Buying 2nd House - Affordability Check

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HardHitter
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Buying 2nd House - Affordability Check

Post by HardHitter » Sat Oct 14, 2017 2:36 pm

I live in a HCOL area and was able to break into a house during the market crash. We are married with no kids, but plan to start trying in 2018. We are wanting to continue to save to buy another house and turn current home into an investment property. I've ran the numbers and wanted to run this by some of you guys to make sure it makes sense and get your feedback on if it is a smart decision to go forward with as a "young" couple (early 30s).

Current Home Value: $720K
Current Home Loan: $150K
Current Home Mortgage: $1.5K/mo (includes mortgage+prop tax+insurance+HOA)
Estimated New Home Mortgage: $3.7K (includes mortgage+prop tax+insurance. Based upon $1M home with $350K down)

With the above numbers, we would have:

$5.3K in mortgage cost for two homes
$3K of estimated rental income from "current home"
"Final Mortgage" of $2.2K/mo. (5.3K-3K)

If I were to throw the $2.2K/mo into my monthly expenses, we are looking at a $6.3K/mo expense. Now this is likely high for two people, but note that we are living comfortably and can restrict budget where needed (e.g This includes a total $2.5K budgeted for food/fun/shopping). Take home income per month after retirement funds is $11.2K leaving us with a $4.8K savings a month.

Is $4.8K/mo enough "savings" to have two homes? On average, how much should I budget for child cost that impacts that monthly saving?

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Sandtrap
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Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Buying 2nd House - Affordability Check

Post by Sandtrap » Sat Oct 14, 2017 2:50 pm

Why no sell the current home and downsize to a smaller unit to rent that has no liabilities (paid in cash) and is a good "renter". Then, apply the extra funds from the sale toward the purchase of your new home?
That would minimize expenses even further and maximize income stream.

An option amongst many.
j :D

letsgobobby
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Re: Buying 2nd House - Affordability Check

Post by letsgobobby » Sat Oct 14, 2017 3:11 pm

HardHitter wrote:
Sat Oct 14, 2017 2:36 pm
I live in a HCOL area and was able to break into a house during the market crash. We are married with no kids, but plan to start trying in 2018. We are wanting to continue to save to buy another house and turn current home into an investment property. I've ran the numbers and wanted to run this by some of you guys to make sure it makes sense and get your feedback on if it is a smart decision to go forward with as a "young" couple (early 30s).

Current Home Value: $720K
Current Home Loan: $150K
Current Home Mortgage: $1.5K/mo (includes mortgage+prop tax+insurance+HOA)
Estimated New Home Mortgage: $3.7K (includes mortgage+prop tax+insurance. Based upon $1M home with $350K down)

With the above numbers, we would have:

$5.3K in mortgage cost for two homes
$3K of estimated rental income from "current home"
"Final Mortgage" of $2.2K/mo. (5.3K-3K)

If I were to throw the $2.2K/mo into my monthly expenses, we are looking at a $6.3K/mo expense. Now this is likely high for two people, but note that we are living comfortably and can restrict budget where needed (e.g This includes a total $2.5K budgeted for food/fun/shopping). Take home income per month after retirement funds is $11.2K leaving us with a $4.8K savings a month.

Is $4.8K/mo enough "savings" to have two homes? On average, how much should I budget for child cost that impacts that monthly saving?
Sounds like you can realize about $500k after selling your house. In theory then you could put $850k down and have a mortgage of around $1200 Or just put $500k down and have a $500k mortgage.

I don't like the idea of keeping your current house as a rental. Within 3 years you'd lose your $500k capital gains tax exemption. Furthermore $3000 of rental income for a home worth $720k is not a good value for a rental, as it's barely 0.4% per month in income whereas the best rentals are closer to 1% ($7200 of rental income for a $720k property).

chuppi
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Re: Buying 2nd House - Affordability Check

Post by chuppi » Sat Oct 14, 2017 11:45 pm

letsgobobby wrote:
Sat Oct 14, 2017 3:11 pm
I don't like the idea of keeping your current house as a rental. Within 3 years you'd lose your $500k capital gains tax exemption. Furthermore $3000 of rental income for a home worth $720k is not a good value for a rental, as it's barely 0.4% per month in income whereas the best rentals are closer to 1% ($7200 of rental income for a $720k property).
I agree. You will end up paying the capital gains if you continue to rent beyond 3 years. Renting looks like a profit of 1.5K per month but you have 600K tied up in that house.

House prices have increased for 7-8 years now. There is a possibility of housing slowing down at some point. You can consider staying put for sometime and then get the next house during the downtime. At least there won't be overbidding and the craziness. You can rent for 2-3 years while waiting for the market to recover and then sell.

Your housing cost in a HCOL area is likely way below average at this point. You don't have kids now. This is a great time to grow your net worth agressively. Once you get the mortgage, add the house maintenance, property taxes and the child care, your cash flow will diminish.

HardHitter
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Re: Buying 2nd House - Affordability Check

Post by HardHitter » Sun Oct 15, 2017 3:52 pm

Thanks guys. These are my thoughts.

Right now I have $570K in equity in my current house ($720K home bought for $417K and a loan of $150K)
If I bought a $1M house and put $350K down, I'd have a $650K loan.
I'd have a total of $800K in loans for both homes ($150K + $650K) and a "value" of $1.7M assuming no appreciation in either home ($1M new home + $720K current)

Some of you said to sell my current house and just use that for a down payment on the new house and have a lower mortgage. Yes I could do that, but wouldn't it best to have another asset for the future?

Some of you said to sell my current house and use that money to buy something smaller to downsize but I don't think I'm going to be able to get the value I have in my house today which was purchased at the bottom of the market. This is my starter house, a 2 bed/2 bath town home. Going smaller you'd be looking at a 1 bedroom place and that would still be $500-$600K.

The way I am looking at this situation is I am paying an extra $700/mo to add a $1M asset.

delamer
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Re: Buying 2nd House - Affordability Check

Post by delamer » Sun Oct 15, 2017 4:18 pm

You haven't mentioned your level of liquid assets. Part of the issue is that it isn't wise to tie up a large chunk of your net worth in 1) illiquid assets and 2) in one type of asset (real estate in one locality).

And there will inevitably be months that the house is not rented, which means the mortgage has to come out of savings. And what happens if it be omes unrentable for an extended period (fire or other damage)? Can you carry it?

Call a couple day care providers in your area and find out what they charge for an infant. That'll be an eye opener, I imagine.

edge
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Location: Great Falls VA

Re: Buying 2nd House - Affordability Check

Post by edge » Sun Oct 15, 2017 4:36 pm

HardHitter wrote:
Sun Oct 15, 2017 3:52 pm


Some of you said to sell my current house and just use that for a down payment on the new house and have a lower mortgage. Yes I could do that, but wouldn't it best to have another asset for the future?

Maybe, maybe not. Depends on the type of asset. Small time rentals seem like a PITA for limited upside.

HardHitter
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Re: Buying 2nd House - Affordability Check

Post by HardHitter » Sun Oct 15, 2017 4:50 pm

delamer wrote:
Sun Oct 15, 2017 4:18 pm
You haven't mentioned your level of liquid assets. Part of the issue is that it isn't wise to tie up a large chunk of your net worth in 1) illiquid assets and 2) in one type of asset (real estate in one locality).

And there will inevitably be months that the house is not rented, which means the mortgage has to come out of savings. And what happens if it be omes unrentable for an extended period (fire or other damage)? Can you carry it?

Call a couple day care providers in your area and find out what they charge for an infant. That'll be an eye opener, I imagine.
I don't have much. I have a weekend car that I can/will sell for $60K. Have $100K cash. Other than that, if I needed cash quick, I'd have to start pulling from retirement funds which don't want it to be an option.

To your point around not having a renter, it wouldn't impact our saving funds, it would just decrease the amount we save a month. Instead of putting $4.8K into the savings account a month, it would decrease to $1.8K.

I've already looked into day care and have spoken to co-workers and average cost is around $1500-$2000/mo.

dellfanboy
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Re: Buying 2nd House - Affordability Check

Post by dellfanboy » Sun Oct 15, 2017 5:10 pm

911 for the weekend Car?

HardHitter
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Re: Buying 2nd House - Affordability Check

Post by HardHitter » Sun Oct 15, 2017 5:19 pm

dellfanboy wrote:
Sun Oct 15, 2017 5:10 pm
911 for the weekend Car?
Yep, 2007 911 Turbo

longterm100
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Re: Buying 2nd House - Affordability Check

Post by longterm100 » Sun Oct 15, 2017 6:45 pm

I'm in a very similar boat to you, and $ in similar ball parks. I close on the new house in 4 weeks and I am debating what to do with my current house.

There are pros and cons to renting it out. As has been mentioned ideally landlords typically want the 1% rule. There is also the capital gains tax after 3-years. There is having all of our capital ties up in real estate, hassle of being a landlord etc. etc.

Personally, I'm leaning towards renting it for a couple of years to see how it goes. If i dont like it then I can always sell. Plus my income is variable so in 2-3 years the second house might be a smaller part of my overall networth. Also there is some comfort knowing that if the second house doesn't work out (for whatever reason) then I have a place to move back into.

I think the most important thing is to get the right second home. It took us almost 2-years of looking and 5 offers.

Jeep512
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Re: Buying 2nd House - Affordability Check

Post by Jeep512 » Mon Oct 16, 2017 6:07 am

Every time I thought about renting out a house, I decided that I really didn't want to be a landlord. I always just sold.

You need to consider the late night maintenance calls...the maintenance costs...the refurb costs between renters...the time it may spend empty.

I decided that my satisfaction as a landlord would greatly depend on the quality of the renters that I was able to find.

Also, do you really want to give someone that you don't really know, complete access to your $870K asset?

Xpe
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Re: Buying 2nd House - Affordability Check

Post by Xpe » Mon Oct 16, 2017 8:32 am

delamer wrote:
Sun Oct 15, 2017 4:18 pm
Call a couple day care providers in your area and find out what they charge for an infant. That'll be an eye opener, I imagine.
I don't think you can buy infants from daycare providers, at least I hope not, my son is at one right now!

Tal-
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Re: Buying 2nd House - Affordability Check

Post by Tal- » Mon Oct 16, 2017 8:39 am

Tal votes no.

Actually, let me rephrase that. Tal prohibits you from doing this!

Unless I'm wrong, today, 100% of the profit on your current home is TAX FREE. After that's been a rental for a while, that changes and becomes taxable.

Next, with 100K in cash, you are behind in investment accrual. No need to panic, but getting some net worth behind a traditional stock/bond portfolio is probably a good short-term goal.

I don't see where you get the down payment for the new property.

You would have way too much exposure to a single real estate market.

And, I think that single real estate market is at risk of being over priced, and being hit hard in a pullback.

Rentals in HCOL area typically perform poorly. You'd be better off taking the profit from the sale and buying 10 rentals in 3 better markets.

With kids planned in the next few years, I would not double your monthly expenses before you know what life after kids looks like.

This is chasing performance.

You have a great opportunity here to have the house you want, and start a good investment portfolio including rentals in another market if you wanted to do so. But, your plan of going all-in on the HCOL area feels extremely risky, and without the upside of a more balanced approach.

I may be missing a lot of other details, but in the absence of such, I strongly advise against this plan.
Debt is to personal finance as a knife is to cooking.

hightower
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Re: Buying 2nd House - Affordability Check

Post by hightower » Mon Oct 16, 2017 8:51 am

I'll throw in my 2 cents...
I wouldn't recommend tying up so much of your net worth in real estate. You're being too debt numb IMO. You're looking at this as if the debt doesn't matter and telling yourself that "for x amount per month more I could have 2 houses instead of 1 and therefore more assets." But, really you're just signing up for more debt and more risk. You're better off financially to just keep saving aggressively and either keep your current house or sell it and use the proceeds for your next house. Not sure why you're in such a hurry to upgrade though if you guys don't have kids yet. A bigger house means bigger expenses down the road.
Real estate is risky and I think you're probably just feeling flush right now because home prices have been appreciating at a very fast rate recently. I lived through the housing market crash in 2008 and watched the value of our home at that time drop overnight by 50%. The worst part was that we had to sell during that time too. It wasn't pretty and left a bad taste in my mouth for real estate. Just imagine if that were to happen again and you owned two houses with 600-700k in debt on those houses. Not only would your equity disappear but rent prices could also tank. The debt would stay the same though and you'd still have to make the big monthly payments. Plus, houses need repairs from time to time. That's cash you have to burn on two different properties. I wouldn't want that hanging over my head. I know some will say "oh well, you can just walk away from a mortgage if you want to," but again, you'd lose all the equity you currently have and have no home. I'd much rather have a big fat taxable brokerage account where I could just keep buying shares of VTI each month through thick and thin and not have to lift a finger worrying about it.

hightower
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Re: Buying 2nd House - Affordability Check

Post by hightower » Mon Oct 16, 2017 9:04 am

HardHitter wrote:
Sun Oct 15, 2017 3:52 pm
The way I am looking at this situation is I am paying an extra $700/mo to add a $1M asset.
This kind of thinking is a slippery slope. You're only paying attention to the 700/month payment. You need to tell yourself "I'm adding 650k of debt to my plate." Because that's actually what's happening. So, you'd go from 150k in debt (assuming that's all you have right now) and suddenly have 800k in debt. If the housing market tanks by 50% again, you'd still owe 800k, but your houses would not be worth 1.7 million anymore. Sure, you could just wait it out for values to rise again, but that could take 8-10 years (like the current housing market has taken to recover). What if you get burnt out in your job or you guys decide you want to move during that time? You'd be stuck with a decision of staying put or selling and losing all your equity. Which essentially means you'd feel trapped.

bloom2708
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Re: Buying 2nd House - Affordability Check

Post by bloom2708 » Mon Oct 16, 2017 9:26 am

If you rent your current house, you will become a small business owner (on top of your day job) with high concentration of residential real estate in your local market.

Many threads on real estate. I would MUCH rather put the equity from house #1 into house #2 and NOT be a small business owner. One bad tenant, one major repair on the rental and you lose 1, 3, 5 years of "income". Add the hassle, taxes and time factor. No thanks.

Read all the replies you get. Note the pros and cons of each option. Do what you want to do. It may work out or you may look back and wish you had picked the other option.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

HardHitter
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Re: Buying 2nd House - Affordability Check

Post by HardHitter » Mon Oct 16, 2017 10:13 am

Appreciate all of your feedback guys. I actually just created an additional thread to follow-up on this one (viewtopic.php?f=2&t=229902) which is a more holistic picture of my situation. We may want to continue our discussion there as it has some additional details (parents rentals will be passed down) that may impact this decision.

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