Home Purchase Options

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Home Purchase Options

Post by LineHand » Mon Jul 15, 2019 10:23 pm

My Wife and I own our current home which is valued at 320k. After looking for several years for a larger home on more land for our growing family, we have made an offer on a home with a asking price of 555k.

We are trying to decide on keeping our current home as a rental or selling it and putting the equity (320k) towards the new mortgage.

The rental would bring in $1800 a month, about 600 of that would go towards taxes, insurance, hoa and maintenance. So figure $1200.

Running it through the mortgage calculator, it looks like we would reduce the mortgage payment by about $1400 by applying the equity to the new mortgage. So I am leaning towards selling.

Is there anything we are missing? Thoughts?

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Re: Home Purchase Options

Post by jharkin » Tue Jul 16, 2019 6:56 am

I think you are on the right track...

1 - Are you sure the rental overhead will only be 600? Where I live a 320k house would have 400-500 a month in property taxes alone. Maintenance could be pricey if you are hiring a property manager, or time intensive. Especially if you have significant lawn maintenance and/or snow removal.

2 - Have you factored in the tax impact on the rental income on your net calculation?

Third option - use enough of the equity to put 20-30% down and invest the remainder. You might want to run the numbers all 3 ways and see what comes out ahead over the time frame you expect to own the new house.

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Re: Home Purchase Options

Post by snackdog » Tue Jul 16, 2019 7:02 am

The rental may net you $1200/mo today (that is the minimum) but what will the average be over the mortgage period (30 years)? The average of the alternative is $1400/month and won't change. If you were confident you would keep the new house a long time and could forecast rent increases, the rental alternative could end up with a higher longer term average benefit. Are you sure you have maintenance costs dialed in?

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Re: Home Purchase Options

Post by JoeRetire » Tue Jul 16, 2019 7:38 am

LineHand wrote:
Mon Jul 15, 2019 10:23 pm
Running it through the mortgage calculator, it looks like we would reduce the mortgage payment by about $1400 by applying the equity to the new mortgage. So I am leaning towards selling.

Is there anything we are missing? Thoughts?

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Re: Home Purchase Options

Post by Yooper16 » Tue Jul 16, 2019 11:22 am

Larger home= more maintenance
Larger yard= more maintenance
Larger family= more responsibility

There is more to life than $$.
Do you really want to add an additional amount of work to the above by becoming a landlord? :oops:

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Re: Home Purchase Options

Post by Watty » Tue Jul 16, 2019 12:04 pm

LineHand wrote:
Mon Jul 15, 2019 10:23 pm
Is there anything we are missing? Thoughts?
1) Right now you can likely qualify for the federal homeowners capital gains exclusion and may not have to pay any federal income taxes on the sale of your house. If you keep it for a rental for more than a few years then you will lose that capital gains exclusion.

2) When you convert your residence to a rental property the way depreciation is calculated becomes a lot more complicated and likely less favorable. If you will be keeping it as a rental then you will be running a business that is worth a third of a million dollars so you should treat it like a business and have a written business plan including professional tax advice and several possible exit strategies. The taxes are likely what will make it work or not. If you are not willing to treat it like a business then you should not keep it as a rental property.

3) 1 and 2 above could mean that if you have a burning desire to be a landlord then it might make sense to sell your current house and buy a different rental property. Often the things that make a house a good rental property are different than what makes a house a good home to live in.

4) If you own both houses then you would have almost $900K in residential real estate that is in the same city and maybe even within a few miles of each other. That could be a large percentage of your net worth or even more than 100% of your net worth. Unless you have a very high net worth that could be a diversification problem.

5) How is owning a $320K rental property better than just buying $320 in REIT stock? If you can't easily state that then there could be a problem.

6) It sounds like you will be managing the property yourself. How will that work when you are on a business trip or vacation?

7) If you rent it for long enough you will eventually have a bad tenant. Read this entire thread as an extreme example.


Running into problems with tenants is actually more likely when you are starting out since it will take a while to learn how to screen tenants.

8) Even if you avoid scammers sometimes people run into real hardships. Not everyone has the right temperament to be a landlord and to evict people when they have some real hardship. I know of a situation where someone was renting an apartment in the back of their house to a disabled veteran in a wheelchair who ran into problems with their disability payments being denied. The disability payments were being appealed which was slow, they eventually got to be three years behind in their rent but they could still not bring themselves to evict the guy. He eventually died and they never got paid the back rent. It then took several months to figure out what to do with the stuff the guy had left in the apartment.

Will you be able to evict a single mom with three kids whose husband has run off? If not then you might not want to be a landlord.
Last edited by Watty on Tue Jul 16, 2019 2:53 pm, edited 1 time in total.

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Re: Home Purchase Options

Post by artgerst » Tue Jul 16, 2019 12:26 pm

^^^^^^ Excellent response with great detail. I love this forum!

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Re: Home Purchase Options

Post by delamer » Tue Jul 16, 2019 1:42 pm

If you keep the current home as a rental, you are putting a pretty big financial bet on your local real estate market.

Unless you have substantial liquid investments, I wouldn’t do it.

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