I foolishly bought a duplex at the height of the bubble about 5 years ago. it obviously has fallen in market value since my purchase. it is valued well below what i owe on it. fortunately, I have had little trouble renting out the upper unit while I occupied the lower. that have covered more than half my mortgage payment (taxes, insurance and all). i’m not too sure how the rental market will change in the near future.
anyhow, i’m sick of living in a duplex, and would like to move out. my initial intentions were to keep the duplex and rent both units, but i’ve grown weary of the troubles involved with renting and maintaining two units.
although i hear a lot about paying down debt and renting rather than buying, based on the predictions put forth by most austrian economists, it almost seems like keeping the house would be a better long term strategy. i have a 30 year fixed rate mortgage. if inflation gets as high as some predict, then eventually i’ll be paying off my mortgage with inflated dollars. so if i make the minimum payments now, then more of my principle will be left to pay with inflated dollars. if i sell my house, might i regret it, having given up that opportunity? or would i be better off if i could sell it at a break-even price and rent instead.?
I dont’ think this is a typical Mises forum type of question, but I’ll take a swing at it. I’m not sure which one it is, either its value is less than what you paid for it or you can break even…[*-)] If you can sell it at a break-even then that’s an easy decision, go for it.
If it’s down 50%, it would have to double to break even. If it’s down 30%, it would have to increase 42%. You would have to ask yourself how realistic it will be for the market come back. Since you don’t want to live there any more, and since you are experienced in renting out part of it already, maybe it makes sense to rent the whole thing for a year or two if you can. Problem is, what happens if the renters stop paying during this depression (ie they lose their jobs)? Can you service both your new living space and this one? On the up side, many people are looking to rent. There is also liability issues, do you have the proper insurance? Is there a swimming pool a child could drown in? This is a classic entrepreneurial decision. You will have to weigh the alternatives yourself. Your own subjective value scales will be the deciding factor.
Congrats on getting a fixed rate. So possibly yes you should keep it (if you can keep your job). Do not think it is so crazy that you end up getting it for only a portion of its value. My old folks ended up getting their first place this way when inflation hit Yugoslavia in the 1980s. The bank just struck out all the loans once the payments barely covered the administrative costs.
This most surely is distant given the independence of each situation but, I do recall Tom Woods writing that when the housing sector in Japan bubbled during the mid 80’s the average home price fell 80% before the market bottomed. Your home value may have quite a lot more to drop if there is any parallel-- absent of gov. prop-ups. This is of course speculation though.
The problem is knowing what the government is going to do. My guess is that when hyper-inflation hits, the government will let banks re-write contracts to allow banks to change the terms to variable interest rates. In which case, you will not be able to pay off your house right away.
First of all, do not be fooled, there is no consensus among Austrians about what will happen. There’s a high probability of serious price inflation occurring, but that doesn’t mean that it will occur. Pending some kind of collapse of derivatives or default of several governments, there could be deflation. Or there could be very mild inflation. Who knows?
Secondly, renting out your duplex should pay off some day, regardless of economic conditions. Just get out some paper, a pencil, and a calculator. First, calculate the loss if you sold the house now. Second, calculate the estimated profit/loss over a number of years, taking into your fixed rate, expected property value, expected upkeep (e.g. taxes, utilities, repair), and expected rent. Fool around with these expected values to see how various levels of inflation/deflation could effect your net profit. Thirdly, compare the loss of selling the house to the expected profits from various scenarios of inflation. Ask yourself these questions: How long will it take for you to turn a profit if inflation is X%? Is that profit worth the number of years it takes to achieve it? Could you earn a greater profit by simply selling your house at a loss and investing in the stock, bond, or foreign exchange markets? etc.
Yes there will be serious inflation, certainly within 30 years.
Rents are gonna plummet, because there are too many houses and because people are gonna be too poor to pay high rents.
House prices will drop like a stone [if we consider their “real” price, not counting inflati0on] , more than they already have, cause there are too many of them.
Unemployment will get higher and higher.
If all of the above is true, then you are lucky to have a roof over your head, and will pay pennies on the dollar for it. If you rent it to someone, you won’t get much, even assuming they keep their jobs and can keep paying rent. So this line of reasoning says stay put and be happy.
Another line of reasoning: So the house is not worth what you owe on it. How much was your down payment? If it was a small amount, you might consider just emptying the house of everything valuable, like copper pipes and so on, and selling that. Then walk away an let the bank take it. Banks do this all the time, but preach that others who do it, even though it’s legal, is immoral. Make your decision about that.
Still another line of reasoning: You are going to make a big bucks decision based on scribbles in an internet forum?
Working on Peter Schiff’s assumptions doesn’t make renting the duplex unprofitable. Rents can fall in real terms, but it doesn’t mean that the nominal rents will fall so much that they will be below the nominal interest rate that the OP will pay. In other words, real rents can fall and still make the whole operation profitable.
i most certainly am not going to make my decision based solely on the responses in this forum. it often helps to get other people’s thoughts on these matters, if for nothing else, to get your own thoughts going. i appreciate all the thoughtful responses. i guess i should have left out the value judgement and kept the question focused on the inflation scenario.
let’s say i owe $150,000 (paid $190,000), and it’s worth about $115,000 now. assuming i could sell it for about what it is currently worth, i’d have a big chunk to cover; a chunk that i’d be unable to pay. if i keep the house and we see significant inflation over the next decade or so, i’ll eventually be paying down my debt with inflated dollars. this is true of my student loans, and any other long term debt i might have. isn’t holding long term (low) fixed rate debt better to hang on to when there is a serious threat of inflation? why hurry to pay off debt now when you could be paying it off later, when the $1000 you owe then is more like $100 in today’s dollars?
there are a lot of other factors. if the government allowed banks to change the terms of my mortgage to adjust for inflation, and require me to pay more, i’d walk away because that’s unjust. if rent goes down and it’s difficult to find renters, it could be more difficult to keep the house, and i’d probably have to stay there.