Buying second house - dilemma

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Topic Author
thedane
Posts: 30
Joined: Mon Jun 11, 2018 7:25 pm

Buying second house - dilemma

Post by thedane »

Team BH,

Need some help/input please regarding potentially buying a second property, which may be primary.

Currently:
  • Married, 30s, no kids (no plans for kids either)
  • Combined income around $230K /year. This year will be lower as wife has been out of work since mid-March due to serious health issue, that is almost gone, and she will be ready to work again. She may drop in income level if we move (see below). My income is around $155K. Some added benefits like stock award etc is not factored into my income on here
  • We live well below our means.
  • Own one house. Valued at approx. $450K-500K. 30 yr fixed at 3.5%, 20 years left / balance of $130K. Good equity of around $320K - $370K. Low property tax of around $1K /yr
  • No other loans/debts
  • Healthy 401Ks: $500K
  • Roth: $50K
  • Taxable: $75K
Dilemma:
Want to get out of big city, been looking at mountain property for some time (2+ years). Found good place for around $550K. Property taxes around $2K. Low ongoing utility costs etc. as place is mostly off grid. 90% solar, and 10% propane generator.
Do we:
  • Sell current property?
  • Keep current property and rent out? We could easily rent out for well above mortgage payment. Estimating rent of $1,700+ vs mortgage of $800
  • If keeping and rent out; do we dig into equity in primary residence for down payment on new house? Do we combine mortgages? How does this work. I am 100% a newbie with this process. Credit scores are 800++
  • Keep current house, buy mountain property, but split time between both locations and rent out mountain property part time a few months each year via AirBnb etc? Jobs allow for flexibility.
  • Are mortgage rates on a 2nd home, if keeping first home, still good?
EDIT:
We have an emergency fund not factored into the above - Good for 12 months of current living expenses
tomtoms
Posts: 334
Joined: Wed Mar 06, 2013 11:56 pm

Re: Buying second house - dilemma

Post by tomtoms »

You should check with a lender and see if you would qualify for two mortgages. Lenders typically count "rent" as income only after 1 year of renting it out.
JBTX
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Joined: Wed Jul 26, 2017 12:46 pm

Re: Buying second house - dilemma

Post by JBTX »

Keeping and renting current house would be something like $15000 income on $500k of equity if mortgage were paid off. That's a pretty poor return on investment. About 3.0%.

What is the motivation to keep 2 properties?
tomtoms
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Re: Buying second house - dilemma

Post by tomtoms »

JBTX wrote: Wed Oct 07, 2020 9:31 pm Keeping and renting current house would be something like $15000 income on $500k of equity if mortgage were paid off. That's a pretty poor return on investment. About 3.0%.

What is the motivation to keep 2 properties?
You are not counting appreciation.
onourway
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Re: Buying second house - dilemma

Post by onourway »

The calculation isn't simply your mortgage payment vs. what you could rent it for. You need to look at the big picture, and you have at least $320k in equity tied up in that home. $1700 in rent on $320k in equity is only a 5% return before you account for a single expense. By the time you factor in taxes and insurance and maintenance and vacancies and whatnot, you could get a better return from a CD, even with today's rates, without the hassle of owning a rental property.
onourway
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Re: Buying second house - dilemma

Post by onourway »

tomtoms wrote: Wed Oct 07, 2020 9:37 pm
JBTX wrote: Wed Oct 07, 2020 9:31 pm Keeping and renting current house would be something like $15000 income on $500k of equity if mortgage were paid off. That's a pretty poor return on investment. About 3.0%.

What is the motivation to keep 2 properties?
You are not counting appreciation.
Nope. And we aren't counting depreciation either.
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Watty
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Re: Buying second house - dilemma

Post by Watty »

thedane wrote: Wed Oct 07, 2020 7:41 pm Do we:
Sell current property?
Keep current property and rent out? We could easily rent out for well above mortgage payment. Estimating rent of $1,700+ vs mortgage of $800
You likely would qualify for the homeowners capital gains exemption if your sold the house. If you keep it for more than a few years you will lose that.

Keeping it a house as a rental rarely makes sense if you would lose that.

The way that the depreciation would work would also be a lot more complex and less favorable since you have already owned it for so many years.

It is hard to quantify but generally speaking the things that make a house a good house to live in and the things that make a house a good rental are a lot different.

If you have a burning desire to be a landlord then it would likely make sense to sell that house and buy a better rental property.
tomtoms
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Re: Buying second house - dilemma

Post by tomtoms »

onourway wrote: Wed Oct 07, 2020 9:38 pm
tomtoms wrote: Wed Oct 07, 2020 9:37 pm
JBTX wrote: Wed Oct 07, 2020 9:31 pm Keeping and renting current house would be something like $15000 income on $500k of equity if mortgage were paid off. That's a pretty poor return on investment. About 3.0%.

What is the motivation to keep 2 properties?
You are not counting appreciation.
Nope. And we aren't counting depreciation either.
Because there is going to be a housing market downturn? What would happen to stocks if something like that happen?

Assets from real estate to stocks tend to go up over a period of time. Like stocks, there is nothing wrong with assuming real estate will go up over time.
phxjcc
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Re: Buying second house - dilemma

Post by phxjcc »

Rent it for 18 months, see if you like it.

If you do, keep renting; otherwise sell. You are still in the 2 year window and get the exemption.
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eye.surgeon
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Location: California

Re: Buying second house - dilemma

Post by eye.surgeon »

Having 2 mortgages is rarely a good idea, unless you're a full-time rental properties landlord.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett
Starfish
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Re: Buying second house - dilemma

Post by Starfish »

You will be exposed to ~1 million $ in RE in the same area and have 600k$ in stocks, mostly 401k. I would not feel very comfortable, it is not enough diversification. If stock market goes down, properties go down in your area and you lose your job right now, you are still ok for a while. But with 2 mortgages you will burn through your buffer much faster.
fundseeker
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Re: Buying second house - dilemma

Post by fundseeker »

You're among others who've recently posted about an interest in a second house, but at least you aren't considering entering into a partnership with relatives to purchase the property.

I just cannot imagine trying to keep up with a second home, and getting it furnished and keeping it stocked with food and other things I'd want to be comfortable there, etc. And I'd feel obligated to go to that one place all of the time, so I would be reluctant to vacation elsewhere if I needed variety or just lost interest. For me, renting as needed is so convenient and keeps life simple. But, it might work out well for you, if you can pay cash for it. Good luck!
TRC
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Re: Buying second house - dilemma

Post by TRC »

We have owned a second home for 10 years. It's about 2 hours away and at the Beach. My first piece of advice would be to rent for a season and see if you like the lifestyle of bouncing between 2 homes. In our experience, it does eventually get old. The drive, grocery shopping, owning 2 of everything, maintenance, worrying about a vacant property, break-ins (yes, we got broken into), paying two sets of utility bills, snow plowing, landscaping, etc.

After the honeymoon phase was over, we started to rent ours out for 6 - 8 weeks during the summer to break even on our bills and we use it for a solid 3-4 weeks a year. However, renting IS WORK (and ours is just a condo). A big challenge is finding a reputable and reliable cleaner to get the place ready between guests. We've been lucky with ours, but we've had some close calls. Stuff breaks too. Our AC went on a Saturday between guests when it was close to 100 degrees outside. We couldn't find an HVAC person on such short notice so much wife and I had to spend an entire Saturday troubleshooting it to finally get it fixed.

That being said, if I were to do it over again I would have just invested the down-payment in the Total Stock Market index and just rent something instead. My wife and kids love it though and it's nearly paid for. After next summer we are planning to dial back the rentals to just 3-4 weeks a year.

Going back to my first piece of advice, rent for a season and see if you really like the lifestyle.
DesertDiva
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Re: Buying second house - dilemma

Post by DesertDiva »

1. Pay off the first mortgage
2. Buy second property with 20% down
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geerhardusvos
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Location: heavenlies

Re: Buying second house - dilemma

Post by geerhardusvos »

thedane wrote: Wed Oct 07, 2020 7:41 pm Team BH,

Need some help/input please regarding potentially buying a second property, which may be primary.

Currently:
  • Married, 30s, no kids (no plans for kids either)
  • Combined income around $230K /year. This year will be lower as wife has been out of work since mid-March due to serious health issue, that is almost gone, and she will be ready to work again. She may drop in income level if we move (see below). My income is around $155K. Some added benefits like stock award etc is not factored into my income on here
  • We live well below our means.
  • Own one house. Valued at approx. $450K-500K. 30 yr fixed at 3.5%, 20 years left / balance of $130K. Good equity of around $320K - $370K. Low property tax of around $1K /yr
  • No other loans/debts
  • Healthy 401Ks: $500K
  • Roth: $50K
  • Taxable: $75K
Dilemma:
Want to get out of big city, been looking at mountain property for some time (2+ years). Found good place for around $550K. Property taxes around $2K. Low ongoing utility costs etc. as place is mostly off grid. 90% solar, and 10% propane generator.
Do we:
  • Sell current property?
  • Keep current property and rent out? We could easily rent out for well above mortgage payment. Estimating rent of $1,700+ vs mortgage of $800
  • If keeping and rent out; do we dig into equity in primary residence for down payment on new house? Do we combine mortgages? How does this work. I am 100% a newbie with this process. Credit scores are 800++
  • Keep current house, buy mountain property, but split time between both locations and rent out mountain property part time a few months each year via AirBnb etc? Jobs allow for flexibility.
  • Are mortgage rates on a 2nd home, if keeping first home, still good?
EDIT:
We have an emergency fund not factored into the above - Good for 12 months of current living expenses
My recommendation would be to sell the house in order to buy the next one. You won’t regret it. You might regret being a landlord though...
VTSAX and chill
CurlyDave
Posts: 1970
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Re: Buying second house - dilemma

Post by CurlyDave »

JBTX wrote: Wed Oct 07, 2020 9:31 pm Keeping and renting current house would be something like $15000 income on $500k of equity if mortgage were paid off. That's a pretty poor return on investment. About 3.0%...
As a long-time real estate investor and landlord, I laugh at that analysis. It does not take price appreciation into account, or the tax benefits of depreciation.

BUT, I do agree with the idea of not renting out this house. Being an accidental landlord seldom works out well. I would sell the current house, use some of the proceeds on a new one, and set aside some for a down payment on an investment property IF I wanted to own a rental.

Good rental properties are seldom the ones that an owner wants to personally live in. A rental should have plain, more utilitarian finish everywhere. Lower initial cost, more durable, and easier to maintain. And should be in a sound, but lower cost neighborhood.

Another point to consider is that if you rent this house out for too long you lose the tax exemption you get from selling.
tibbitts
Posts: 11878
Joined: Tue Feb 27, 2007 6:50 pm

Re: Buying second house - dilemma

Post by tibbitts »

So you can work at your job in either property, but your spouse will lose her job if you move, correct? But your spouse is okay with that.

Having had experience with the two-property situation, I would sell your current house and move to where you want to live.
DesertDiva
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Joined: Thu Mar 01, 2018 12:49 pm
Location: In the desert

Re: Buying second house - dilemma

Post by DesertDiva »

Another consideration: altitude sickness is a big problem for some people. Have you spent much time in the mountains? Like more than a weekend? If not, you might try to visit for a period of time before committing to a real estate transaction.

Something to think about :beer
Topic Author
thedane
Posts: 30
Joined: Mon Jun 11, 2018 7:25 pm

Re: Buying second house - dilemma

Post by thedane »

Thank you all. Great input all around!
I should clarify:
Current home in state A, new home in state B. We are torn on buying new home but retain current home for either permanent rental (which most of you recommend against) or retaining current home as primary residence, and then utilize mountain home as secondary, but rent out via short term rentals (Airbnb style etc). Or simply buy new home, and sell current home (simplicity at its finest!)

First next step for me is to get a hold of a mortgage broker and see what we even qualify for. Then re-asses
DesertDiva wrote: Thu Oct 08, 2020 1:07 pm Another consideration: altitude sickness is a big problem for some people. Have you spent much time in the mountains? Like more than a weekend? If not, you might try to visit for a period of time before committing to a real estate transaction.

Something to think about :beer
Yes, very good point. We are covered. We both do extensive hiking (Everest base camp, Kilimanjaro, Andes mountains, etc)
tibbitts wrote: Thu Oct 08, 2020 11:44 am So you can work at your job in either property, but your spouse will lose her job if you move, correct? But your spouse is okay with that.

Having had experience with the two-property situation, I would sell your current house and move to where you want to live.
Thank you. Spouse would have to get new job in same field, which is totally manageable in that area. Long term she does want to shift to another field, but not yet.

And good point about personal feedback on owning two properties. This seems to be a trend people say to avoid.
geerhardusvos wrote: Thu Oct 08, 2020 8:57 am
My recommendation would be to sell the house in order to buy the next one. You won’t regret it. You might regret being a landlord though...
Thank you, and noted! I like the easy button option of not dealing with a broken water heater in another state, at 9pm on a Saturday...
DesertDiva wrote: Thu Oct 08, 2020 8:32 am 1. Pay off the first mortgage
2. Buy second property with 20% down
Time for me to get cranking!
onourway wrote: Wed Oct 07, 2020 9:37 pm The calculation isn't simply your mortgage payment vs. what you could rent it for. You need to look at the big picture, and you have at least $320k in equity tied up in that home. $1700 in rent on $320k in equity is only a 5% return before you account for a single expense. By the time you factor in taxes and insurance and maintenance and vacancies and whatnot, you could get a better return from a CD, even with today's rates, without the hassle of owning a rental property.
Thank you for pointing out the basics. This is so true, and something we need to be aware of. It is often easy to miss the obvious.
tomtoms wrote: Wed Oct 07, 2020 7:57 pm You should check with a lender and see if you would qualify for two mortgages. Lenders typically count "rent" as income only after 1 year of renting it out.
Thank you. Top of my list today/tomorrow. I "think" we are in good financial health, but never know. And we certainty do NOT want to sit too tight.
JBTX wrote: Wed Oct 07, 2020 9:31 pm Keeping and renting current house would be something like $15000 income on $500k of equity if mortgage were paid off. That's a pretty poor return on investment. About 3.0%.

What is the motivation to keep 2 properties?
"Safety" if we do not end up liking the mountain style living after 12+ months, we could always move back. Current home is in a highly desirable area that will only continue to increase in value/popularity. But to your indirect point, we could always just buy in other area.
Other idea was to be able to rent out mountain cabin 6 months a year via short term rentals. But maintain current home as primary residence.
JBTX
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Re: Buying second house - dilemma

Post by JBTX »

CurlyDave wrote: Thu Oct 08, 2020 9:49 am
JBTX wrote: Wed Oct 07, 2020 9:31 pm Keeping and renting current house would be something like $15000 income on $500k of equity if mortgage were paid off. That's a pretty poor return on investment. About 3.0%...
As a long-time real estate investor and landlord, I laugh at that analysis. It does not take price appreciation into account, or the tax benefits of depreciation.

BUT, I do agree with the idea of not renting out this house. Being an accidental landlord seldom works out well. I would sell the current house, use some of the proceeds on a new one, and set aside some for a down payment on an investment property IF I wanted to own a rental.

Good rental properties are seldom the ones that an owner wants to personally live in. A rental should have plain, more utilitarian finish everywhere. Lower initial cost, more durable, and easier to maintain. And should be in a sound, but lower cost neighborhood.

Another point to consider is that if you rent this house out for too long you lose the tax exemption you get from selling.
I am glad i was able to amuse you.

As to ignoring the appreciation, that is a valid point that I missed. I would counter that my expenses were too low and my net income was too high and assumed 100% rental occupancy.
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willthrill81
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Re: Buying second house - dilemma

Post by willthrill81 »

CurlyDave wrote: Thu Oct 08, 2020 9:49 am
JBTX wrote: Wed Oct 07, 2020 9:31 pm Keeping and renting current house would be something like $15000 income on $500k of equity if mortgage were paid off. That's a pretty poor return on investment. About 3.0%...
As a long-time real estate investor and landlord, I laugh at that analysis. It does not take price appreciation into account, or the tax benefits of depreciation.
How much price appreciation will the house experience? That's an unknown. Cash flows, on the other hand, are known.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
CurlyDave
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Re: Buying second house - dilemma

Post by CurlyDave »

willthrill81 wrote: Thu Oct 08, 2020 8:33 pm
...How much price appreciation will the house experience? That's an unknown. Cash flows, on the other hand, are known.
The OP mention a purchase price and a current value, this determines a CAGR. Sure there are unknowns in projecting it into the future, but cash flows for stocks didn't come down the mountain engraved on Moses' tablets. Lots of unknowns there also, but most of us put money into stocks.

Actually, CAGRs for real estate are documented for longer than stocks, probably much longer. Although I personally discount any data more than a few decades old in either the stock or real estate world -- too much has changed. You can call that recency bias if you wish, but if you wanted to buy stocks in the 1920s there is an excellent chance you rode a streetcar to a brokerage house and handed a wad of cash to a clerk. Traders on most of our scale might find out what the trade price was in a day or two. A completely different world than today. Ask anyone who uses Robinhood.

The problems with old real estate data are similar. A lot of US real estate data can be traced back to land grants from European kings. Of course the original inhabitants had different ideas about ownership.

And less than 100 years ago mortgages were frequently 30 year amortization, but due in 5 years or so. My ancestors lost houses to foreclosure in the 1930s. Hard to compare real estate appreciation then and now.
CurlyDave
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Re: Buying second house - dilemma

Post by CurlyDave »

JBTX wrote: Thu Oct 08, 2020 8:18 pm
CurlyDave wrote: Thu Oct 08, 2020 9:49 am
JBTX wrote: Wed Oct 07, 2020 9:31 pm Keeping and renting current house would be something like $15000 income on $500k of equity if mortgage were paid off. That's a pretty poor return on investment. About 3.0%...
As a long-time real estate investor and landlord, I laugh at that analysis. It does not take price appreciation into account, or the tax benefits of depreciation.

BUT, I do agree with the idea of not renting out this house. Being an accidental landlord seldom works out well. I would sell the current house, use some of the proceeds on a new one, and set aside some for a down payment on an investment property IF I wanted to own a rental.

Good rental properties are seldom the ones that an owner wants to personally live in. A rental should have plain, more utilitarian finish everywhere. Lower initial cost, more durable, and easier to maintain. And should be in a sound, but lower cost neighborhood.

Another point to consider is that if you rent this house out for too long you lose the tax exemption you get from selling.
I am glad i was able to amuse you.

As to ignoring the appreciation, that is a valid point that I missed. I would counter that my expenses were too low and my net income was too high and assumed 100% rental occupancy.
I did not mean that comment to be as harsh as it came out. I apologize.

But my experience in real estate investing is that the largest return almost always comes from price appreciation, and the tax advantages of depreciation is another large contributor to the overall return. But, that is on properties chosen to be rentals from the start.
barberakb
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Re: Buying second house - dilemma

Post by barberakb »

CurlyDave wrote: Fri Oct 09, 2020 12:47 am
JBTX wrote: Thu Oct 08, 2020 8:18 pm
CurlyDave wrote: Thu Oct 08, 2020 9:49 am
JBTX wrote: Wed Oct 07, 2020 9:31 pm Keeping and renting current house would be something like $15000 income on $500k of equity if mortgage were paid off. That's a pretty poor return on investment. About 3.0%...
As a long-time real estate investor and landlord, I laugh at that analysis. It does not take price appreciation into account, or the tax benefits of depreciation.

BUT, I do agree with the idea of not renting out this house. Being an accidental landlord seldom works out well. I would sell the current house, use some of the proceeds on a new one, and set aside some for a down payment on an investment property IF I wanted to own a rental.

Good rental properties are seldom the ones that an owner wants to personally live in. A rental should have plain, more utilitarian finish everywhere. Lower initial cost, more durable, and easier to maintain. And should be in a sound, but lower cost neighborhood.

Another point to consider is that if you rent this house out for too long you lose the tax exemption you get from selling.
I am glad i was able to amuse you.

As to ignoring the appreciation, that is a valid point that I missed. I would counter that my expenses were too low and my net income was too high and assumed 100% rental occupancy.
I did not mean that comment to be as harsh as it came out. I apologize.

But my experience in real estate investing is that the largest return almost always comes from price appreciation, and the tax advantages of depreciation is another large contributor to the overall return. But, that is on properties chosen to be rentals from the start.
What do you mean by the highlighted portion? You can claim depreciation on any rental units, even if they weren't rentals to begin with.
OP, we just bought our 2nd home. But we plan on using it and renting it as an airbnb for most of the year when we aren't there.
JBTX
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Re: Buying second house - dilemma

Post by JBTX »

barberakb wrote: Fri Oct 09, 2020 1:25 am
CurlyDave wrote: Fri Oct 09, 2020 12:47 am
JBTX wrote: Thu Oct 08, 2020 8:18 pm
CurlyDave wrote: Thu Oct 08, 2020 9:49 am
JBTX wrote: Wed Oct 07, 2020 9:31 pm Keeping and renting current house would be something like $15000 income on $500k of equity if mortgage were paid off. That's a pretty poor return on investment. About 3.0%...
As a long-time real estate investor and landlord, I laugh at that analysis. It does not take price appreciation into account, or the tax benefits of depreciation.

BUT, I do agree with the idea of not renting out this house. Being an accidental landlord seldom works out well. I would sell the current house, use some of the proceeds on a new one, and set aside some for a down payment on an investment property IF I wanted to own a rental.

Good rental properties are seldom the ones that an owner wants to personally live in. A rental should have plain, more utilitarian finish everywhere. Lower initial cost, more durable, and easier to maintain. And should be in a sound, but lower cost neighborhood.

Another point to consider is that if you rent this house out for too long you lose the tax exemption you get from selling.
I am glad i was able to amuse you.

As to ignoring the appreciation, that is a valid point that I missed. I would counter that my expenses were too low and my net income was too high and assumed 100% rental occupancy.
I did not mean that comment to be as harsh as it came out. I apologize.

But my experience in real estate investing is that the largest return almost always comes from price appreciation, and the tax advantages of depreciation is another large contributor to the overall return. But, that is on properties chosen to be rentals from the start.
What do you mean by the highlighted portion? You can claim depreciation on any rental units, even if they weren't rentals to begin with.
OP, we just bought our 2nd home. But we plan on using it and renting it as an airbnb for most of the year when we aren't there.
Not to speak for curlydave, but based upon his prior post, I think he is saying what makes a good rental property does not necessarily correlate with what you choose as your home.
Valuethinker
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Re: Buying second house - dilemma

Post by Valuethinker »

thedane wrote: Wed Oct 07, 2020 7:41 pm Team BH,

Need some help/input please regarding potentially buying a second property, which may be primary.

Currently:
  • Married, 30s, no kids (no plans for kids either)
  • Combined income around $230K /year. This year will be lower as wife has been out of work since mid-March due to serious health issue, that is almost gone, and she will be ready to work again. She may drop in income level if we move (see below). My income is around $155K. Some added benefits like stock award etc is not factored into my income on here
  • We live well below our means.
  • Own one house. Valued at approx. $450K-500K. 30 yr fixed at 3.5%, 20 years left / balance of $130K. Good equity of around $320K - $370K. Low property tax of around $1K /yr
  • No other loans/debts
  • Healthy 401Ks: $500K
  • Roth: $50K
  • Taxable: $75K
Dilemma:
Want to get out of big city, been looking at mountain property for some time (2+ years). Found good place for around $550K. Property taxes around $2K. Low ongoing utility costs etc. as place is mostly off grid. 90% solar, and 10% propane generator.
Do we:
  • Sell current property?
  • Keep current property and rent out? We could easily rent out for well above mortgage payment. Estimating rent of $1,700+ vs mortgage of $800
  • If keeping and rent out; do we dig into equity in primary residence for down payment on new house? Do we combine mortgages? How does this work. I am 100% a newbie with this process. Credit scores are 800++
  • Keep current house, buy mountain property, but split time between both locations and rent out mountain property part time a few months each year via AirBnb etc? Jobs allow for flexibility.
  • Are mortgage rates on a 2nd home, if keeping first home, still good?
EDIT:
We have an emergency fund not factored into the above - Good for 12 months of current living expenses

The only rationale for keeping the old home is because you might go back there, some day.

Otherwise you wind up with a considerable burden, when it was not your intention to go into the rental housing business?

AirBnB in a time of Covid-19 is problematic? I am pretty sure where I am located (UK) would require a deep, professional clean after every new visitor - that would get expensive, fast. Or you do it yourself and risk exposure.

If you are seeking a lifestyle change my thought would be to rent out there for a year and find out if it works. For example teenage kids would hate to be isolated away from all their friends for an extended period (as has happened in Covid-19 areas, of course). As you age you need more access to acute medical care (after nearly 30 years of retired country life, my aunt is now having chemotherapy).

If you seriously contemplate the dual life I would look into a city centre condo. They might be cheaper right now given virus.
CurlyDave
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Re: Buying second house - dilemma

Post by CurlyDave »

JBTX wrote: Fri Oct 09, 2020 1:50 am
barberakb wrote: Fri Oct 09, 2020 1:25 am
CurlyDave wrote: Fri Oct 09, 2020 12:47 am
...But my experience in real estate investing is that the largest return almost always comes from price appreciation, and the tax advantages of depreciation is another large contributor to the overall return. But, that is on properties chosen to be rentals from the start.
What do you mean by the highlighted portion? You can claim depreciation on any rental units, even if they weren't rentals to begin with.
OP, we just bought our 2nd home. But we plan on using it and renting it as an airbnb for most of the year when we aren't there.
Not to speak for curlydave, but based upon his prior post, I think he is saying what makes a good rental property does not necessarily correlate with what you choose as your home.
JBTX is exactly right.

Obviously real estate investors can do well with many different business models, but DW and I chose to get started in smaller SFHs in sound but not luxurious neighborhoods. We chose houses utilitarian features, and tried to ones that were priced below average for the market and neighborhood. Usually because of a curable defect of some sort that the current owners were not interested in curing and wanted to sell "as is".

These are the houses where the potential for price appreciation through minor improvements is the greatest for a small operator.

Now clearly there are investors who do well with big, flashy, high end properties, but for the beginner it is better to make your mistakes on less expensive properties.

And, price appreciation works best for you when you are leveraged. In the OP's case, there had already been so much price appreciation that the property was underleveraged. Since I view real estate investment as a business, this represents poor capital utilization. Being debt free on a personal residence is frequently desired on this site, but rentals are a different story.
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Re: Buying second house - dilemma

Post by willthrill81 »

CurlyDave wrote: Fri Oct 09, 2020 12:38 am
willthrill81 wrote: Thu Oct 08, 2020 8:33 pm
...How much price appreciation will the house experience? That's an unknown. Cash flows, on the other hand, are known.
The OP mention a purchase price and a current value, this determines a CAGR. Sure there are unknowns in projecting it into the future, but cash flows for stocks didn't come down the mountain engraved on Moses' tablets. Lots of unknowns there also, but most of us put money into stocks.
Stocks and rental properties are so disparate from each other that such a comparison is not practical or meaningful. A big portion of stocks' long-term returns have come from capital appreciation. That's not been the case with most rental properties.
CurlyDave wrote: Fri Oct 09, 2020 12:38 am Actually, CAGRs for real estate are documented for longer than stocks, probably much longer.
Yep. Shiller examined that. Here's what he found.
From 1890 to 1990 the appreciation in US housing was just about zero. That amazes people, but it shouldn’t be so amazing because the cost of construction and labor has been going down.
https://www.pragcap.com/robert-shiller- ... n-housing/

Therefore, betting on higher appreciation than that is just that, betting (i.e. speculation).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Buying second house - dilemma

Post by CurlyDave »

willthrill81 wrote: Fri Oct 09, 2020 10:10 am
CurlyDave wrote: Fri Oct 09, 2020 12:38 am
willthrill81 wrote: Thu Oct 08, 2020 8:33 pm
...How much price appreciation will the house experience? That's an unknown. Cash flows, on the other hand, are known.
The OP mention a purchase price and a current value, this determines a CAGR. Sure there are unknowns in projecting it into the future, but cash flows for stocks didn't come down the mountain engraved on Moses' tablets. Lots of unknowns there also, but most of us put money into stocks.
Stocks and rental properties are so disparate from each other that such a comparison is not practical or meaningful. A big portion of stocks' long-term returns have come from capital appreciation. That's not been the case with most rental properties.
CurlyDave wrote: Fri Oct 09, 2020 12:38 am Actually, CAGRs for real estate are documented for longer than stocks, probably much longer.
Yep. Shiller examined that. Here's what he found.
From 1890 to 1990 the appreciation in US housing was just about zero. That amazes people, but it shouldn’t be so amazing because the cost of construction and labor has been going down.
https://www.pragcap.com/robert-shiller- ... n-housing/

Therefore, betting on higher appreciation than that is just that, betting (i.e. speculation).
Even if we take Schiller as the absolute truth (remembering that the data analyzed stops in 1990), all it really says is that buying outright or being underleveraged is not going to be helpful. If I buy with 20% down, the leverage will give me a nominal return of 5 times inflation, a real return of 4 times inflation. And, if I look hard enough I can find properties where the rents pay the PITI and allow a small set-aside for maintenance and improvements. And, if I hold for the mortgage term, viola! the tenants have paid off my mortgage returning all of my original capital to me.

The best inflation estimates I can find are about 2.6% over the time period in question, although there is variation. So capital appreciation on a property bought in 1890 with 20% down would be a CAGR of 10.4% real and 13% nominal. This compares very well with stock returns over the same period.

And, while everyone can't do it, any reasonably handy person can put sweat equity into real property. I can't buy AAPL and offer to cut their lawn every week for a higher dividend.
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Re: Buying second house - dilemma

Post by JBTX »

willthrill81 wrote: Fri Oct 09, 2020 10:10 am
CurlyDave wrote: Fri Oct 09, 2020 12:38 am
willthrill81 wrote: Thu Oct 08, 2020 8:33 pm
...How much price appreciation will the house experience? That's an unknown. Cash flows, on the other hand, are known.
The OP mention a purchase price and a current value, this determines a CAGR. Sure there are unknowns in projecting it into the future, but cash flows for stocks didn't come down the mountain engraved on Moses' tablets. Lots of unknowns there also, but most of us put money into stocks.
Stocks and rental properties are so disparate from each other that such a comparison is not practical or meaningful. A big portion of stocks' long-term returns have come from capital appreciation. That's not been the case with most rental properties.
CurlyDave wrote: Fri Oct 09, 2020 12:38 am Actually, CAGRs for real estate are documented for longer than stocks, probably much longer.
Yep. Shiller examined that. Here's what he found.
From 1890 to 1990 the appreciation in US housing was just about zero. That amazes people, but it shouldn’t be so amazing because the cost of construction and labor has been going down.
https://www.pragcap.com/robert-shiller- ... n-housing/

Therefore, betting on higher appreciation than that is just that, betting (i.e. speculation).
Schiller data is real returns. There is still nominal appreciation. And if you leverage, financing payments are fixed, and if they are (mostly) covered by cash flow, in time your leveraged return will exceed inflation.

Of course, there are risks of price downturns, recessions that reduce rents/cash flows, and the personal time invested, which of course is worth something.
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Re: Buying second house - dilemma

Post by tomtoms »

willthrill81 wrote: Fri Oct 09, 2020 10:10 am
CurlyDave wrote: Fri Oct 09, 2020 12:38 am
willthrill81 wrote: Thu Oct 08, 2020 8:33 pm
...How much price appreciation will the house experience? That's an unknown. Cash flows, on the other hand, are known.
The OP mention a purchase price and a current value, this determines a CAGR. Sure there are unknowns in projecting it into the future, but cash flows for stocks didn't come down the mountain engraved on Moses' tablets. Lots of unknowns there also, but most of us put money into stocks.
Stocks and rental properties are so disparate from each other that such a comparison is not practical or meaningful. A big portion of stocks' long-term returns have come from capital appreciation. That's not been the case with most rental properties.
CurlyDave wrote: Fri Oct 09, 2020 12:38 am Actually, CAGRs for real estate are documented for longer than stocks, probably much longer.
Yep. Shiller examined that. Here's what he found.
From 1890 to 1990 the appreciation in US housing was just about zero. That amazes people, but it shouldn’t be so amazing because the cost of construction and labor has been going down.
https://www.pragcap.com/robert-shiller- ... n-housing/

Therefore, betting on higher appreciation than that is just that, betting (i.e. speculation).
This analysis is a bit amateurish. People need to differentiate between someone who doesn’t own rental vs. accidental landlord vs. real estate investor.
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Re: Buying second house - dilemma

Post by willthrill81 »

CurlyDave wrote: Fri Oct 09, 2020 11:50 am
willthrill81 wrote: Fri Oct 09, 2020 10:10 am
CurlyDave wrote: Fri Oct 09, 2020 12:38 am
willthrill81 wrote: Thu Oct 08, 2020 8:33 pm
...How much price appreciation will the house experience? That's an unknown. Cash flows, on the other hand, are known.
The OP mention a purchase price and a current value, this determines a CAGR. Sure there are unknowns in projecting it into the future, but cash flows for stocks didn't come down the mountain engraved on Moses' tablets. Lots of unknowns there also, but most of us put money into stocks.
Stocks and rental properties are so disparate from each other that such a comparison is not practical or meaningful. A big portion of stocks' long-term returns have come from capital appreciation. That's not been the case with most rental properties.
CurlyDave wrote: Fri Oct 09, 2020 12:38 am Actually, CAGRs for real estate are documented for longer than stocks, probably much longer.
Yep. Shiller examined that. Here's what he found.
From 1890 to 1990 the appreciation in US housing was just about zero. That amazes people, but it shouldn’t be so amazing because the cost of construction and labor has been going down.
https://www.pragcap.com/robert-shiller- ... n-housing/

Therefore, betting on higher appreciation than that is just that, betting (i.e. speculation).
Even if we take Schiller as the absolute truth (remembering that the data analyzed stops in 1990), all it really says is that buying outright or being underleveraged is not going to be helpful. If I buy with 20% down, the leverage will give me a nominal return of 5 times inflation, a real return of 4 times inflation.
JBTX wrote: Fri Oct 09, 2020 12:09 pm Schiller data is real returns. There is still nominal appreciation. And if you leverage, financing payments are fixed, and if they are (mostly) covered by cash flow, in time your leveraged return will exceed inflation.
Call me an old fogey, but something about the logic of 'We can turn this mediocre investment into a great one by just turning up the leverage' just really rubs me the wrong way, probably because, as JBTX pointed out, the risk level is being ramped up. Many who were sold on the idea of leveraging properties to the hilt went bankrupt about a decade ago.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Buying second house - dilemma

Post by JBTX »

willthrill81 wrote: Fri Oct 09, 2020 4:55 pm
CurlyDave wrote: Fri Oct 09, 2020 11:50 am
willthrill81 wrote: Fri Oct 09, 2020 10:10 am
CurlyDave wrote: Fri Oct 09, 2020 12:38 am
willthrill81 wrote: Thu Oct 08, 2020 8:33 pm
...How much price appreciation will the house experience? That's an unknown. Cash flows, on the other hand, are known.
The OP mention a purchase price and a current value, this determines a CAGR. Sure there are unknowns in projecting it into the future, but cash flows for stocks didn't come down the mountain engraved on Moses' tablets. Lots of unknowns there also, but most of us put money into stocks.
Stocks and rental properties are so disparate from each other that such a comparison is not practical or meaningful. A big portion of stocks' long-term returns have come from capital appreciation. That's not been the case with most rental properties.
CurlyDave wrote: Fri Oct 09, 2020 12:38 am Actually, CAGRs for real estate are documented for longer than stocks, probably much longer.
Yep. Shiller examined that. Here's what he found.
From 1890 to 1990 the appreciation in US housing was just about zero. That amazes people, but it shouldn’t be so amazing because the cost of construction and labor has been going down.
https://www.pragcap.com/robert-shiller- ... n-housing/

Therefore, betting on higher appreciation than that is just that, betting (i.e. speculation).
Even if we take Schiller as the absolute truth (remembering that the data analyzed stops in 1990), all it really says is that buying outright or being underleveraged is not going to be helpful. If I buy with 20% down, the leverage will give me a nominal return of 5 times inflation, a real return of 4 times inflation.
JBTX wrote: Fri Oct 09, 2020 12:09 pm Schiller data is real returns. There is still nominal appreciation. And if you leverage, financing payments are fixed, and if they are (mostly) covered by cash flow, in time your leveraged return will exceed inflation.
Call me an old fogey, but something about the logic of 'We can turn this mediocre investment into a great one by just turning up the leverage' just really rubs me the wrong way, probably because, as JBTX pointed out, the risk level is being ramped up. Many who were sold on the idea of leveraging properties to the hilt went bankrupt about a decade ago.
From what I have seen the math and time commitment don't work for me, but if you don't overleverage and stay the course, with low rates you can likely make a modest positive return.
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Re: Buying second house - dilemma

Post by willthrill81 »

JBTX wrote: Fri Oct 09, 2020 5:31 pm
willthrill81 wrote: Fri Oct 09, 2020 4:55 pm
CurlyDave wrote: Fri Oct 09, 2020 11:50 am
willthrill81 wrote: Fri Oct 09, 2020 10:10 am
CurlyDave wrote: Fri Oct 09, 2020 12:38 am

The OP mention a purchase price and a current value, this determines a CAGR. Sure there are unknowns in projecting it into the future, but cash flows for stocks didn't come down the mountain engraved on Moses' tablets. Lots of unknowns there also, but most of us put money into stocks.
Stocks and rental properties are so disparate from each other that such a comparison is not practical or meaningful. A big portion of stocks' long-term returns have come from capital appreciation. That's not been the case with most rental properties.
CurlyDave wrote: Fri Oct 09, 2020 12:38 am Actually, CAGRs for real estate are documented for longer than stocks, probably much longer.
Yep. Shiller examined that. Here's what he found.
From 1890 to 1990 the appreciation in US housing was just about zero. That amazes people, but it shouldn’t be so amazing because the cost of construction and labor has been going down.
https://www.pragcap.com/robert-shiller- ... n-housing/

Therefore, betting on higher appreciation than that is just that, betting (i.e. speculation).
Even if we take Schiller as the absolute truth (remembering that the data analyzed stops in 1990), all it really says is that buying outright or being underleveraged is not going to be helpful. If I buy with 20% down, the leverage will give me a nominal return of 5 times inflation, a real return of 4 times inflation.
JBTX wrote: Fri Oct 09, 2020 12:09 pm Schiller data is real returns. There is still nominal appreciation. And if you leverage, financing payments are fixed, and if they are (mostly) covered by cash flow, in time your leveraged return will exceed inflation.
Call me an old fogey, but something about the logic of 'We can turn this mediocre investment into a great one by just turning up the leverage' just really rubs me the wrong way, probably because, as JBTX pointed out, the risk level is being ramped up. Many who were sold on the idea of leveraging properties to the hilt went bankrupt about a decade ago.
From what I have seen the math and time commitment don't work for me, but if you don't overleverage and stay the course, with low rates you can likely make a modest positive return.
Yes, I agree with that. I don't think that rental real estate is appropriate for most investors, but I do think that it can be a valuable addition to a portfolio comprised of 'paper' assets.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Buying second house - dilemma

Post by av111 »

CurlyDave wrote: Fri Oct 09, 2020 12:47 am
JBTX wrote: Thu Oct 08, 2020 8:18 pm
CurlyDave wrote: Thu Oct 08, 2020 9:49 am
JBTX wrote: Wed Oct 07, 2020 9:31 pm Keeping and renting current house would be something like $15000 income on $500k of equity if mortgage were paid off. That's a pretty poor return on investment. About 3.0%...
As a long-time real estate investor and landlord, I laugh at that analysis. It does not take price appreciation into account, or the tax benefits of depreciation.

BUT, I do agree with the idea of not renting out this house. Being an accidental landlord seldom works out well. I would sell the current house, use some of the proceeds on a new one, and set aside some for a down payment on an investment property IF I wanted to own a rental.

Good rental properties are seldom the ones that an owner wants to personally live in. A rental should have plain, more utilitarian finish everywhere. Lower initial cost, more durable, and easier to maintain. And should be in a sound, but lower cost neighborhood.

Another point to consider is that if you rent this house out for too long you lose the tax exemption you get from selling.
I am glad i was able to amuse you.

As to ignoring the appreciation, that is a valid point that I missed. I would counter that my expenses were too low and my net income was too high and assumed 100% rental occupancy.
I did not mean that comment to be as harsh as it came out. I apologize.

But my experience in real estate investing is that the largest return almost always comes from price appreciation, and the tax advantages of depreciation is another large contributor to the overall return. But, that is on properties chosen to be rentals from the start.
CurlyDave

Good points.

OP

Important other benefits , you eat your cake {get rent) while cake (your equity) becomes bigger. When you want a still bigger cake you can sell the big cake and buy a bigger one and use a 1031 exchange to defer taxes.

Only thing is it takes work. So expect to spend 20 hours every year in self managing the rental
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Re: Buying second house - dilemma

Post by willthrill81 »

CurlyDave wrote: Fri Oct 09, 2020 12:47 am But my experience in real estate investing is that the largest return almost always comes from price appreciation, and the tax advantages of depreciation is another large contributor to the overall return. But, that is on properties chosen to be rentals from the start.
I do not doubt that at all, especially if you've purchased homes in HCOL areas over the last twenty years. But that still doesn't change the fact that price appreciation in real estate is speculative. Real estate, whether a specific plot or in general, is not guaranteed to outperform or even match inflation over any given period of time. The real estate investors I personally know who have been successful focus entirely on the returns generated from cash flows when evaluating potential properties and do not try to forecast appreciation at all unless it's forced via improvement of the property.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Buying second house - dilemma

Post by finite_difference »

If you can rent a $500k home in your city for $1700/month, can you rent a $500k mountain house for $1700/month? I would try renting for a year to see if you like it.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
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Re: Buying second house - dilemma

Post by tomtoms »

willthrill81 wrote: Fri Oct 09, 2020 7:58 pm
JBTX wrote: Fri Oct 09, 2020 5:31 pm
willthrill81 wrote: Fri Oct 09, 2020 4:55 pm
CurlyDave wrote: Fri Oct 09, 2020 11:50 am
willthrill81 wrote: Fri Oct 09, 2020 10:10 am

Stocks and rental properties are so disparate from each other that such a comparison is not practical or meaningful. A big portion of stocks' long-term returns have come from capital appreciation. That's not been the case with most rental properties.



Yep. Shiller examined that. Here's what he found.


https://www.pragcap.com/robert-shiller- ... n-housing/

Therefore, betting on higher appreciation than that is just that, betting (i.e. speculation).
Even if we take Schiller as the absolute truth (remembering that the data analyzed stops in 1990), all it really says is that buying outright or being underleveraged is not going to be helpful. If I buy with 20% down, the leverage will give me a nominal return of 5 times inflation, a real return of 4 times inflation.
JBTX wrote: Fri Oct 09, 2020 12:09 pm Schiller data is real returns. There is still nominal appreciation. And if you leverage, financing payments are fixed, and if they are (mostly) covered by cash flow, in time your leveraged return will exceed inflation.
Call me an old fogey, but something about the logic of 'We can turn this mediocre investment into a great one by just turning up the leverage' just really rubs me the wrong way, probably because, as JBTX pointed out, the risk level is being ramped up. Many who were sold on the idea of leveraging properties to the hilt went bankrupt about a decade ago.
From what I have seen the math and time commitment don't work for me, but if you don't overleverage and stay the course, with low rates you can likely make a modest positive return.
Yes, I agree with that. I don't think that rental real estate is appropriate for most investors, but I do think that it can be a valuable addition to a portfolio comprised of 'paper' assets.
Most people can’t afford to buy rentals. Problem solved.
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Re: Buying second house - dilemma

Post by tomtoms »

willthrill81 wrote: Fri Oct 09, 2020 9:07 pm
CurlyDave wrote: Fri Oct 09, 2020 12:47 am But my experience in real estate investing is that the largest return almost always comes from price appreciation, and the tax advantages of depreciation is another large contributor to the overall return. But, that is on properties chosen to be rentals from the start.
I do not doubt that at all, especially if you've purchased homes in HCOL areas over the last twenty years. But that still doesn't change the fact that price appreciation in real estate is speculative. Real estate, whether a specific plot or in general, is not guaranteed to outperform or even match inflation over any given period of time. The real estate investors I personally know who have been successful focus entirely on the returns generated from cash flows when evaluating potential properties and do not try to forecast appreciation at all unless it's forced via improvement of the property.
You have to realize there are many different ways to make money in real estate. There is no one business model.

I know people who make money from rent. I know people who make money from appreciation. I know people who make money from buying fixers.

Forget what you have been reading from some real estate guru who is trying to sell you the secret of making money in real estate.
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Re: Buying second house - dilemma

Post by willthrill81 »

tomtoms wrote: Fri Oct 09, 2020 9:39 pm
willthrill81 wrote: Fri Oct 09, 2020 9:07 pm
CurlyDave wrote: Fri Oct 09, 2020 12:47 am But my experience in real estate investing is that the largest return almost always comes from price appreciation, and the tax advantages of depreciation is another large contributor to the overall return. But, that is on properties chosen to be rentals from the start.
I do not doubt that at all, especially if you've purchased homes in HCOL areas over the last twenty years. But that still doesn't change the fact that price appreciation in real estate is speculative. Real estate, whether a specific plot or in general, is not guaranteed to outperform or even match inflation over any given period of time. The real estate investors I personally know who have been successful focus entirely on the returns generated from cash flows when evaluating potential properties and do not try to forecast appreciation at all unless it's forced via improvement of the property.
You have to realize there are many different ways to make money in real estate. There is no one business model.

I know people who make money from rent. I know people who make money from appreciation. I know people who make money from buying fixers.

Forget what you have been reading from some real estate guru who is trying to sell you the secret of making money in real estate.
The only 'real estate guru' I ever paid any attention to was advocating intense leveraging of real estate and never paying down mortgages, ever. He probably went bankrupt a decade ago. The individuals I was speaking of are friends and family members who've been doing it for decades, not some random guy on the net.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Buying second house - dilemma

Post by tomtoms »

willthrill81 wrote: Fri Oct 09, 2020 9:55 pm
tomtoms wrote: Fri Oct 09, 2020 9:39 pm
willthrill81 wrote: Fri Oct 09, 2020 9:07 pm
CurlyDave wrote: Fri Oct 09, 2020 12:47 am But my experience in real estate investing is that the largest return almost always comes from price appreciation, and the tax advantages of depreciation is another large contributor to the overall return. But, that is on properties chosen to be rentals from the start.
I do not doubt that at all, especially if you've purchased homes in HCOL areas over the last twenty years. But that still doesn't change the fact that price appreciation in real estate is speculative. Real estate, whether a specific plot or in general, is not guaranteed to outperform or even match inflation over any given period of time. The real estate investors I personally know who have been successful focus entirely on the returns generated from cash flows when evaluating potential properties and do not try to forecast appreciation at all unless it's forced via improvement of the property.
You have to realize there are many different ways to make money in real estate. There is no one business model.

I know people who make money from rent. I know people who make money from appreciation. I know people who make money from buying fixers.

Forget what you have been reading from some real estate guru who is trying to sell you the secret of making money in real estate.
The only 'real estate guru' I ever paid any attention to was advocating intense leveraging of real estate and never paying down mortgages, ever. He probably went bankrupt a decade ago. The individuals I was speaking of are friends and family members who've been doing it for decades, not some random guy on the net.
You should ask them how they are doing this year. Landlords who focus primarily on rent (apt/condo) are not doing as well as landlords who own single family homes. Real estate is complex. There are different ways to make money.
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Re: Buying second house - dilemma

Post by willthrill81 »

tomtoms wrote: Sat Oct 10, 2020 10:34 am
willthrill81 wrote: Fri Oct 09, 2020 9:55 pm
tomtoms wrote: Fri Oct 09, 2020 9:39 pm
willthrill81 wrote: Fri Oct 09, 2020 9:07 pm
CurlyDave wrote: Fri Oct 09, 2020 12:47 am But my experience in real estate investing is that the largest return almost always comes from price appreciation, and the tax advantages of depreciation is another large contributor to the overall return. But, that is on properties chosen to be rentals from the start.
I do not doubt that at all, especially if you've purchased homes in HCOL areas over the last twenty years. But that still doesn't change the fact that price appreciation in real estate is speculative. Real estate, whether a specific plot or in general, is not guaranteed to outperform or even match inflation over any given period of time. The real estate investors I personally know who have been successful focus entirely on the returns generated from cash flows when evaluating potential properties and do not try to forecast appreciation at all unless it's forced via improvement of the property.
You have to realize there are many different ways to make money in real estate. There is no one business model.

I know people who make money from rent. I know people who make money from appreciation. I know people who make money from buying fixers.

Forget what you have been reading from some real estate guru who is trying to sell you the secret of making money in real estate.
The only 'real estate guru' I ever paid any attention to was advocating intense leveraging of real estate and never paying down mortgages, ever. He probably went bankrupt a decade ago. The individuals I was speaking of are friends and family members who've been doing it for decades, not some random guy on the net.
You should ask them how they are doing this year. Landlords who focus primarily on rent (apt/condo) are not doing as well as landlords who own single family homes. Real estate is complex. There are different ways to make money.
They are long-term investors (decamillionaires BTW) who are not concerned about a single year's performance.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Buying second house - dilemma

Post by enclee »

CurlyDave wrote: Thu Oct 08, 2020 9:49 am
JBTX wrote: Wed Oct 07, 2020 9:31 pm Keeping and renting current house would be something like $15000 income on $500k of equity if mortgage were paid off. That's a pretty poor return on investment. About 3.0%...
As a long-time real estate investor and landlord, I laugh at that analysis. It does not take price appreciation into account, or the tax benefits of depreciation.

BUT, I do agree with the idea of not renting out this house. Being an accidental landlord seldom works out well. I would sell the current house, use some of the proceeds on a new one, and set aside some for a down payment on an investment property IF I wanted to own a rental.

Good rental properties are seldom the ones that an owner wants to personally live in. A rental should have plain, more utilitarian finish everywhere. Lower initial cost, more durable, and easier to maintain. And should be in a sound, but lower cost neighborhood.

Another point to consider is that if you rent this house out for too long you lose the tax exemption you get from selling.
Sounds great to consider appreciation, but that's not something that can reliably forecasted. SFH buyers aren't looking at the total property cost when they borrow, but are looking at borrowing a monthly payment. Interest rates are historically low and that's skewing values to be higher. So, it does give me some pause in my own real estate ventures to more closely consider local economies, industry, and income levels. Real estate is all local though, and just like you mentioned this property wasn't purchased as a rental.

All the money is made on the buy, and the OP captured significant appreciation already. They won, time to leave the table and cash out.
bltn
Posts: 881
Joined: Mon Feb 20, 2017 9:32 pm

Re: Buying second house - dilemma

Post by bltn »

willthrill81 wrote: Sat Oct 10, 2020 10:42 am
tomtoms wrote: Sat Oct 10, 2020 10:34 am
willthrill81 wrote: Fri Oct 09, 2020 9:55 pm
tomtoms wrote: Fri Oct 09, 2020 9:39 pm
willthrill81 wrote: Fri Oct 09, 2020 9:07 pm

I do not doubt that at all, especially if you've purchased homes in HCOL areas over the last twenty years. But that still doesn't change the fact that price appreciation in real estate is speculative. Real estate, whether a specific plot or in general, is not guaranteed to outperform or even match inflation over any given period of time. The real estate investors I personally know who have been successful focus entirely on the returns generated from cash flows when evaluating potential properties and do not try to forecast appreciation at all unless it's forced via improvement of the property.
You have to realize there are many different ways to make money in real estate. There is no one business model.

I know people who make money from rent. I know people who make money from appreciation. I know people who make money from buying fixers.

Forget what you have been reading from some real estate guru who is trying to sell you the secret of making money in real estate.
The only 'real estate guru' I ever paid any attention to was advocating intense leveraging of real estate and never paying down mortgages, ever. He probably went bankrupt a decade ago. The individuals I was speaking of are friends and family members who've been doing it for decades, not some random guy on the net.
You should ask them how they are doing this year. Landlords who focus primarily on rent (apt/condo) are not doing as well as landlords who own single family homes. Real estate is complex. There are different ways to make money.
They are long-term investors (decamillionaires BTW) who are not concerned about a single year's performance.
Real estate investing is generally much more complicated than passively investing in the stock market. Or, put another way, more speculative. And usually no more lucrative than stock market indexing.

And usually more effort intensive. I have a friend who combined several vacation condominium investments into one large, expensive ocean front rental condominium, which he sometimes uses. He gets around some of the effort needed to maintain this investment by paying for management. The management fee is 30% of the gross! From my limited experience in the past with rental residential real estate investment, making money with a 30% management fee will require unusual appreciation in property value. It s hard to count on that.
av111
Posts: 104
Joined: Mon Jan 26, 2015 1:27 pm

Re: Buying second house - dilemma

Post by av111 »

bltn wrote: Sat Oct 10, 2020 11:38 am by paying for management. The management fee is 30% of the gross! From my limited experience in the past with rental residential real estate investment, making money with a 30% management fee will require unusual appreciation in property value. It s hard to count on that.
Bltn

Vacation rentals collect cleaning fee for every occupancy. Quite possibly 30% includes these services

No one should buy rental homes when they don't want to. But don't think your friend is losing money because rental is not a good decision for him. He may be making a killing (or not, we won't know until he posts) with the beachfront condo with very minor inconveniences
AV111
BrooklynInvest
Posts: 273
Joined: Sun Jul 28, 2013 9:23 am

Re: Buying second house - dilemma

Post by BrooklynInvest »

I rent out 1 1/2 floors in my brownstone. I've found:
  • Over the very long term the finances have worked out well for me but my reduction in costs + increase in rent I get now is a function of reinvestment, time and luck that rates declined. Future performance will very

    It's frequent work and occasional stress. Over time I've built a good list of contractors and fixers that help and are cost effective but I still have twice as may things going wrong as someone with a 1-family house.

    Sometimes you'll have tenants that'll increase the stress. Sometimes the opposite

    I benefit greatly from the fact that my rental is downstairs. I can fix what I can (not much admittedly!) easily. Distance is gonna complicate things and/or increase the cost

I guess the question is this - If you didn't already own the property would you buy it as an investment? If not, there's the answer. One counter-argument. You're thinking about making a big change. What if you don't like it? Would a feasible plan be rent just as a means of delaying the sale in case you wanna come back? Good luck!
bacon4retirement
Posts: 43
Joined: Sun Apr 19, 2020 9:59 pm

Re: Buying second house - dilemma

Post by bacon4retirement »

thedane wrote: Wed Oct 07, 2020 7:41 pm Low ongoing utility costs etc. as place is mostly off grid. 90% solar, and 10% propane generator.
Not sure what mostly off-grid means, and whether this just electricity or heat as well. The total cost of utilities is often much higher for offgrid houses than a comparable on-grid house, otherwise we would all be off the grid :wink: . If the place has recently been fitted with new panels/batteries/generator, the ongoing cost may be low until equipment needs replacing. In some cases off-grid living might appear cheaper because of large behavioral changes result in much lower electricity consumption and a higher tolerance for time spent futzing with equipment.
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