Planning for potential second home purchase

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Topic Author
yeric
Posts: 11
Joined: Sun Mar 27, 2016 10:53 pm

Planning for potential second home purchase

Post by yeric » Mon Jun 10, 2019 10:11 pm

Hi folks,

Our family is pondering a move out of the state. We haven't nailed down the exact location and practically speaking the actual move probably wouldn't occur for another two years. We currently hold enough assets in cash and investments to allow us to cover a down payment on a new home in the new location without having to sell our current home if market conditions weren't favorable (I'm assuming here that we could rent it out while we wait for conditions to improve). Of course, with our investments being 80% stocks, there's no telling what they'll be worth in two years. So, we're considering selling enough to set aside a potential down payment and socking it away in a CD. That's a big sale for us (and a hefty LTCG payment) so I was hoping to get some feedback before we make such a move.

Has anyone else found themselves in a similar situation?

Some hard numbers/details:
  • 24% marginal income tax rate
  • We have ~$600K in retirement accounts and $250K in non-retirement with an overall 80/20 equities/bond allocation
  • $70K in non-emergency cash savings
  • Our home is currently worth ~$500K with ~$350K mortgage owed
  • The absolute most expensive property we'd be looking at is $750K. We'd plan for a 25% down payment (if we decided we needed a construction loan to build) which comes to $187K. With the $70K cash savings, we'd need an additional $117K. To cover LTCG (15%), we'd need to sell $135K in investments

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Sandtrap
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Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Planning for potential second home purchase

Post by Sandtrap » Mon Jun 10, 2019 11:20 pm

A lot depends on:

Do you have significant assets to cover yourself if the rental home is vacant for 6 months?

When the home is rented, will the rent pay for "all" of your expenses? IE: homeowners insurance, mortgage, etc, etc.

How long a period could you sustain if the home did not sell at your desired price for some time?

If you had to sell the home for much less than you want due to market conditions, perhaps at least enough to payoff the mortgage balance? What financial position would you be in then?

Do you have an exit plan?


The R/E market is somewhat unpredictable and therefore hard to make future plans.
So , there must be contingency plans (backup) as well.

It's all a doable plan though going out on a limb a bit. But, be prepared to get out of the older home at any time if it becomes a cash drag. I've seen many try to do a similar swap and the original home with a mortgage has to be sold for far far less than expected to get out of paying on two ends.

Is there a way for you to swing this move without taking so much out of your funds?

How would you do this transition if you had to do it quickly and sell the older home?

Nissanzx1
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Joined: Wed Jul 18, 2018 11:13 pm

Re: Planning for potential second home purchase

Post by Nissanzx1 » Mon Jun 10, 2019 11:53 pm

Seems like there are quite a few unknowns here. Long distance land lording is not without its challenges...

$350K plus $750K owed on mortgages is quite a bit to chew with this net worth. I’m kind of sweating just thinking about it quite frankly. In the meantime, I’d be cutting lifestyle and socking away cash in preparation for this move. Hate to sell any of these investments either personally...

StealthRabbit
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Joined: Sat Jun 13, 2009 1:25 am

Re: Planning for potential second home purchase

Post by StealthRabbit » Tue Jun 11, 2019 12:21 am

BTDT... 40 yrs ago... needed to relocate (1500 miles) during a DEAD housing market and 12% mortgage.
worked out OK, but DOUBLE housing cost for 4 yrs.... (@ $4/ hr night shift wages, single income family then and now)

and currently... (have homes in 3 states). ALL are revenue producing / all but one are cash flow positive (12% cap rates).

We are early retirees, so keep everything rented full time and live in the bunkhouse / slave cabin / separate living qtrs at each location (Fly between at will). Tax deductible travel, all are in NICE retreat areas with NICE views and acreage (peaceful + maintenance) .

Not trivial, will reduce this level of activity when age 75+ (Condo rather than 5 mini-farms would be a lot easier!)

Will likely sell on contract to retain cash flows.

Renters have paid off a lot of my assets. (while assets are spinning off 12% income) at a price...

whomever
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Joined: Sat Apr 21, 2012 5:21 pm

Re: Planning for potential second home purchase

Post by whomever » Tue Jun 11, 2019 8:57 am

For a probabilistic answer ...

Will the eventual move be mandatory, and at a time you don't get to choose?

We wanted to move out of the big city upon retirement. We started house shopping a couple of years before retirement, and in fact bought a house a couple of years before retiring (and had to put up with the hassles of owning a distant house). But we didn't dedicate any money to the purchase when we started shopping. Our thinking was that if some financial calamity happened (another Great Depression, we both got laid off+stocks diving) while we were shopping, we weren't required to move. We could just have sat tight until things improved (and if the calamity was another Great Depression, we might well want to keep working a few extra years anyway).

If the move will be mandatory and happen at at a time you don't get to choose, then you don't get to take advantage of that flexibility :-(.

(as an aside, I get the sense that people sometimes are too rigid when planning for the future. For example, we have some money in TIAA Trad. When do we plan to annuitize? We haven't decided. If the market tanks badly and we need money to pay the bills, we could annuitize tomorrow. If the market doesn't, we might wait until 70. If tax laws changed (say in some way that makes Roth conversions less attractive) we might sooner, because we wouldn't be converting. So we don't really have just one plan; we have a multiplicity of plans, depending on what surprises the future brings.)

JGoneRiding
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Re: Planning for potential second home purchase

Post by JGoneRiding » Tue Jun 11, 2019 10:26 am

Maybe I miss understood the question. I thought it was how to or if you should sell to maintain liquidity for a vague future move.

I might do some but I wouldn't bother with all of it. I would instead set aside the next 2 years saving for it and sell slowly as it might make sense. I would try to split the ltcg into 2 or 3 tax years. You might not need or want the money at all so don't rush it.

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Watty
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Re: Planning for potential second home purchase

Post by Watty » Tue Jun 11, 2019 11:06 am

Why not just get a home equity loan line of credit on your current house? You have to do that before you list the house for sale.

When you make a big move like this I would highly recommend renting in the new location for six months or a year before buying. That will allow you to be sure that you want to stay in that area and learn the local housing market better.

I have done a corporate relocation when I had to fly into a city I did not know for a long weekend or two and drive around with a real estate agent and buy a house. Renting was not an option since my company would only pay many of the substantial relocation costs of buying the house if I bought a house right away.

It took most of the time I had to narrow down what area I wanted to buy in then I was limited to what houses happened to be on the market that weekend. The seller knew I was moving in from out of state and took advantage of that in several steps of the negotiation.

I probably got an OK house and deal but I am sure that I could have done a lot better if I was living in the area and could have taken more time to buy a house.

If you have the time you can even pick a specific subdivision you want to live in then watch it as the houses come on the market then buy when a good one comes on the market.

Topic Author
yeric
Posts: 11
Joined: Sun Mar 27, 2016 10:53 pm

Re: Planning for potential second home purchase

Post by yeric » Tue Jun 11, 2019 9:33 pm

Maybe I miss understood the question. I thought it was how to or if you should sell to maintain liquidity for a vague future move.
If/how to sell now to support our vague future plans is indeed the main question in our minds although other's experiences are good food for thought.

One thing they've got me thinking about is how, if we sell now, we'll have just enough to saddle ourselves with two mortgages that we'll probably struggle to maintain unless we can set ourselves up as long-distance landlords. Success! :|

The idea of keeping any new savings liquid over the next two years and just rolling with whatever the market situation is at that point is sounding pretty attractive...

LadyIJ
Posts: 542
Joined: Thu Mar 06, 2014 8:00 pm

Re: Planning for potential second home purchase

Post by LadyIJ » Sun Jun 16, 2019 6:05 pm

yeric wrote:
Mon Jun 10, 2019 10:11 pm
Hi folks,

Our family is pondering a move out of the state. We haven't nailed down the exact location and practically speaking the actual move probably wouldn't occur for another two years. We currently hold enough assets in cash and investments to allow us to cover a down payment on a new home in the new location without having to sell our current home if market conditions weren't favorable (I'm assuming here that we could rent it out while we wait for conditions to improve). Of course, with our investments being 80% stocks, there's no telling what they'll be worth in two years. So, we're considering selling enough to set aside a potential down payment and socking it away in a CD. That's a big sale for us (and a hefty LTCG payment) so I was hoping to get some feedback before we make such a move.

Has anyone else found themselves in a similar situation?

Some hard numbers/details:
  • 24% marginal income tax rate
  • We have ~$600K in retirement accounts and $250K in non-retirement with an overall 80/20 equities/bond allocation
  • $70K in non-emergency cash savings
  • Our home is currently worth ~$500K with ~$350K mortgage owed
  • The absolute most expensive property we'd be looking at is $750K. We'd plan for a 25% down payment (if we decided we needed a construction loan to build) which comes to $187K. With the $70K cash savings, we'd need an additional $117K. To cover LTCG (15%), we'd need to sell $135K in investments
Considering your net worth, a $750K home seems out of wack to me. I wouldn't put myself in that position. Unless I'm missing something here? Your net worth is under $1.5 million and you want to buy a second home for $750K while still owning the fist home. I couldn't sleep at night.

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