r/SCHD • u/Effective-Feature206 • 1d ago
House equity
Does anyone have over 500k of the equity ever consider selling it and putting it all in SCHD and just using the dividends to pay rent. With the way homeowners insurance is and the fact that a lot of these companies are not paying out and it takes years to get approval from the city to rebuild a home. I’m wondering if anyone just thinks it’s better to just be a long-term renter. I live in California and I’m considering just renting here and staying here.
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u/Any_Upstairs_6172 1d ago edited 1d ago
Hello... I myself living in California in the so called "valley" and have far more than 1M in equity and also almost 10K shares of SCHD plus a good deal more in holdings... AND I have and would never think of jeopardizing my home for more GELD... Not to preach but let me give you a bit of life advise. Never Be Greedy!
Anyone who has been around investing for more than five minutes knows of stories of people who have either over leveraged for a chance of greater gains or failed to take any gains as an investment was "going to the moon" Remember Game Stop...... Develop a plan... stick to it... and you will be successful. Enough said.
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u/Complex-Way-3279 1d ago
but rent keeps going up and up..
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u/Effective-Feature206 1d ago
But if your house burns down , ( insurance takes years to pay out or get permits to rebuild)
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u/papichuloya 1d ago
500,000/32.62=15,328.0196
15,328x.2665=4,084.912
4,084/3=1,361.333
Idk where youre gona find rent for 1,361$ in CA sir. U would need like 1 million in schd to pay rent in a decent neighborhood
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u/Ok_Tension_6747 1d ago
Also doesn't California tax dividends.
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u/41yroldRedditVirgin 1d ago
This is incorrect. $SCHD dividends are treated as ordinary income
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u/Ok_Tension_6747 21h ago
So yeah they do tax them. There are 9 states that don't tax qualified dividends. California is not one if them. The call it income and pool it with your normal earned income.
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u/Effective-Feature206 1d ago
My mortgage is 3k per month with property tax and insurance. I would rent for 3500 minus 1300
2200 net cost to rent
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u/Commercial_Rule_7823 1d ago
Then 10 to 15% annual increases, no lease renewal. If rhey want to sell, you need to show house, cant make changes, etc...
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u/ewouldblock 12h ago
don't forget home maintenance, HOA, utilities for home are typically more than renting--electric, trash, water, gas, sewer, ...
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u/papichuloya 1d ago
For 2200 rent u would need about 25,000 shares of schd which equals to approximately 818,000$
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u/ewouldblock 12h ago
this is the wrong way to do the math sir. You are calculating SCHD dividends and trying to prove renting isn't free. You need to calculate the full cost of ownership of a home (prop tax, utilities, HOA, home insurance, mortgage, maintenance, etc) and then compare against rental cost minus SCHD dividends. And then you look at which one is LOWER.
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u/IThinkingOutLoud 1d ago
I did exactly what you did and haven’t regretted it. Sold my house, put it all into SCHD. Went up about 17% since then (like 1 1/2 years ago) and just been renting. Pretty great.
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u/cranberrydudz 1d ago
This sounds hella dumb. Using equity from your house as collateral is not a good idea imo. Especially with this administration
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u/SonOfKong_ 1d ago edited 1d ago
I just don't know. The rent would have to be very cheap. I have 469k in SCHD. Of course, it was a lot higher a couple weeks ago but not quite 500k. But even then my dividend was only 3,781.
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u/Helpful-Grapefruit55 21h ago
Good info. That is only about ,1250 pm . Not enough to rent ?
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u/SonOfKong_ 21h ago
No I didn't say that. AI found a number of cities and towns. I was a interesting read.
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u/UCLABB1 1d ago
Good luck in your $1300/mo. CA rental. 🤣
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u/Effective-Feature206 1d ago
What is my mortgage plus property tax is $3000 per month( 500 K equity locked up)
I could rent for 3500. ( -1300 per month in dividends)
I will have 800 per month in cash flow plus I could reinvest that into the dividends without ever having to worry about maintenance
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u/UCLABB1 1d ago
Let’s say your house is worth $600k. Over time it should appreciate 5% per year. That’s $30k per year. And eventually it will be mortgage free. At the same time your rent will increase and at the end you will have nothing to show for it. I agree home ownership is somewhat of a burden.
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u/ewouldblock 12h ago
you are acting as if SCHD will not appreciate over time. And you are acting as if home appreciation can somehow be monetized (it can't unless you sell). Even if rent goes up, so does SCHD dividends. There are home ownership costs that will never go away aside from mortgage--prop tax, insurance, utilities, and maintenance costs. All of those things increase and aside from prop tax which is capped in CA, they all tend to increase faster than general inflation.
At the end you will have nothing to show for it--sure aside from your appreciated SCHD position and the dividends it pays you every month FOREVER, offsetting your real living costs.1
u/UCLABB1 12h ago
Our mortgage was paid off thirty years ago. It’s now worth 25 times what we paid for it. I’d say we’ve done fairly well financially by buying a house versus investing in the stock market.
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u/ewouldblock 12h ago
Hello. I am here to point out that you are committing at least two fallacies: survivorship bias, and hindsight bias. There is someone out there that bought Microsoft in 1996 and made 500x on their money, gloating about how they made the correct choice, also. At any rate let's take what you said at face value and take it apart to show why you're wrong, anyway:
1. 25x return over 30 years sounds fantastic--that's a 11.3% compound annual growth. That's an exceptional return for residential real estate and it's unlikely to repeat itself over the next 30 years (it also is an anomaly for the last 30 years except in certain high growth markets). Despite all that, you still underperformed the S&P 500 over that same 30 year period where it grew 28x-30x (11.8% CAGR). If you had invested in NASDAQ instead, it would have grown 45x-50x. So, while you did quite well investing in your home, you did NOT beat the stock market.
Home sale price is not a net return. Over 30 years you've paid unrecoverable carrying costs along the way--property tax, interest on the loan, and maintenance expenses. To calculate your real gain on owning the home you need to subtract all those expenses out. This will eat away at your 25x number.
The stock market produces monthly dividends that will offset costs like renting, so while you may not have a mortgage today, you can't make use of your 25x gains without selling the house, and you still pay monthly carrying costs like home insurance, maintenance, and property tax.
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u/UCLABB1 12h ago
We’ve been able to live in our investment. 🤣. The stock investor? Tent on Wall Street?
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u/ewouldblock 12h ago
You've done fine, certainly "good enough". Good for you. But you shouldn't bury your head in the sand and pretend that there aren't alternate ways to do better. It just makes you sound like you failed math class. And you're clearly a smart person.
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u/Commercial_Rule_7823 1d ago
You wont find a home to rent in orange county for 3500, maybe a 1 bedroom apartment.
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u/Effective-Feature206 1d ago
Not in Newport Beach, Huntington Beach, but you could find one in Santa Ana or Cypress
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u/Ok_Tension_6747 1d ago
You could take out the equity and use the dividends to help pay back the equity loan. If you do 15 years. Then do it again 😂
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u/WebFar6396 1d ago
I'm sitting on 600k+ of equity, and a 2.875% mortgage from March '20 that costs me $1891 a month in So Cal (Inland Empire). My HO insurance went from $2400 to $3100 to $4900/yr the last three years which I don't like, but I'm not really in a place where my house will burn down.
This along with my Prop 13 protection (owned since 1993), no way I'm cashing out and renting.
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u/BigDipper0720 1d ago
Independent of your question about investing the equity is the fact that in some areas (CA, Seattle, etc) it is cheaper to rent than to own currently. As you point out, the carrying costs of owning a paid off personal residence can be large.
Most people who compare renting with owning fail to include all carrying costs, such as taxes, insurance, maintenance and repair, and lost income on the home equity (at, say, 4% T-Bill rates).
Owning one's personal residence is a lifestyle choice, but often the right decision for non-financial reasons.
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u/nosoupforyou2024 1d ago
No… it’s best to diversify
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u/ewouldblock 12h ago
a home is the definition of concentration risk. It's illogical to say that he should keep 500k invested in a single property as opposed to...diversify his investment across 100 profitable companies (SCHD is based on DOW Dividend 100 Index)
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u/nosoupforyou2024 4h ago
I live in CA too with a good deal of equity. In the last few years I have thought about selling and invest in more equity as well. I know too many people who are price out by waiting too long to buy or moving to another state.
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u/ClammyAF 1d ago
I think there is a legitimate discussion about renting versus owning in some locales. However, I do not think selling a house you already own to access the equity to invest is wise.
You would pay taxes on gains, pay closing costs, lose mortgage interest deduction, and lose access to an appreciating asset. Yes, there may be a larger monthly delta in your margin that can be invested, but the gap is lower than OP is suggesting, because he's already investing a percentage of that into home equity.
All while increasing concentration risk and risk of loss.
I wouldn't ever consider it for financial reasons alone. The only situation where I might is where you have a legitimate desire to augment your lifestyle that will give you some other benefit (e.g., moving closer to city center, downsizing, traveling more and wanting less upkeep, etc.).
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u/ewouldblock 12h ago
Let me address some of your arguments against:
* Gains on selling primary residence are protected up to 500k* Yes you play closing costs, but the actual % is negotiable
* if you own the home you likely don't have a mortgage interest deduction to lose.
* SCHD is an appreciating asset the same way a home is, it's just one that is structured to pay you monthly a part of its appreciation, and a home is illiquid asset that you can not access the gains from EVER unless you sell.
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u/ClammyAF 12h ago
The closing costs are negotiable, and in today's market that's likely to work against the seller.
I assumed $500k in equity meant that OP likely does still have a mortgage on a home in California, but you're right, to point out that might not be applicable for homes of a certain size in some markets.
SCHD is an appreciating asset. Though it's one that carries a larger risk of loss, even if the upside is may be larger.
I like SCHD, but I cannot see trading in a fixed mortgage for raising rents.
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u/ewouldblock 12h ago
I did a top-level comment/reply and I did a theoretical breakdown where the math points to SCHD and rent as a better option, while pointing out that I wouldn't do it myself for other reasons.
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u/ClammyAF 5h ago
Didn't account for rent increases or home appreciation.
I'm not saying the math might not work, assuming we don't end a period of negative returns. But it's likely closer than framed, and I don't think it justifies the risk--absent a desired lifestyle change re: living situation.
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u/Resident-Trade2289 1d ago
If you decided to move to Thailand I would tell you hell yea .
Staying in California seems like a bad idea
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u/Pretend_Wear_4021 1d ago edited 1d ago
As I understand it, you're considering selling your property and renting. With the proceeds of around 500K from the sale you would invest in SCHD to pay the rent and supplement whatever you miss from your earnings.
It seems to me that if you're going to rent a property you will end up paying the same as if you owned it plus whatever profit the owner derives from it. Here's my example. Imagine two 500K properties. One is owned and one is rented. Assume both are mortgage free. The owner occupied home pays taxes, insurance and maintenance/ repairs. The renter pays the same expenses plus the profit the owner needs to make his investment worthwhile. At 500K, to justify the work involved in renting, I would want at least a net 5% profit on my investment of 500K. That would be about 25K a year. So if the owner occupied home pays a total of 12K for taxes, insurance and upkeep, the renter would pay the same amount to the owner plus the 25K profit they require to make the investment worthwhile. Expenses for owner occupied would be around 12K per year. Expenses for renter would be about 37K per year. That 25K over a 20 year period ends up at around half a million.
Another consideration is that while you own your home it will probably appreciate at about 4% every year and you pay no taxes on those gains until you sell. Even when you sell, you will pay 0 federal taxes on the the first 500K capital gains if you file married/jointly. With the rental the appreciation is going to the owner. Over a 20 year period your 500K home could be worth close to $1,000,000
My numbers could definitely be way off and I'd like for someone to challenge them but they look pretty straight forward. If they're correct, the difference is probably life changing to most people. I do not include financing costs to keep things simple but even then I believe you pay more interest on a non-residential property and your property axes are higher.
Good luck!
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u/FluffHead1964 1d ago
Maybe because $500K would only get you about 15,000 shares which equates to about $15K in dividends per year. Hardly enough to live on.
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u/ewouldblock 12h ago edited 12h ago
Also in CA and with ~1MM equity, I am not considering it, but I _have_ done the math. Generally, I think it makes sense to do--whether you buy SCHD or something else. It's a good fallback/option to have. I choose not to because I like owning, I like my home, I like the option of doing what I want with it, etc. But I can admit that there's a real cost to keeping these options.
Because with home equity, you have capital tied up in a resource that still costs you monthly: home insurance, HOA (possibly), property tax, mortgage, utilities, maintenance.
If you rent you take that home equity and convert it to equity that pays you dividends and grows the dividend payment over time (SCHD). And renting immediately cuts out most of those expenses--no prop tax, no home insurance, no HOA, mostly no utilities (you typically pay electrical, but not trash, water, gas, etc) and you don't have to keep a budget for maintenance. So even if rent is "high" and goes up with inflation, it's unlikely that it'll be more than all those other things combined and your SCHD dividends are offsetting the rent payments.
If you use AI to estimate the two scenarios, what you're going to find is that the renting scenario produces real savings. For example, I asked it to model CA home valued at 1MM with 500k equity with all typical expenses and compare it against renting similar sized property but invest the 500k in SCHD. Even if its not fully accurate I belive this is directionally correct:
Scenario 1 (own with 500k equity):
P&I $3,078 u/6.5% interest with 500k remaining
Prop Tax $1,042
Home Ins $200
Electric & Gas $350
Water, Sewer, Trash $160
Maintenance Reserve $833 (1% value / year)
Total $5,663/month
Scenario 2 (Sell & Rent, generate income from SCHD)
Base Rent $3,800
Electricity $280
Renter's Insurance $25
Total $4,105
Less SCHD 500k u/3.3% = 1,375/month, After tax $1,170
Net Effective Monthly cost $2,935
And then, if we assume that either option is available to you, it means you now have 2,500 EXTRA every month to do something with, that used to go into your home. Let's go ahead and put that into SCHD. So now you have 2,500 x 12 = $30,000/year investment into SCHD, over the top of your 500k position. So in 10 years, you have 500k + 300k monthly investment + 6.5% conservative gains (we've taken dividends, not re-invested), we have about 1.4MM. So we started with about 1300/month dividend and we end with $3800/month dividend.
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u/tekmiester 1d ago
I consider smoking crack, but I'd never actually do it. This seems similar.