Deciding whether to rent or sell

As mentioned earlier, Emily and I are moving out of our condo in San Mateo. We had to decide whether to keep it as an investment (and probably offer it for rent), or sell it. It’s not an easy question! If we sold it we’d likely invest in stock market index funds, so let’s compare the two.

Return on investment

This is the most qualitative consideration. We want to know how much we would expect to earn in a typical year from the two options.

Our home was first sold on December 12, 2003 for $620,000. Current value as of March 12, 2019 is approximately $1,300,000. That’s a return of 209.68% over fifteen and a half years, which is an annualized return of roughly 5%. That’s just for the property itself.

Expenses are $13,156.12 yearly property tax and $618.74 per month HOA dues, which comes out to $20,581 per year. That reduces the annualized return to 3.42%. Note that yearly property tax is only allowed to increase at most 2% per year due to Prop 13, so assuming Bay Area real estate appreciates more than 2% per year, property tax can be expected to become less of a burden proportionally as time goes on. Also I expect the monthly HOA dues to increase at a greater rate than inflation as part of the HOA’s plan for the reserves to be “fully funded.”

What if we rented it out? Looking at similar-sized rentals on Zillow we could expect a renter to pay between $4,000 and $5,000 per month. Let’s assume $4,500 per month. Let’s also assume 100% occupancy, 10% property management fee, and $1,000 per year in maintenance expenses. That’s $47,600 income per year. That brings the annualized return up to 7.08%—hey, not bad. If we wanted to be generous and assume $5,000 per month rent with no management fee and no maintenance then that’s $60,000 per year which is an annualized return of 8.03%.

Now what about the stock market? Let’s look at SPY because it’s enormously popular (most assets of any ETF). Let’s use the same fifteen and a half year time range as above. Assuming this random website that I found with Google (appears to no longer be working as of 2019-03-14) is correct, the total return is 244.19% which is an annualized return of 8.45%. That doesn’t account for taxes paid on the dividends. And of course there’s no guarantee future performance will match this rate.

So that’s pretty close. Of course there’s a high margin of error in the above numbers and it only increases over time. There’s no guarantee real estate or the stock market will appreciate at the same rates. But from my point of view it’s basically a wash. Neither option is obviously better than the other.


Owning stock is trivially easy. We use Schwab with “reinvest dividends” turned on, so there’s no ongoing work. The yearly tax filing effort is negligible—we’ll own stock either way, so there aren’t any additional 1099 forms.

Owning a home and not offering it for rent is fairly easy: Pay yearly property tax (manually-initiated online ACH transfer once or twice a year). Pay monthly HOA dues (auto draft). Maybe carry some kind of insurance (maybe not necessary if it’s unoccupied, since the HOA carries insurance on the building). Vote on HOA ballots.

Offering it for rent is significantly more work. Approving tenants. Coordinating with management company. Deciding on repairs while not being local. Dealing with tenants who might violate HOA rules. Keeping track of income and expenses and handling it correctly when filing our taxes (and forcing us to file with California, too).


How dependable are the two options? The stock market has ups and downs but it averages out over time. I think it’s unlikely the US economy will collapse and never recover, and so risk of catastrophic loss of value is low.

Owning an expensive home is scary. It’s a lot of eggs to have in one basket. I’m not worried about sea level rise (I think it’s likely dams and locks will be built at the Golden Gate when sea level rise becomes severe enough to affect us). I’m not worried about fire. I’m mostly not worried about dam collapse (though I believe we are in the path of the Crystal Springs Dam). I’m mostly not worried about the Bay Area real estate market collapsing (there might be dips but I think it’ll be ok in the long run). I’m a little worried about potential loss of value from catastrophic earthquake.

So I think it’s unlikely the condo will lose significant value, but conventional wisdom is that it’s better to diversify. Real estate in aggregate is a sound investment but one unit of real estate has risk.


  • The return on investment from operating the condo as a rental is not clearly higher than investing in stock market index funds.
  • Owning the condo, and especially operating as a rental, is more work than stock market index funds.
  • Owning the condo has more risk, though this factor is insignificant.

And so in an effort to simplify my life and responsibilities, my preference is to sell the condo.

Two footnotes

At the top I said, “we’d likely invest in stock market index funds.” That’s not 100% accurate. We’d probably spend part of the money on a new house (or down payment on a new house). If we didn’t sell the condo then we’d quite possibly need to get a mortgage in order to buy a new house. It’s possible that mortgage rates are low enough that the mortgage would be effectively “free”—I haven’t checked.

When selling a primary residence there’s a “home sale exclusion” where, for married couples filing jointly, up to $500,000 of profit from the sale is tax-free. It seems like it’s not possible to take advantage of this if the property is converted to a rental. Which means that when the property is eventually sold we’d need to pay taxes on around $300,000 of profit (the approximate increase in value since we’ve lived here) that we otherwise would have avoided.

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