.5%

That alone should make it obvious what you should do

Usually renting is the way to go … more work but better return … hard to say tho market in a huge bubble imo… would be nice to sell at the top and rebuy 2-3 properties after it crashes lol… I live in the mountains north GA high demand for air bnb so that’s what I do

An amazing rental yield is about 10%. A standard rental yield is 3-5%. Stock market almost matches the best rental yields out there with MUCH less risk.

What if the value of the house falls, what if interest rates go up again, what if demand for rentals drops in your area, what if a degenerate tenant smashes up your house?

People also don't factor in the other costs of purchasing a home and then fixing it up as much as they should.

But here's the biggest factor on a personal level...

TIME.

I can just invest on an app and spend my spare time doing things I'm interested in. I don't have to worry about some nobhead tenants or getting someone to watch over my property when I'm away. I'm a free man.