2nd Home Down Payment

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Topic Author
OriolesFan89
Posts: 53
Joined: Tue Jul 15, 2014 7:28 am

2nd Home Down Payment

Post by OriolesFan89 » Tue Jan 14, 2020 9:16 am

My wife and I are looking to buy a home later this year, going from the downtown life to being 10 miles from downtown. We're looking at homes in the $400-$550k range so let's call a traditional down payment of 20% of $100k. We have $35k in a high-interest savings account tabbed for this right now. If we put the hammer down, we can still max out our 401k's and add about $3k/month to that. We have about $35k in individual stocks that I don't mind parting ways with also, but would have to pay mostly long term gains on those.

What's your take on how we should make/save for down payment? I know an FHA loan is 3.5% but you pay PMI, which can be paid off quickly, so that's an idea. Are there options out there for something between 3.5% and 20% down payment? I've heard that you get less favorable interest rates on your 2nd home but not sure how true that is.

About us:
- Married in 2019. Both are 31. Planning/hoping to have our first child in the first half of 2021.
- I've owned our current house since 2012. We are considering renting it out, likely for ~$2500. It's a $1950 mortgage payment (that includes $630/month in property taxes). I'll pay my friend who is in the property manage business $150/month to manage that. I know those numbers aren't great but my area hasn't done well since I bought.
- Gross income of around $225k combined last year ($115k him, $100k her, $10k roommate rental income). We invested/saved ~$90k of that.
- Net worth of about $1.0M. We've been able to invest what I'd consider a lot in our 20s due to both walking to work and getting rid of student loans relatively young.

bloom2708
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Re: 2nd Home Down Payment

Post by bloom2708 » Tue Jan 14, 2020 11:10 am

The easiest answer is sell your current home. Use the equity to buy your next home.

Most people thinking about a second home don't have to think about how many years it will take to get 20% down. If you had $1 million in your taxable account with zero gains or a loss, would you sell 50% to buy the next house? Some would. Some wouldn't.

I can't tell if your question is "how" to save or "where" to save. How is like you mentioned. Funds you have already, monthly from a paycheck, from a bonus. Slow and steady wins the race.

If the numbers "aren't great" to rent and pay someone to manage renting your current house, why do it? You will lose your cap gains deduction if you rent it and don't live in it for a few years. That alone is reason to sell.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words: Whole food, plant based

mervinj7
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Re: 2nd Home Down Payment

Post by mervinj7 » Tue Jan 14, 2020 11:14 am

bloom2708 wrote:
Tue Jan 14, 2020 11:10 am
If the numbers "aren't great" to rent and pay someone to manage renting your current house, why do it? You will lose your cap gains deduction if you rent it and don't live in it for a few years. That alone is reason to sell.
+1 Sell your home. Take the caps gains deduction. Use the proceeds to fund the down payment of 2nd home. Of course, you may need another post on how to buy a home before selling your first home...

Topic Author
OriolesFan89
Posts: 53
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Re: 2nd Home Down Payment

Post by OriolesFan89 » Tue Jan 14, 2020 3:05 pm

Am I missing something about this capital gains deduction that you both mentioned? Am I correct that you don't pay taxes on the increase in home value up to $500k for a married couple? So my $320k home can be sold for $820k without paying capital gains tax on it? I understand that this would go away after not living there for 2 years. I would likely sell my home for something like $320k-$350k, which is basically no appreciation in 8 years.

bloom - My question wasn't really how or where to save, it was how much to save. I just don't know if it's worth waiting/grinding out the $100k into my savings account, or if I should take the FHA loan route and keep investing in my brokerage account. Or if there are common enough 10% down payments out there so that I can avoid PMI.

bloom2708
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Re: 2nd Home Down Payment

Post by bloom2708 » Tue Jan 14, 2020 4:26 pm

OriolesFan89 wrote:
Tue Jan 14, 2020 3:05 pm
Am I missing something about this capital gains deduction that you both mentioned? Am I correct that you don't pay taxes on the increase in home value up to $500k for a married couple? So my $320k home can be sold for $820k without paying capital gains tax on it? I understand that this would go away after not living there for 2 years. I would likely sell my home for something like $320k-$350k, which is basically no appreciation in 8 years.

bloom - My question wasn't really how or where to save, it was how much to save. I just don't know if it's worth waiting/grinding out the $100k into my savings account, or if I should take the FHA loan route and keep investing in my brokerage account. Or if there are common enough 10% down payments out there so that I can avoid PMI.
FHA is typically first time home buyers. This is your second home, I would check in to see if you qualify for an FHA loan.

If there is PMI in an FHA loan, it usually can't be paid off. It is part of the "deal".

What did you pay for your first home? (I see no appreciation). If you paid $250k and it is now worth $350k, that is $100k gain you can take tax free if/when you sell. Ignore, no gain.

If you don't want to sell and don't have the money, I don't think you can afford a second home. Who knows. I'm wrong all the time.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words: Whole food, plant based

fittan
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Re: 2nd Home Down Payment

Post by fittan » Tue Jan 14, 2020 5:06 pm

Don't mean to be debbie downer but all you just wrote reminds me of 2008 all over again. Less than 20% down, checked. Over leveraged, checked.

All it takes is one recession, one job loss, a couple of bad tenants (not paying rent) and you'll find yourself in a bind.

You're doing well financially. Keep chugging away and be defensive. Remember what Warren Buffet advised, it's when the tide goes down do you know who is swimming naked. If I am you I will be aggressive in paying off the current mortgage. If you really want to move, like other said, sell current.

lessismore22
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Re: 2nd Home Down Payment

Post by lessismore22 » Tue Jan 14, 2020 5:23 pm

OriolesFan89 wrote:
Tue Jan 14, 2020 9:16 am

- I've owned our current house since 2012. We are considering renting it out, likely for ~$2500. It's a $1950 mortgage payment (that includes $630/month in property taxes). I'll pay my friend who is in the property manage business $150/month to manage that.
Seems like a lot of risk(vacancy risk) to take, for only a small return of $400/m max profit. With $1.0M NW in your early 30's and $200k+ annual income I don't see the need to take this risk. The capacity...sure. The need...no. Sell it and stick to your investment plan, you'll retire a millionaire many times over without ever needing the stress of owning a rental property.

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sergeant
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Re: 2nd Home Down Payment

Post by sergeant » Tue Jan 14, 2020 6:31 pm

I wouldn't go this route unless the first home was paid off, a more positive cash flow with rent, and 20% down for the new home. Even then I probably wouldn't do it as I hate being a landlord.
Lincoln 3 EOW! AA 40/60.

Topic Author
OriolesFan89
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Joined: Tue Jul 15, 2014 7:28 am

Re: 2nd Home Down Payment

Post by OriolesFan89 » Fri Jan 24, 2020 11:04 am

Thanks for the great responses, all. You all are more risk adverse than I am it sounds like. Maybe that's a product of me not having been through a recession yet?

Bloom - I paid $320k for it. I could probably get $350k. Not a great last 8 years for Baltimore!

fittan - Not a debbie downer! That's a fair take. Thank you for the glass of cold water. I have never tried to time the market but the highs are finally getting me a little queasy. I won't fuss around with the less than 20% down thing since we're in a position that if we only do the maximum contribution limits to our retirement plans, we should be able to stockpile $100k in our high-yield savings by the end of the year. I could accelerate that a bit by selling some individual stocks, which is fine by me.

lessismore22 - Yes, that's a small profit but at least I'm marching towards more equity in the home too! But your take is noted.

After learning about being able to not pay capital gains on the home sell if I've been living there at least 2 of the previous 5 years, I think this is what I'll do: We currently have a tenant (she's also a friend) who is responsible. If she was interested in having 2 similar friends move in with her, I think I would rent to them until they moved out. That arrangement could last up to 3 years so that I could claim it as my primary home for at least 2 of the last 5 years then. So I like this option, or selling. And if she isn't interested in renting in, I just sell.

Admiral
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Re: 2nd Home Down Payment

Post by Admiral » Fri Jan 24, 2020 11:14 am

Sell it, end of story. The house has not appreciated, and your profit on using it as a rental is barely worth the hassle. That tells me there is no reason to keep it. It would be one thing if it had doubled in value and you could get maximum rent in a highly desirable area. But that is not the case, so sell it.

Your other choice is to wait, and continue to save until you have 20% of the purchase price. I would not buy a home--nor recommend that others do so--without at least 20% down.

Second homes are (IMO) not for 30 year olds unless they are exceedingly well off.

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