Sell or keep low mortgage house?

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thedele
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Joined: Thu Mar 19, 2015 1:00 pm

Sell or keep low mortgage house?

Post by thedele »

Married couple around 40 with a young child.

We live in a VHCOL in a condo worth about $1.1M, with a 15 year 2.8% mortgage that’s currently costing us $4k a month. We have 9 years left on the mortgage.

We would like to upgrade for more space and a better school district (the current one is ok for now but we will have to consider private in a few years if we stay). The ones that meet our needs are in $1.5m-$1.8m range, sadly.

My feeling is that we should keep and rent our current house for its unbeatable mortgage rate. It has only appreciated by about $120k since we bought it. We could get at least $4.5k in rent (as it’s a desirable location for renters), which would allow us to break even comfortably for 9 years and then provide a stream of income. However, not having that equity does mean a higher mortgage on a new house to the tune of $2k more a month for 30 years, which feels like a lot at our age.

Our financials:
$1.5m in taxable retirement
$1.1m in tax advantaged retirement
$120k in college savings
$800k in non-retirement earmarked investments
Household income $600k on average, but one of our jobs is in the tech industry which is prone to instability.
Jeepguy
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Re: Sell or keep low mortgage house?

Post by Jeepguy »

What do you owe on your condo?
grkmec
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Re: Sell or keep low mortgage house?

Post by grkmec »

What’s the cap rate on the condo ?

Take $4.5k * 12 months = $54k
Less taxes
Less HOA
Less Insurance
= ???

I am guessing 35-40k ?

That implies a cap rate of low to mid 3%?

That’s not good. If you didn’t own this condo today as an investment and I offered you a 2.8% loan, would you buy it ?
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cchrissyy
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Re: Sell or keep low mortgage house?

Post by cchrissyy »

a great rate doesn't turn a bad rental into a good idea

keep in mind if you rent it out, barely breaking even, you are paying much more on the new condo's mortgage because the decision to keep this means you had to take out a higher loan at higher interest.
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safari
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Re: Sell or keep low mortgage house?

Post by safari »

Personally I would sell the condo for these reasons:

1. Are you sure you want to be a landlord? It's not for everyone. The low rate you have right now should not factor into this.
2. Would you want to deal with the tenants? Sure, you could hire a management company, but that will eat into the profit.
3. You will have to get a larger mortgage on your new place at the high interest. It would be better to put more money down, using the sales proceeds from your old condo.
4. You could only deduct the interest on up to $750K of your mortgage debt (assuming you're itemizing deductions, given your income).
5. This will tie up a lot of money in an illiquid asset.
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Metsfan91
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Re: Sell or keep low mortgage house?

Post by Metsfan91 »

Sell it. No need to deal with renters.
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Watty
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Re: Sell or keep low mortgage house?

Post by Watty »

Jeepguy wrote: Sat Feb 10, 2024 8:50 pm What do you owe on your condo?
One of the most important figures which was not included in the post. :oops:

thedele wrote: Sat Feb 10, 2024 8:28 pm We could get at least $4.5k in rent (as it’s a desirable location for renters), which would allow us to break even comfortably for 9 years and then provide a stream of income.
It would be good if you could show your math for that since you may have left out things like;

1) vacancies, refreshing the condo between tenants, and the occasional bad tenant or even the tenant from hell.

2) A property management company. You make really good money in your day jobs so you really need to have a property manager so that you do not need to do things like take the afternoon off with short notice. You also need someone to handle the property if you are out of town on business or a overseas on a two week vacation.

3) If you have $500K in home equity then the mortgage on your next house will be $500K larger if you do not sell the condo. That means that your new 6.5%(ish) mortgage payment will be about $3,000 a month larger. To truly break even you would also need to pay that out of your rent payment.
toddthebod
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Re: Sell or keep low mortgage house?

Post by toddthebod »

thedele wrote: Sat Feb 10, 2024 8:28 pm However, not having that equity does mean a higher mortgage on a new house to the tune of $2k more a month for 30 years, which feels like a lot at our age.
You are paying $6,000/month to keep a condo that rents for $4,500. Seems like a terrible deal.
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lakpr
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Re: Sell or keep low mortgage house?

Post by lakpr »

Jeepguy wrote: Sat Feb 10, 2024 8:50 pm What do you owe on your condo?
IF that $4k figure includes only principal and interest, the outstanding loan seems to be between $380k and $385k. Mortgage amortization calculator says the monthly payment on a 2.8% mortgage with 9 years left on a $380k principal is $3984, and $385k principal is $4037.
https://www.mortgagecalculator.org/?q=d4n2d-1KW
bradinsky
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Re: Sell or keep low mortgage house?

Post by bradinsky »

To make it worth keeping as a rental, you should be getting somewhere between $8K & $9K per month. If not, sell it. Keeping it & losing money every month would be a less than intelligent decision on your part!
Bikesy
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Re: Sell or keep low mortgage house?

Post by Bikesy »

There's no way to do this analysis without knowing what you owe on the condo. The more equity you have the more you should lean toward selling and rolling that money into your new mortgage. One pro for keeping it that a lot of people gloss over is the debt amortization. You're on a 15 year so a good chunk of the 4k payment is actually principal pay down which is adding to your net worth.
Topic Author
thedele
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Re: Sell or keep low mortgage house?

Post by thedele »

Sorry, should have mentioned we owe $300k on the condo. The $4k monthly payments include taxes and HOA.
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snackdog
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Re: Sell or keep low mortgage house?

Post by snackdog »

Sell condo for $1.1MM, pocket $700k after selling costs, cap gain tax and mortgage payoff. Invest $200k in VTSAX hoping for long term return of 7% or $1200/mo. Purchase new home with $500k down, $1MM borrowed on a 5/1/30 Jumbo ARM for 6.125% and ~$6,100/mo P&I. $6100-1200= $4900/mo.

or
Keep condo. Keep for $4000/mo PITH plus long term costs of $12,000/yr for rental insurance, vacancies, prop management help, and repairs. (insurance = $1k, one mo vacancy = $4500; prop management 10% = $450/mo, repairs/improvements 0.5% of value = $5000/yr). Total monthly cost $5000 minus $4500 rent = $500/mo cost. Take $500,000 out of savings for down payment (lose 7% annual long term appreciation or $3000/mo). Total cost $6100+$500+3000=$9,600/mo cost.

QED. Check my math and assumptions!
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skp
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Re: Sell or keep low mortgage house?

Post by skp »

Sell condo for $1.1MM, pocket $700k after selling costs, cap gain tax and mortgage payoff. Invest $200k in VTSAX hoping for long term return of 7% or $1200/mo. Purchase new home with $500k down, $1MM borrowed on a 5/1/30 Jumbo ARM for 6.125% and ~$6,100/mo P&I. $6100-1200= $4900/mo.

or
Keep condo. Keep for $4000/mo PITH plus long term costs of $12,000/yr for rental insurance, vacancies, prop management help, and repairs. (insurance = $1k, one mo vacancy = $4500; prop management 10% = $450/mo, repairs/improvements 0.5% of value = $5000/yr). Total monthly cost $5000 minus $4500 rent = $500/mo cost. Take $500,000 out of savings for down payment (lose 7% annual long term appreciation or $3000/mo). Total cost $6100+$500+3000=$9,600/mo cost.

QED. Check my math and assumptions!
[/quote]

How about Not moving and staying put. Whats the math on that? And it's at least worth look if I liked the house. In 9 years it will be paid off. The higher taxes on a better school district are with you forever. How bad are the public schools? What's the math on paying for private school? How much do privates' cost and how much will the increase in the mortgage, taxes, insurance and utilities offset that.
Last edited by skp on Sun Feb 11, 2024 8:43 am, edited 1 time in total.
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Nate79
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Re: Sell or keep low mortgage house?

Post by Nate79 »

Easy sell.
Jeepguy
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Re: Sell or keep low mortgage house?

Post by Jeepguy »

I agree with the other comments, sell the condo and use proceeds as down payment to reduce the size of new loan
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