Rod Hagen Posted February 26 Posted February 26 In a different thread I had asked about making a fully-paid-for house in the Hollywood Hills an Air BnB. Then there were fires, and I've had a rethink. A little more information, I have no intention of ever living in this house. 1. Rent it? To what end, since I never intend to live in it? 2. Another option is I know someone else who wants to rent it and then he will use it as an AirBnB. 3. Sell and invest? Before the fires, at lunch outside I was discussing this with a friend in Aspen (Gay Ski Week) and a woman turned to us and said, "sell and invest. The market may fluctuate, but ultimately it always performs better." I said, but it's the Hollywood Hills (this was before the fires) and she said, doesn't matter, Market is always the better choice. So, I asked Chat GPT, and I can see now as I paste it that further down I FORGOT to factor in Liability and Fire Insurance expenses over the next 10 years. Nevertheless: "Me: Taking property tax and income tax into consideration as well as average cost of property maintenance, over the last 20 years which has performed better: renting a fully paid for 3 bedroom House in the Hollywood Hills, currently valued hypothetically at 1.4 million, or the equivalent value of what it would have been worth 20 years ago invested in the market with annual distributions paid out rather than reinvested? " And this is what Chat GPT said (I apologize for the length). Do you agree, do you have any thing else to say that might be helpful? "ChatGPT said: ChatGPT To accurately evaluate this scenario, let’s break it down step by step for both cases. Case 1: Renting the Fully Paid-Off 3-Bedroom House Initial Value 20 Years Ago: Home values in Los Angeles have appreciated at an annual rate of approximately 3.7%. If the house is currently worth $1.4 million, its estimated value 20 years ago would have been:Value in 2004=1.4 million(1+0.037)20≈700,000Value in 2004=(1+0.037)201.4 million≈700,000 Rental Income: Assume average monthly rent started at $2,500 in 2004 and gradually increased by 3% annually (to reflect inflation and market trends). Over 20 years, the cumulative rental income would total approximately $900,000 - $1,000,000. Property Expenses: Property Tax: Roughly 1.25% of the property’s assessed value, averaging $10,000 annually at the start and increasing with appreciation. Maintenance Costs: Estimated at 1% of the property value annually, averaging $7,000–$10,000 at the start and increasing over time. Total expenses over 20 years: Approximately $500,000 - $600,000. Net Rental Income: After expenses, the total rental income would be approximately $300,000 - $400,000. Final Value of the Property: With appreciation at 3.7% annually, the property’s value has increased to $1.4 million. Total Wealth from Real Estate: Net Rental Income+Final Property Value=300,000+1,400,000=1,700,000Net Rental Income+Final Property Value=300,000+1,400,000=1,700,000 Case 2: Stock Market Investment Initial Investment: The equivalent $700,000 (value of the home in 2004) invested in the stock market. Stock Market Returns: The S&P 500 has averaged an 8.5% annual return (adjusted for annual distributions instead of reinvestment). Annual Distributions: Assume a 2% dividend yield paid out annually. Over 20 years, this results in total distributions of approximately:2%×700,000×20≈280,0002%×700,000×20≈280,000 Final Investment Value: With the remaining 6.5% return reinvested annually:Final Value=700,000×(1+0.065)20≈2,440,000Final Value=700,000×(1+0.065)20≈2,440,000 Total Wealth from Stock Investment: Final Investment Value+Distributions=2,440,000+280,000=2,720,000Final Investment Value+Distributions=2,440,000+280,000=2,720,000 Comparison Metric Real Estate Stock Market Initial Value (2004) $700,000 $700,000 Final Value (2024) $1,400,000 $2,440,000 Net Income/Distributions $300,000 - $400,000 $280,000 Total Wealth (2024) $1,700,000 $2,720,000 Conclusion Over the last 20 years, the stock market investment significantly outperformed the real estate investment, providing a total wealth of approximately $2.72 million compared to $1.7 million from renting out a fully paid-off house in the Hollywood Hills However, the real estate investment offered steady rental income and property appreciation, making it a solid, lower-risk option for wealth generation. The stock market, while riskier, provided substantially higher returns. You said: What would you have to say about the same scenario going forward 10 years? ChatGPT said: ChatGPT To evaluate the performance of renting a fully paid-off 3-bedroom house in the Hollywood Hills versus investing its current value ($1.4 million) in the stock market over the next 10 years, we need to make some assumptions about future trends. Key Assumptions for the Next 10 Years Real Estate: Annual property appreciation: 3.5% (slightly conservative compared to historical Los Angeles rates). Annual rental growth: 3%. Annual property taxes: 1.25% of the property's growing value. Annual maintenance costs: 1% of the property’s growing value. Stock Market: Annual stock market return: 8% (reflecting historical trends). Dividend yield: 2%, distributed annually. The remaining 6% return is reinvested. Scenario 1: Real Estate Investment Property Value Growth: Future Value=1,400,000×(1+0.035)10≈1,985,000Future Value=1,400,000×(1+0.035)10≈1,985,000 Rental Income: Current monthly rent: $5,000. Rent grows by 3% annually. Total rent collected over 10 years (accounting for growth):Total Rent≈5,000×12×(1.030+1.031+…+1.039)≈720,000Total Rent≈5,000×12×(1.030+1.031+…+1.039)≈720,000 Expenses: Property Taxes: Approximately 1.25% of the property value annually (growing as the property appreciates). Over 10 years:Taxes≈1.25%×average value over 10 years≈155,000Taxes≈1.25%×average value over 10 years≈155,000 Maintenance: 1% of the property value annually. Over 10 years:Maintenance≈1%×average value over 10 years≈124,000Maintenance≈1%×average value over 10 years≈124,000 Net Rental Income: Net Rental Income=720,000−(155,000+124,000)≈441,000Net Rental Income=720,000−(155,000+124,000)≈441,000 Total Real Estate Wealth: Future Value of Property+Net Rental Income=1,985,000+441,000=2,426,000Future Value of Property+Net Rental Income=1,985,000+441,000=2,426,000 Scenario 2: Stock Market Investment Initial Investment: $1.4 million. Annual Returns: Total return: 8% annually. Dividend yield: 2% distributed annually. Remaining 6% reinvested for growth. Future Value of Investment: Future Value=1,400,000×(1+0.06)10≈2,515,000Future Value=1,400,000×(1+0.06)10≈2,515,000 Dividends Paid: 2% of $1.4 million distributed annually, adjusted for reinvestment:Total Dividends≈1,400,000×0.02×10≈280,000Total Dividends≈1,400,000×0.02×10≈280,000 Total Stock Market Wealth: Future Value of Investment+Dividends Paid=2,515,000+280,000=2,795,000Future Value of Investment+Dividends Paid=2,515,000+280,000=2,795,000 Comparison Metric Real Estate Stock Market Initial Value $1,400,000 $1,400,000 Final Value (10 years) $1,985,000 $2,515,000 Net Income/Distributions $441,000 (net rent) $280,000 (dividends) Total Wealth (10 years) $2,426,000 $2,795,000 Conclusion Going forward 10 years, the stock market investment is likely to outperform real estate in terms of total wealth. The stock market investment could grow to $2.8 million, while real estate wealth (property value plus net rental income) would reach $2.4 million. That said: Real estate provides tangible, relatively stable returns, offering cash flow from rent and a hard asset in an appreciating area. The stock market carries higher risk but delivers potentially higher returns, especially with compounding from reinvested returns. Your choice depends on your risk tolerance, need for liquidity, and desire for active (property management) versus passive (investment) income." One last thing, I asked someone very smart and very close to me and he did the math, incorporating fire and liability insurance as well, much more efficiently, but basically the same result: As long as I never intend to live there, invest, don't rent. Thoughts? + Vegas_Millennial 1
+ Vegas_Millennial Posted February 26 Posted February 26 Also add liquidity into your decision. If in a few years you need or would like $100K, you can easily sell that much of your stock investments and get the money within a few days. The only way to get that money out of real estate is to sell the whole thing, when timing might not be best for you and is time consuming. Or, you can go through the time consuming process of obtaining a cash-out mortgage on the home; but, now you're hurting your real estate investment numbers even more. The information you shared above already points to stocks... The liquidity factor for me pushes me solidly into the pro-stock camp. Lotus-eater, BSR and Rod Hagen 2 1
Rod Hagen Posted February 27 Author Posted February 27 (edited) Thank you. I guess my question is does anyone think any part of what Chat said is wrong, or if there are advantages to renting it out that I am not thinking of, or if anyone is convinced the Market is going to tank like never before or that the Real Estate market is going to soar? Or, something else? I find Real Estate so dull, I'm not familiar with any of this. Much of my life I've heard lamenting, for instance Bette Midler (during an Irvine concert) about her Laguna Home, that they never should have sold the place "It'd be worth a fortune right now". Are they wrong to say that about a fully-paid for house because actually the market, if that's what they did with the money, was historically the better choice? Edited February 27 by Rod Hagen
+ Vegas_Millennial Posted February 27 Posted February 27 49 minutes ago, Rod Hagen said: I'm not familiar with any of this. This ☝️ Invest in what you know. Most people know the concept of being a landlord from playing Monopoly, but they don't know a thing about stocks. If you are comfortable with index funds, for example, but uncomfortable about real estate, then choose the index funds. You can also do a little bit of both (owning stocks and real estate), by finding a REIT (Real Estate Investment Trust) which is a type of mutual fund that must invest in real estate for rent, and then returns most of the income as dividends to the shareholders. REITs received favorable tax treatment, so they tend to slightly outperform s&p500 index funds. But, you'll pay higher taxes on the dividends returned each year instead of the lower capital gains tax rate, so REIT are best kept in Roth accounts. 10% of all my Roth accounts are in REITs, so I will always have some exposure to investments in the real estate rental market. Rod Hagen and Lotus-eater 2
+ Vegas_Millennial Posted February 27 Posted February 27 56 minutes ago, Rod Hagen said: I guess my question is does anyone think any part of what Chat said is wrong, or if there are advantages to renting it out that I am not thinking of... The Chat failed to mention California Prop 13, which caps increases in property taxes to 1% each year. I don't know if that applies to rental properties or not. The Chat also didn't compare after tax dollars of both investments. For investing, you can assume most of the earnings will be subject to lower capital gains tax rates. For the house, it's a complicated game of deducting depreciation from the rental income as you rent, then paying taxes on it all when you sell, albeit still at the lower capital gains rate. The rental income itself would be taxed at higher personal income tax rates. The real benefit in real estate is if you intended to leave your assets to heirs. Your heir could sell the house the day after the title is transferred to him, and he wouldn't owe any capital gains taxes because the base value of the house is reset when the asset transfers in probate. Unlike stocks, where he would owe capital gains based on the difference between what you paid for the stocks and what price he sold them at. Rod Hagen 1
Kevin Slater Posted February 27 Posted February 27 Without having read the previous posts, I gotta say I love my rentals. Passive income while you sleep is a great thing. Plus, you depreciate the thing on a 27.5 year schedule. All part of a well balanced portfolio. Kevin Slater + nycman and + Vegas_Millennial 1 1
Lotus-eater Posted February 27 Posted February 27 (edited) I live in the area and would be happy to take up residence in the house while you decide.😁 Owning a SFH as an investment is like owning stock in one small company, which is risky because of a lack of diversification (especially if the house constitutes more than 4% of your wealth), and the market does not compensate you for unsystematic risk (even if stocks are riskier as an asset class than real estate, you can more easily diversify stocks, so ChatGPT's answer is misleading). And if you aren't willing to manage the property yourself (and pray you don't get a squatter), you're giving up some of the potential gains. REITS are a better option if you want minimal hassle. Edited February 27 by Lotus-eater Rod Hagen and + Vegas_Millennial 1 1
hungry4darkmeat Posted February 27 Posted February 27 I inherited my parents house but didn’t want to live in it so I fixed it up myself and sold it. Then the pandemic hit and the value went up almost a hundred percent. I should have kept it and rented it out. Gods not making any more land and it’s getting harder and harder to find an affordable rung of the property ladder unless you’re flush with cash. My advice is unless you already own property you should keep it Rod Hagen 1
+ nycman Posted February 27 Posted February 27 (edited) I think a lot of great points have been made. I agree that your math doesn’t take into account the tax benefits of property ownership, especially when it comes to inheritance. Personally, I hate being a landlord, I love having liquid assets, and I don’t give a shit how much my nephews end up having to pay in taxes when I die. I also like owning the land I live on outright, so that no one can easily take that away from me (although that doesn’t really apply in this scenario since you’re not living there). At times I’ve made a small fortune in the real estate market and I come from a family that was heavily into the rental/real estate market. Over the long haul, my stock portfolio has vastly outperformed my real estate investments. Also, being a landlord is a full time job, and one that I personally don’t enjoy. So, for me it feels right to own the land I live on, and invest everything else in the stock market. YMMV. PS since all of these calculations are based on % return on investment, the value of the house and the size of the stock market investment don’t really matter. That of course assumes the % return on 80 x $100,000 homes is the same as the % return on one $8 Million home. Spoiler alert, it’s not. Enough about money….now let’s have some fun….. 15 hours ago, Rod Hagen said: Then there were fires,…. 15 hours ago, Rod Hagen said: Before the fires,….. 15 hours ago, Rod Hagen said: (this was before the fires)….. 15 hours ago, Rod Hagen said: house in the Hollywood Hills…. 15 hours ago, Rod Hagen said: it's the Hollywood Hills 15 hours ago, Rod Hagen said: 3 bedroom House in the Hollywood Hills,…. So, was this before or after the fires and where’s the house located again? grin Edited February 27 by nycman + Vegas_Millennial, + FrankR, Rod Hagen and 1 other 2 2
+ PhileasFogg Posted March 3 Posted March 3 Unless your stock market investments are completely buy and hold, stock market investments have tax implications different than an income strategy in the real estate Rod Hagen 1
Rod Hagen Posted March 14 Author Posted March 14 On 2/27/2025 at 1:20 AM, nycman said: I also like owning the land I live on outright, so that no one can easily take that away from me (although that doesn’t really apply in this scenario since you’re not living there). This is something that sickens me when I read the Real Estate section of the Thursday New York Times. They'll feature a reasonable unit for sale for a reasonable price....and then I see the Monthly Maintenance, not to mention the tax, is 4 or sometimes 5 times a month what I pay in rent in LA. So you own it....but you have to pay that much to the Condo (or god forbid Coop) folks? Dude, that sucks!
Jim_n_NYC Posted March 14 Posted March 14 1 hour ago, Rod Hagen said: This is something that sickens me when I read the Real Estate section of the Thursday New York Times. They'll feature a reasonable unit for sale for a reasonable price....and then I see the Monthly Maintenance, not to mention the tax, is 4 or sometimes 5 times a month what I pay in rent in LA. So you own it....but you have to pay that much to the Condo (or god forbid Coop) folks? Dude, that sucks! Part of that issue in NYC is that the land the building is built on is leased and not owned. So you now have a land owner separate from the Co-op. Maintenance for buildings that own both isn't too bad, but there's one we looked at and couldn't figure out why the maintenance would be higher than the mortgage until we saw there was a separate land owner. Rod Hagen 1
+ PhileasFogg Posted March 14 Posted March 14 5 hours ago, Rod Hagen said: This is something that sickens me when I read the Real Estate section of the Thursday New York Times. They'll feature a reasonable unit for sale for a reasonable price....and then I see the Monthly Maintenance, not to mention the tax, is 4 or sometimes 5 times a month what I pay in rent in LA. So you own it....but you have to pay that much to the Condo (or god forbid Coop) folks? Dude, that sucks! I’m looking for weekend getaways in New Orleans right now and it’s the same. PLUS, they are incredibly tough - nearly impossible- to do STR’s
KeepItReal Posted March 14 Posted March 14 On 2/26/2025 at 7:46 PM, Rod Hagen said: Thank you. I guess my question is does anyone think any part of what Chat said is wrong, or if there are advantages to renting it out that I am not thinking of, or if anyone is convinced the Market is going to tank like never before or that the Real Estate market is going to soar? Or, something else? I find Real Estate so dull, I'm not familiar with any of this. Much of my life I've heard lamenting, for instance Bette Midler (during an Irvine concert) about her Laguna Home, that they never should have sold the place "It'd be worth a fortune right now". Are they wrong to say that about a fully-paid for house because actually the market, if that's what they did with the money, was historically the better choice? I don't agree with many of the scenarios - I think ChatGPT is making incorrect assumptions. Only two things you need to remember when buying property (according to my friend in NYC that made a fortune in real estate): 1. The money in real estate is made at the buy - you have to buy low or you will never see a good return. 2. Your initial rental income should be at least 1% of purchase price or you will not be able to beat the stock market. If you pay $1.4mil for a property your initial rental income should be at least $14,000 a month or you are not being compensated for the risks involved in renting out real estate. I know many will disagree with these two statements, but if you sit down with your CPA and talk real scenarios, you will be surprised by how accurate they are. I was. (The information above does not constitute financial advice, get advice before you invest...and not from me, you can't afford me! 😆) Rod Hagen and + Vegas_Millennial 1 1
Kevin Slater Posted March 14 Posted March 14 4 hours ago, Jim_n_NYC said: Part of that issue in NYC is that the land the building is built on is leased and not owned. This is by far the exception and not the rule. Most condos and co-ops own the land the building sits on. Kevin Slater KeepItReal, + Vegas_Millennial, cany10011 and 1 other 2 1 1
Rod Hagen Posted March 15 Author Posted March 15 18 hours ago, KeepItReal said: I don't agree with many of the scenarios - I think ChatGPT is making incorrect assumptions. Only two things you need to remember when buying property (according to my friend in NYC that made a fortune in real estate): 1. The money in real estate is made at the buy - you have to buy low or you will never see a good return. 2. Your initial rental income should be at least 1% of purchase price or you will not be able to beat the stock market. If you pay $1.4mil for a property your initial rental income should be at least $14,000 a month or you are not being compensated for the risks involved in renting out real estate. I know many will disagree with these two statements, but if you sit down with your CPA and talk real scenarios, you will be surprised by how accurate they are. I was. (The information above does not constitute financial advice, get advice before you invest...and not from me, you can't afford me! 😆) My background is in engineering, but for some reason I'm entirely dense when it comes to Real Estate. Since I already own the property (inheritance) then is what you say now applicable to what the property is worth now. So if it's worth say, 1.4 million, it would only be worth renting it out if I rent it for at least $14k/month?
KeepItReal Posted March 15 Posted March 15 1 hour ago, Rod Hagen said: My background is in engineering, but for some reason I'm entirely dense when it comes to Real Estate. Since I already own the property (inheritance) then is what you say now applicable to what the property is worth now. So if it's worth say, 1.4 million, it would only be worth renting it out if I rent it for at least $14k/month? So by the previous logic provided, I would say it different: the property is only worth 1.4mil today if you can get $14k rent a month, today. If you can only get $10k in rent, the cash generating ability indicates it is only worth 1mil and so the math indicates you would be better off by selling it if you can get 1.4 mil since it is overprices and invest the proceeds elsewhere. Of course there are other, non cash flow reasons why you may decide to keep the property (like sentimental value etc). But I am going by the cold, hard numbers. Does that make sense? + Vegas_Millennial and Rod Hagen 2
TonyDown Posted March 21 Posted March 21 I'm a little bit surprised a newly remodeled 3 bed, 2 bath house in the Hollywood Hills is only worth $ 1,400,000. Is that estimate from Zillow? That said, I stayed at a large Airbnb in the Hollywood Hills while attending OutFest. There were multiple rooms, fully occupied. So the gentleman that owned the place was making a nice income. I noticed some of the properties in his area needed some TLC, and one property was throwing a party. I do sympathize with your worry after recent fires I have always worried about fires and slides, since moving to the West Coast. I have owned 3 houses in California, all on flat lands. Do you anticipate any trouble getting insurance? Might be worth researching insurance options if your current provider decides to cancel. Many owners have had their coverage dropped in Los Angeles. Rod Hagen 1
+ PhileasFogg Posted March 21 Posted March 21 TickTock - I’m less that a month from closing the sale of my last home, nearly settled in to my new home, and wondering where to role the profit. 1031 exchange isn’t an option (with a tax liability well in to 6 figures), but it’s a relief since now I can be deliberate and I rushed. What are good STR markets that I can occasionally enjoy myself? I’m open to multiple options.
+ FrankR Posted March 21 Posted March 21 2 hours ago, PhileasFogg said: TickTock - I’m less that a month from closing the sale of my last home, nearly settled in to my new home, and wondering where to role the profit. 1031 exchange isn’t an option (with a tax liability well in to 6 figures), but it’s a relief since now I can be deliberate and I rushed. What are good STR markets that I can occasionally enjoy myself? I’m open to multiple options. Hard to answer that without more information. In general, the best short term parking vehicles for funds are money market funds, high yield savings accounts, CDs and short term bonds or treasuries. cany10011 1
+ PhileasFogg Posted March 21 Posted March 21 11 hours ago, FrankR said: Hard to answer that without more information. In general, the best short term parking vehicles for funds are money market funds, high yield savings accounts, CDs and short term bonds or treasuries. STR=Short Term Rental i know well how to invest the other stuff 😉 + FrankR 1
hungry4darkmeat Posted March 21 Posted March 21 I inherited the house I grew up in when my parents passed away several years ago. I fixed it up and sold it for a nice profit. Then the pandemic hit and now it’s worth twice what I sold it for. In hindsight I should have kept it and rented it out. God’s not making any more land and mortgages are harder and harder to get. Do whatever you can to hold onto the property- even if you have to take a small loss now by renting it out, you can always borrow against the equity if you get into a financial bind. if you have the luxury of having enough land to build something else on, the ability to renovate or reconfigure the existing space into multiple dwellings and especially if you’re somewhere that’s relatively conveniently located, you can literally turn it into a cash machine down the road. the only reason I didn’t do that is because I have a rent regulated apartment in manhattan which is infinitely more difficult to find than a house in the burbs. But if I had kept it I would be about 300k richer and that’s enough by itself to generate pretty significant passive income when invested wisely.
Rod Hagen Posted March 25 Author Posted March 25 I've landed on selling it. I don't ever want to live in it and the land is too narrow to parcel into something I might move into. Actually, it's the stairs. The fucking stairs. Essentially all houses in the Hills have stairs. Even 40 Million Dollar monstrosities in the Bird Streets have stairs. I don't want to age into a house with stairs. So, I'll be staging and selling it as soon as the GoshDarn renovations are done (4 months over the initial completion date, WTF?!) Thank you everyone, you helped me a lot. Lotus-eater and + Vegas_Millennial 2
+ nycman Posted March 27 Posted March 27 On 3/25/2025 at 11:54 AM, Rod Hagen said: I don't want to age into a house with stairs. Good for you little bro! I just started renovating a house and I told the architect "no fucking stairs". My dream is coming alive as we speak. "A perfect little world, where no one really needs you." Rod Hagen 1
KeepItReal Posted March 27 Posted March 27 32 minutes ago, nycman said: Good for you little bro! I just started renovating a house and I told the architect "no fucking stairs". My dream is coming alive as we speak. "A perfect little world, where no one really needs you." Well, that will make it fukin hard to reach the other levels... installing an elevator? Aren't you a fancy devil! 😋
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