Buy a new house with cash? Please advise

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
teramesher
Posts: 59
Joined: Thu Jun 02, 2011 11:03 pm

Buy a new house with cash? Please advise

Post by teramesher » Fri Sep 23, 2016 12:18 am

We are in a situation where we are looking for a new house. We purchased our current home in 2012 and the value has gone up quite nicely. I am considering following options:

A) Buy a new house and rent our current house.
B) Sell our current house. Sell my vanguard ETFs investment. Buy the new house with cash.

Option A is attractive if the house market continues to appreciate even if it's at a slower than average pace.

Option B:
Pros:
- no monthly mortgage payment
- save me from paying interest on loan (over 80k in 4 years of payment)

Cons:
- Other than my 401k which won't be touched, all my ETF funds will be sold
- no tax break on loan interest payment
- no liquid cash.

I just can't tell which option is better. I understand there's no clear cut answer, but appreciate any feedback from those who have been in similar situation.

itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Buy a new house with cash? Please advise

Post by itstoomuch » Fri Sep 23, 2016 12:42 am

JMO :mrgreen: Never lock yourself into one thinking mode. Keep your options open. Be prepared to move left or right as the situation unfolds. :oops:
If the house that you want is also the house that some one else wants, Buy with cash.
If the house is not in play with other buyers, finance it.
In either case, you can later do one or the other with a relatively small fee-The closing fees.

YMMV
GL
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

Leemiller
Posts: 1054
Joined: Sat Jun 01, 2013 12:42 pm

Re: Buy a new house with cash? Please advise

Post by Leemiller » Fri Sep 23, 2016 5:17 am

If you're really interested in rental property, you can also sell this house - taking advantage of the capital gains exclusion for a primary residence - and purchase a new home and investment property. That way you can pick a good investment property, rather than having this one become the property by default.

J295
Posts: 1665
Joined: Sun Jan 01, 2012 11:40 pm

Re: Buy a new house with cash? Please advise

Post by J295 » Fri Sep 23, 2016 5:41 am

@leemiller makes a good point IF you want to be in the landlord business. Work through the tax basis you'd have available for depreciation if you used your current home vs. a new property.

We've declined to be in the real estate landlord business for a variety of reasons, although many family members and friends are in that investment and generally do fine.

We have not had any debt on homes or otherwise since we paid off our prior home sometime in our 30s. We're just no big fans of debt. Not right or wrong, just our comfort level and plan. It does really help you to sleep easy and shrug when the equity markets get dicey because you know you have a place to lay your head at night without concerns about a bank loan.

If you are still working and can use the depreciation and interest deductions then a rental might be more attractive. In retrospect if we could have purchased or been partners in a modest commercial property during my peak earning years it could have helped a bit with the tax bill.

Of course, you will have leverage issues which work well in the event of appreciation and quite poorly in the event of declining markets/recession (I'm old enough to remember prime rate in the 20% range in the late 70s, black Monday, the tech crash, and more recently 2007-2009 ... it does happen and will happen again ... not saying you need to stuff money under your pillow, just be prepared to ride out the storms.

ramsfan
Posts: 434
Joined: Mon Mar 19, 2007 3:27 am

Re: Buy a new house with cash? Please advise

Post by ramsfan » Fri Sep 23, 2016 6:37 am

So, I have a couple of opinions to share. Please PM me if you want any more info as I don't check the boards often.

First, some questions to consider. what interest rate would you expect to get on your home loan
Second what are the tax implication of selling your ETF's
Third, would you have a strong cash position if you paid cash for your new home, it doesn't sound like it.... but that is important.

As far as whether to keep your current home or rent it, that is easy for me... no way. I don't want to be in landlord business. But each person is different.

Some things to consider doing, that I did successfully..... If you CAN but the home case, but are not sure if you WANT to, you can make your offer non-contingent on financing. Which makes it stronger. Be prepared to document that you have the ability to do this.

Then, you can still get a loan. Before anyone thinks this is dishonest, it is not. You are just contractually obligated to buy the house whether you get a loan or not.

In this scenario, you can get really aggressive on the type of loan, since you could pay cash if you want to. I did a 5/1 ARM at 2.75% 2 years ago. I financed 60% LTV, put 40% down.

After you settle in, then you can look to pay down the loan principal further, as funds are available.
You could then also get a home equity line of credit, to draw cash as needed.

b42
Posts: 292
Joined: Thu Apr 11, 2013 7:00 pm

Re: Buy a new house with cash? Please advise

Post by b42 » Fri Sep 23, 2016 6:39 am

A third option would be to sell your current house and put 20% down on the new house to get a conventional 15/30 year mortgage. You could save the money left over from the first sale and use it to max out your retirement accounts (if they aren't already). You would be paying mortgage interest, but you can deduct some of it on your taxes if you itemize, and that gives you some liquidity in case of a market downturn of if money is needed for an emergency repair or renovation. In this situation you would also have the option of paying off the mortgage early to help save on interest.

User avatar
Watty
Posts: 14328
Joined: Wed Oct 10, 2007 3:55 pm

Re: Buy a new house with cash? Please advise

Post by Watty » Fri Sep 23, 2016 7:38 am

teramesher wrote:We purchased our current home in 2012 and the value has gone up quite nicely. I am considering following options:

A) Buy a new house and rent our current house.
Two possible show stoppers on that idea.

1) With the capital gains you likely qualify for the homeowners capital gains exclusion so if you sell it now then you likely will not have to pay any capital gains taxes. If you rent it for more than a few years you will lose that and eventually have to pay capital gains taxes on that gain when you sell it.

2) Without a good rental history a lender will greatly or completely disregard the rental income on your application for a new mortgage. You will need to have enough other income to qualify for both mortgages at once.

teramesher wrote:Option A is attractive if the house market continues to appreciate even if it's at a slower than average pace.


:oops:

Will Rogers Quote: “The way to make money in the stock market is to buy a stock. Then, when it goes up, sell it. If it's not going to go up, don't buy it!”

Housing prices do go down sometimes which is very possible especially if something happens like mortgage interest rates go back above 6%. Except for the last few years they were that high for many decades.
teramesher wrote:Option B:
Pros:
- no monthly mortgage payment
- save me from paying interest on loan (over 80k in 4 years of payment)
It would also save you thousands of dollars in loan origination costs.

You would also have a lot less sequence of returns risk. I have posted this example before;
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also paid a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.

teramesher
Posts: 59
Joined: Thu Jun 02, 2011 11:03 pm

Re: Buy a new house with cash? Please advise

Post by teramesher » Fri Sep 23, 2016 1:11 pm

I should have provide more details of the numbers to make my question more meaningful.

Let’s call our current house “House 1” and the new house we are purchasing “House 2”

- We bought House 1 in 2012 for 600k. The list price will be around 850k - 950k if I were to sell it. The current loan balance is 420k at 30 yr 3.625% fixed.
- The price range for House 2 will be between 600k-800k, but may need go near 900k knowing this crazy market in Seattle. Talking with the loan agent, I will be able to qualify for 1 mil with 20% down at 30 yr 3.5% fixed even without showing any rental income history on House 1.

Source of money if House 2 is cash purchased:
- Proceed from House 1
- Sell my VTI and VEU ETFs. Valued at 300k. All are long term except 10k.
- Sell my company stock options, ESPP, RSU

If we decide to rent House 1, we will make a decision whether we sell it or not to avoid capital tax before 3 year mark. If we keep it, do a 1031 exchange.
If we decide to sell House 1, we will try to sell most of my investment, but still leave some money aside for emergency.

What is certain is we are going to buy House 2 before we decide on either options. This means that we will recast the loan and pay all or most of it using the money I listed above if we sell House 1.

teramesher
Posts: 59
Joined: Thu Jun 02, 2011 11:03 pm

Re: Buy a new house with cash? Please advise

Post by teramesher » Fri Sep 23, 2016 11:48 pm

I have a little bit of wrinkle in our plan. Talking to my loan agent this afternoon, I will have to make significant down payment on a new house in order to meet debt to income ratio qualification IF we want to keep our current house and buy the new house first.

Obviously, we can sell our current house first, then debt to income ratio becomes none issue. We have a infant in our family and want to avoid selling first, which would mean we will need to rent until we find the new house.

So the question is does it make sense to sell most of my index ETFs to use as down payment to do this? My wife, infant, and I took a stroll this evening to talk about this, but cannot seem to come to a decision.

itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Buy a new house with cash? Please advise

Post by itstoomuch » Sat Sep 24, 2016 12:07 am

I the best I can come up is to take withdrawals from IRA/Roths/Taxables to buy house ( downpay or cash purchase)
Sell current house and take the proceeds to reestablished withdrawals from IRA/Roths which must be done within 60 days of withdrawal and preferable in the same calendar year. Identification of target home and buyers for current home will important and time is crucial.

I have plans to take make withdrawals of Roths for the target purchase downpayment. I am not too concern about returning the money to Roth when we sell current home. Proceeds will just go into taxable account and managed for dividends. Currently our Roth is very heavy in cash for the purpose of a retirement home purchase (Seattle).

GL
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

teramesher
Posts: 59
Joined: Thu Jun 02, 2011 11:03 pm

Re: Buy a new house with cash? Please advise

Post by teramesher » Sat Sep 24, 2016 12:57 am

itstoomuch,

I don't have IRA/Roths. gasp! Most of my to-be downpayment is in ETFs and stock options.

Just out of curiosity, where is your current house you are selling in seattle?

JGoneRiding
Posts: 1180
Joined: Tue Jul 15, 2014 3:26 pm

Re: Buy a new house with cash? Please advise

Post by JGoneRiding » Sat Sep 24, 2016 11:20 pm

I would wait to make decision on "1" until you have actually found "2"

This is what i would try to do : prep 1 for sale, find 2, list 1 as soon as offer is accepted on 2. Hope 1 and 2 can close nearly simultaneously. If that doesnt work, figure out how much you need to put down to make d:i come out ok.

In side seattle proper i would not want to be a landlord its very tenant friendly. Outside would be ok king isn't bad to be a landlord in but each city has its own rules. I am a landlord and on marrying we put both our houses into rental and bought another. We will sale his before the capital protection runs out

itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Buy a new house with cash? Please advise

Post by itstoomuch » Sun Sep 25, 2016 10:10 am

teramesher wrote:itstoomuch,

I don't have IRA/Roths. gasp! Most of my to-be downpayment is in ETFs and stock options.

Just out of curiosity, where is your current house you are selling in seattle?
Living in Salem, Ore. on one of the hills. We do have a rental condo in Seattle from an inheritance and which will probably never used as our residence.
Last edited by itstoomuch on Sun Sep 25, 2016 10:28 am, edited 1 time in total.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

letsgobobby
Posts: 11646
Joined: Fri Sep 18, 2009 1:10 am

Re: Buy a new house with cash? Please advise

Post by letsgobobby » Sun Sep 25, 2016 10:24 am

teramesher wrote:We are in a situation where we are looking for a new house. We purchased our current home in 2012 and the value has gone up quite nicely. I am considering following options:

A) Buy a new house and rent our current house.
B) Sell our current house. Sell my vanguard ETFs investment. Buy the new house with cash.
There are so many other options. Why aren't you considering those?

C) Buy new house with 20% down. Move. Then sell current house.

is the one I'd choose but there are many others.

I would not choose B. I don't like to lock up large sums of money in low-returning asset classes (residential real estate in Seattle going forward is probably best thought of as a low return asset class).

teramesher
Posts: 59
Joined: Thu Jun 02, 2011 11:03 pm

Re: Buy a new house with cash? Please advise

Post by teramesher » Sun Sep 25, 2016 1:16 pm

letsgobobby wrote:
teramesher wrote:We are in a situation where we are looking for a new house. We purchased our current home in 2012 and the value has gone up quite nicely. I am considering following options:

A) Buy a new house and rent our current house.
B) Sell our current house. Sell my vanguard ETFs investment. Buy the new house with cash.
There are so many other options. Why aren't you considering those?

C) Buy new house with 20% down. Move. Then sell current house.

is the one I'd choose but there are many others.

I would not choose B. I don't like to lock up large sums of money in low-returning asset classes (residential real estate in Seattle going forward is probably best thought of as a low return asset class).
C) is close to what I am considering for A). We are tossing the idea of putting the house on the market for both rent and sell. Then we can pick depending on the offer. I am currently looking for a loan agent that will do a loan above 43% debt to income ratio based on my asset.

Can you share what other options you are thinking?

foreverihope
Posts: 129
Joined: Thu Dec 03, 2015 12:15 pm

Re: Buy a new house with cash? Please advise

Post by foreverihope » Sun Sep 25, 2016 1:51 pm

Some areas have high insurance requirements(sfla) that give cash buyers the option of not buying them while still being covered for liability.

Dottie57
Posts: 4615
Joined: Thu May 19, 2016 5:43 pm

Re: Buy a new house with cash? Please advise

Post by Dottie57 » Sun Sep 25, 2016 3:36 pm

It isn't either or situation.

Sell the house
Sell a small or large amount of etfs.
Take out a much smaller mortgage for a shorter period of time.

Really think hard if you want to be a landlord. Lots of work at inconvenient times.
Make sure you can make money being a landlord.

Good luck.

Tal-
Posts: 357
Joined: Fri Apr 22, 2016 10:41 pm

Re: Buy a new house with cash? Please advise

Post by Tal- » Sun Sep 25, 2016 4:52 pm

My thoughts, to the questions that you didn't actually ask:

Would house #1 make a viable rental?
No. Unless it rents for something like $6000 month (literally), you should NOT keep this as a rental. And... it won't rent for $6000/month...

Should you buy your new house in cash?
Probably not. You're in good shape financially, but I think you loose a lot of liquidity if you buy a 900K house with cash. I could be talked out of this view, but it would require one of my expectations about your situation being pretty far off.

What else?
You're in good shape, but holding ESPP and RSUs is probably not a good idea. You're a smart guy and I'm sure you know the arguments, but I do want to highlight that holding them introduces a lot unnecessary risk.
Debt is to personal finance as a knife is to cooking.

User avatar
Meg77
Posts: 2409
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: Buy a new house with cash? Please advise

Post by Meg77 » Sun Sep 25, 2016 5:25 pm

Another option is to take out a HELOC on your homestead and use that for the down payment on house 2 rather than selling all your stocks. That might enable you to put even more down and therefore minimize debt service and mortgage origination costs. Talk to your loan officer though; you may need to wait 30-60 days after heloc closes to apply for a new mortgage, or else they'll consider the down payment borrowed which isn't allowed on some loan types.

I think you should sell your ESPP and RSUs anyway if they are vested. What if your company stock takes a big dip next quarter? Your whole income and a big chunk of your investments are at risk. Use the money for the new house or shift to broad market index funds.
"An investment in knowledge pays the best interest." - Benjamin Franklin

cherijoh
Posts: 4957
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Buy a new house with cash? Please advise

Post by cherijoh » Sun Sep 25, 2016 5:28 pm

teramesher wrote:I should have provide more details of the numbers to make my question more meaningful.

Let’s call our current house “House 1” and the new house we are purchasing “House 2”

- We bought House 1 in 2012 for 600k. The list price will be around 850k - 950k if I were to sell it. The current loan balance is 420k at 30 yr 3.625% fixed.
- The price range for House 2 will be between 600k-800k, but may need go near 900k knowing this crazy market in Seattle. Talking with the loan agent, I will be able to qualify for 1 mil with 20% down at 30 yr 3.5% fixed even without showing any rental income history on House 1.

Source of money if House 2 is cash purchased:
- Proceed from House 1
- Sell my VTI and VEU ETFs. Valued at 300k. All are long term except 10k.
- Sell my company stock options, ESPP, RSU

If we decide to rent House 1, we will make a decision whether we sell it or not to avoid capital tax before 3 year mark. If we keep it, do a 1031 exchange.
If we decide to sell House 1, we will try to sell most of my investment, but still leave some money aside for emergency.

What is certain is we are going to buy House 2 before we decide on either options. This means that we will recast the loan and pay all or most of it using the money I listed above if we sell House 1.
Personally, I would chose "neither".

You have enough capital gains in the house that IMO you won't want to lose the capital gains exclusion. Selling a house with a tenant isn't all that easy, so you probably won't have it rented as long as you think if you want to sell it and still qualify for the exclusion. Have you calculated how much rent you would need to charge in order to be cash flow positive? How easy would it be to rent in this price range? I'm not in HCOL area, but this seems like a much more expensive house than would typically purchased as rental real estate. Therefore you should definitely determine if you would be getting an adequate return on the money you'd tie up.

Are you prepared to sell your current house before buying house #2? If not then it doesn't sound like you are really doing an all cash purchase. You would be getting a mortgage with all the associated closing costs, then paying it off quickly but leaving yourself cash poor. Not the best plan IMO. Are you certain the bank would be interested in recasting the mortgage? Especially if you start with a jumbo loan and then it shrinks down to conventional loan status.

teramesher
Posts: 59
Joined: Thu Jun 02, 2011 11:03 pm

Re: Buy a new house with cash? Please advise

Post by teramesher » Sun Sep 25, 2016 7:26 pm

Tal- wrote:
Would house #1 make a viable rental?
No. Unless it rents for something like $6000 month (literally), you should NOT keep this as a rental. And... it won't rent for $6000/month...
How did you come to $6000?

Tal-
Posts: 357
Joined: Fri Apr 22, 2016 10:41 pm

Re: Buy a new house with cash? Please advise

Post by Tal- » Sun Sep 25, 2016 8:15 pm

teramesher wrote:
Tal- wrote:
Would house #1 make a viable rental?
No. Unless it rents for something like $6000 month (literally), you should NOT keep this as a rental. And... it won't rent for $6000/month...
How did you come to $6000?
I'm playing with rough numbers here, so bare with me.

The most intuitive way to think about a rental's cashflow is to compare property value to monthly rents. The highs/targets from several years ago were around 2%, meaning a solid rental should rent for 2% of it's value (a 100K house renting for 2k/month). That was historically atypical, and 1% has been the more widely used number (a 100K house renting for 2K/month).

1% is a good rule of thumb, and it makes a ton of sense for lower-end properties. I would not buy a 100K house for a rental that didn't get awfully close to 1%. But, as housing values increase, you can bend the 1% rule.

Somewhere around .5%, all houses will have a CAP rate in the low single digits. These may or may not be profitable, depending on financing and a bit of luck, but it will be a lot of work, and a lot of risk for only a modest return. I would never support a house with a .5% rental rate.

Most would argue that for an upper end rental, .8% will still get you a decent return, but that a .6% is getting too low of a return. I'd set .7% as my line in the sand. At .7%, you'll probably get mid single digit cash-on-cash, and high single-digit returns excluding appreciation. That makes the investment more risky than a balanced portfolio, but rewards that risk with the likelihood of greater than portfolio returns.
Debt is to personal finance as a knife is to cooking.

itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Buy a new house with cash? Please advise

Post by itstoomuch » Sun Sep 25, 2016 11:25 pm

OP: Depends1.

Our son purchased in 2014, a home in Seattle (where we wish to buy a retirement home). We had always assumed that this is his first home. A new home will happen on a marriage and kids and would be financed by the first house. However, he said that he would probably not sell this townhouse because Rents are more than the PITI on a purchase. The excess rent over PITI, will enhance his Income for the next home. This is one of the reasons for the housing shortage in Seattle and Portland.

YMMV
Last edited by itstoomuch on Sun Sep 25, 2016 11:41 pm, edited 1 time in total.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Buy a new house with cash? Please advise

Post by itstoomuch » Sun Sep 25, 2016 11:41 pm

OP: Depends 2:

Son's neighbor in the townhouse complex is moving to another home in Seattle. They decided that Airbnb is a better economic decision than renting out this townhouse.

Son, himself, does Airbnb for either the whole house when he's out of town or private room with bath & house privileges, He makes $10k/yr on less than 90 days of rental/yr without too much trouble. We have to make reservations 6-8 weeks in advance for a weekend visit and never on 3 day weekends.

YMMV
Last edited by itstoomuch on Mon Sep 26, 2016 10:59 am, edited 1 time in total.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

User avatar
aj76er
Posts: 592
Joined: Tue Dec 01, 2015 11:34 pm
Location: Portland, OR

Re: Buy a new house with cash? Please advise

Post by aj76er » Mon Sep 26, 2016 12:36 am

Leemiller wrote:If you're really interested in rental property, you can also sell this house - taking advantage of the capital gains exclusion for a primary residence - and purchase a new home and investment property. That way you can pick a good investment property, rather than having this one become the property by default.
I like this option.
I wouldn't sell your ETFs. Don't underestimate the value of liquidity and compounding.
I've learned that the best way to rebalance a portfolio is to do it gradually (e.g. mortgage payments on the house, or DCA into the stock market, etc... ). In this manner, you can spread out risk over time; which is much more psychologically comforting for most people.
Look for a small investment property that doesn't tie up a giant piece of your portfolio. Then you can really gauge how you like being a landlord without tying up too much capital.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

letsgobobby
Posts: 11646
Joined: Fri Sep 18, 2009 1:10 am

Re: Buy a new house with cash? Please advise

Post by letsgobobby » Mon Sep 26, 2016 12:40 am

Tal- wrote:
teramesher wrote:
Tal- wrote:
Would house #1 make a viable rental?
No. Unless it rents for something like $6000 month (literally), you should NOT keep this as a rental. And... it won't rent for $6000/month...
How did you come to $6000?
I'm playing with rough numbers here, so bare with me.

The most intuitive way to think about a rental's cashflow is to compare property value to monthly rents. The highs/targets from several years ago were around 2%, meaning a solid rental should rent for 2% of it's value (a 100K house renting for 2k/month). That was historically atypical, and 1% has been the more widely used number (a 100K house renting for 2K/month).

1% is a good rule of thumb, and it makes a ton of sense for lower-end properties. I would not buy a 100K house for a rental that didn't get awfully close to 1%. But, as housing values increase, you can bend the 1% rule.

Somewhere around .5%, all houses will have a CAP rate in the low single digits. These may or may not be profitable, depending on financing and a bit of luck, but it will be a lot of work, and a lot of risk for only a modest return. I would never support a house with a .5% rental rate.

Most would argue that for an upper end rental, .8% will still get you a decent return, but that a .6% is getting too low of a return. I'd set .7% as my line in the sand. At .7%, you'll probably get mid single digit cash-on-cash, and high single-digit returns excluding appreciation. That makes the investment more risky than a balanced portfolio, but rewards that risk with the likelihood of greater than portfolio returns.
I am far from a real estate expert but found similar info on line and used it to guide my rent/buy decisions the last few years. Based on this type of calculation, we decided to rent out a home we could probably sell for around $250k, getting $1500 per month or 0.60%. Although a little thin on the rental income relative to price, the price is up about 1/3 in the 3 years since we bought so I'm also comparing it to the lower purchase price we paid. And the current price isn't actually attainable, because we'd have to pay taxes and agent commissions and receive closer to $230k; 1500/230000 = 0.65%.

Tal-
Posts: 357
Joined: Fri Apr 22, 2016 10:41 pm

Re: Buy a new house with cash? Please advise

Post by Tal- » Mon Sep 26, 2016 8:40 am

letsgobobby wrote:
I am far from a real estate expert but found similar info on line and used it to guide my rent/buy decisions the last few years. Based on this type of calculation, we decided to rent out a home we could probably sell for around $250k, getting $1500 per month or 0.60%. Although a little thin on the rental income relative to price, the price is up about 1/3 in the 3 years since we bought so I'm also comparing it to the lower purchase price we paid. And the current price isn't actually attainable, because we'd have to pay taxes and agent commissions and receive closer to $230k; 1500/230000 = 0.65%.
Property appreciation/depreciation is a big wild card. Most real estate experts (who aren't trying to sell you something) will say that cashflow is the *only* important metric, and that appreciation/depreciation in underlying property value should not be included in your pro formas.

With that said, it's awesome that your rental did so well! Our first rental was similar - we kept it as a rental because we would have needed to pay to sell it. So, we kept it, mostly broke even each year, but lucked out and realized a bunch of appreciation a few years later. It was awesome, but I wouldn't suggest counting on it happening in the future.
Debt is to personal finance as a knife is to cooking.

Post Reply