Author Topic: Keep our house or sell it and save/invest 40% of our income?  (Read 3301 times)

lifeplus

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Keep our house or sell it and save/invest 40% of our income?
« on: February 03, 2019, 08:38:12 PM »
My wife and I are thinking through some big changes in our life for an early(ish) retirement and have some questions for the community.

We live in the Bay Area in a highly desirable area with healthy appreciation.

Here's how it breaks down:
  • Bought home for $950k in 2009
    Current value: 1.6 - 1.7MM
    Balance due : $400k
    8.5 years left on mortgage

We are high income earners but we recently realized just how much we're spending on our home. 51% of our income goes into our house monthly (PITI and Utilities). Eeek.

Here's are our questions considering if we should stay or sell our home:
1. Stay the course, pay our mortgage slowly over the next 8.5 years and use our house as a key retirement asset (could appreciate to $2MM in that time).
or
2. Sell our home, buy a new home for less, and for cash (roughly $800-900k in our area). Continue benefiting from Bay Area appreciation in the new home. Take whatever is left over and invest in index funds and put the roughly 40% we'd be saving monthly and invest it.

At first we felt like #2 was a clear win, but my wife had a point that #2 is a lot of work and she's not sure there's a clear win as staying could result in big appreciation, so maybe the struggle for the next 8.5 years would be worth it? What are we missing?

Do note, we need to stay in the Bay Area as that is where our jobs are located.

Thanks for your input.

JAYSLOL

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #1 on: February 03, 2019, 10:01:29 PM »
Do you hope to still live in the Bay area after you reach financial independence and don't need to be near the work anymore?  Is the place somewhere you hoped to live long-term when you bought it?  Has that changed, or just the numbers are making you question your choice?  MMM isn't about not spending money, it's about deciding what brings you real happiness and only parting with money when it aligns with that.  If you only live in the Bay area for the jobs and would leave as soon as you had the money, i'd consider selling for the right offer and renting somewhere close to work that will let you save more of your salary. 

remizidae

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #2 on: February 03, 2019, 10:18:24 PM »
The thing about relying on a very valuable house as a reitrement asset is that it leaves you highly undiversified. How much are you saving now outside the mortgage payments? If you were to continue on this track, what percentage of your total assets do you expect the house would be after it's paid off? Do you have a Plan B if the house appreciates less than you expect?

I agree with the previous poster that you should also consider your ties (both emotional and logistical) to the area. If you bought another house, how long would you expect to stay there?

Dicey

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #3 on: February 03, 2019, 11:45:23 PM »
More information needed as noted above, but here's a wild one. You could recast your mortgage into at least a 15 year, or better still a 30 year repayment period. Now your house will be super cheap and you'll have a ton of money to shovel into diversified investments. Let your investments grow. Eventually you'll have enough to FIRE and pay off the mortgage. Boom! You're done.

lifeplus

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #4 on: February 04, 2019, 08:14:17 AM »
@JAYSLOL - No we do not intdent to stay in the Bay Area after we retire. However, we've done the math on renting vs buying and it makes more sense to own in the Bay. If we stay longer than 5 years it makes more sense to buy - we have about 8 years to FIRE. A lot more if we keep our current home. Yes, owning a home gives us great joy, so we'd like to do that. Our current home gives us great joy, but not 51% of our income joy, nor delaying retriement for 8+ years longer.

@remizidae - Yes, diversifying so we're not just in our home as our key asset is why we're putting this option out on the table for us. We currently only save 10% of our income, which goes into our 401k's respectively to get the full match (6% and a 4% match). Other than that, we're currently breaking even or slighly negative each month. That's why we found MMM and FIRE as we realized we were spinning out wheels. I also own two businesses that are doing well. There's an option to sell these in the next 3 - 4 years, but I don't want to count on that, just in case it doesn't happen.

In our new, sell the house and buy a new house for cash and start investing towards FI now, our house would be 60% of our RE assets. If we stay the course it's nearly 95%.

If we bought we'd stay at least until our daughter is out of high school (about 10 years).

@Dicey - yes, we played through that, but seeing the math on those numbers feels harsh. We'd save $2k per monthon a 30 year vs $4,500 per month if we bought a new place outright. It's an option, one to consider, but we still wouldn't be saving very much. Not enough to reach FIRE within a reasonable amount of time 8 - 10 years.


JAYSLOL

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #5 on: February 04, 2019, 10:05:04 AM »
@lifeplus Sounds like thats your best plan, find a smaller place you can buy for cash and put the rest of your income to work in the market.  It's not likely in your area, but I'd keep an eye out for deals on rentals in the meantime just incase an amazing deal popped up.  I'm not exactly in the Bay Area, but I do live in a HCOL place, I've decided to rent partly because renting here is better than buying at the moment, but also because i've worked out a deal with my employer and am able to rent a house at a fraction of the going rate through work.  You mentioned you run a couple businesses, would you be able to buy a place for the business and rent out a suite to yourself at a fraction of the rental rate? 

When it comes time, check out MMM's how to sell a house article if you haven't already -  https://www.mrmoneymustache.com/2015/06/20/how-to-sell-a-house/

lifeplus

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #6 on: February 04, 2019, 11:10:20 AM »
@lifeplus Sounds like thats your best plan, find a smaller place you can buy for cash and put the rest of your income to work in the market.  It's not likely in your area, but I'd keep an eye out for deals on rentals in the meantime just incase an amazing deal popped up.  I'm not exactly in the Bay Area, but I do live in a HCOL place, I've decided to rent partly because renting here is better than buying at the moment, but also because i've worked out a deal with my employer and am able to rent a house at a fraction of the going rate through work.  You mentioned you run a couple businesses, would you be able to buy a place for the business and rent out a suite to yourself at a fraction of the rental rate? 

When it comes time, check out MMM's how to sell a house article if you haven't already -  https://www.mrmoneymustache.com/2015/06/20/how-to-sell-a-house/

Thanks for that info. Yes, I talked to my two partners about buying a place and renting it back to my business/es (Life/Work Loft) but I have a wife and 7 year old daughter and my wife said no way to living like that. She's on board with downsizing to get to FIRE sooner, but not for going that extreme; i.e. would not bring happiness. Still talking about doing that a biz venture with my partners as we'd be cashflow positive, but that's another topic.

Still contemplating, and this info and idea-share is very helpful. Thanks to everyone who has participated and who may participate in further discussion.

Cassie

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #7 on: February 04, 2019, 12:50:57 PM »
I would downsize.

robartsd

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #8 on: February 04, 2019, 12:58:24 PM »
Why not downsize and get a mortgage on the new house? If you downsize now, you can purchase with 20% down AND invest over 900k. (1,600,000 sell price - 80,000 transaction cost - 400,000 mortgage - 180,000 down (20%) on 900,000 home = 940,000). Then your house would be less than 50% of your RE assets!

What are your expected expenses after retiring? At your net worth of $1.2M, I'd consider retiring now (200k paid off home in LCOL area leaves 1M invested allowing 3k monthly spend at 3.6% withdraw rate).

beer-man

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #9 on: February 05, 2019, 06:16:43 AM »
Option 3...just throwing it out there.
 Sell house declare yourself FI. Relocate, both of you work part-time anywhere doing anything where you bring in enough to pay for housing and provide insurance.

 A basic house being worth 1.3 million doesn’t register with me but I’m in a low cost of living area. 


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slappy

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #10 on: February 05, 2019, 06:25:56 AM »
Personally I wouldn't feel comfortable counting on the home to appreciate. Just downsize. Or like others said, sell and retire somewhere lower cost of living.

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #11 on: February 05, 2019, 07:04:31 AM »
Not sure exactly where you are, but I don't think you are going to find much of a house in the Bay Area for your desired price range.  Especially if it is in a decent school district.  You paid $950k in 2009 because of economic conditions.  In the next recession, prices will also drop.  If the money flow out of China stops, prices will drop.  The value of your house may not go all the way back to $950k, but at some point it will drop.  Prices dropped substantially in the early 90's, about 20 to 25 percent.  Planning on selling with additional appreciation in a specific window is foolish.  You need to be flexible on timing if you are planning to use the proceeds from a sale as part of your retirement strategy.

At $1.6 to $1.7 million, you will probably escape with minimal capital gains tax for gains over the $500,000 exclusion.  At $2 million, you will not.  You may pay the additional 3.8 percent Medicare tax, plus in California, capital gains are taxed as ordinary income.  Over a third of your taxable gain will be lost to taxes.

In your shoes, I would do a more detailed analysis of the numbers under various scenarios.  Incorporate all of the impacts on the proceeds.  Consider refinancing the remaining $400k on a 30 year mortgage if the interest rate makes that feasible.  Invest the money freed up by the refinance.  And have a close look at what you can buy in areas where you would be able to get a house at the price point you want.  I can't find any houses in that price range that I would buy.

lifeplus

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #12 on: February 08, 2019, 11:47:55 AM »
@robartsd - Great breakdown. Thank you for that. Yes, we've been breaking things down in many different scenarios. I posted one but didn't get any response, probably too detailed so I removed the post. I didn't want it to feel like spam.

Question for you: If YOU had a $900k lump sum dropped into your lap and put into "investing" (as you noted) where would you put that money? VTSAX and VBMFX (70/20)? Just curious.

Declaring ourselves FI isn't what we're seeking. Having a great life, which we have, is #1. I have a near FI lifestyle already as I can work remotely in a job I created for myself (my own biz). But our families are here in the Bay, our daughter's friends are here. So goin to FI after she finishes high school (10 years) is our goal. That would = happiness to us. Then, if we play our cards right, we can retire with a sizeable dividend and have the freedom to go/live be where ever we'd like. We'd still be young ish and able to enjoy our retirement years.

One thing that is worth exploring is life after FI. I nearly have that and I must say, it's fun, but it also leaves me wondering sometimes if I could be maximizing all this free time. Another topic for another day.

« Last Edit: February 08, 2019, 02:36:10 PM by lifeplus »

robartsd

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #13 on: February 08, 2019, 04:28:39 PM »
Question for you: If YOU had a $900k lump sum dropped into your lap and put into "investing" (as you noted) where would you put that money? VTSAX and VBMFXVBTLX (70/20)? Just curious.
I'd add international exposure: some VTIAX and possibly some VTABX. Since if I was lump sum investing $900k I would be planning imminent FIRE; my mix would be more conservative - something like: 400k VTSAX, 200k VBTLX, 200k VTIAX, 100k VTABX. Since you don't plan to FIRE soon, you might as well be more aggressive.

lifeplus

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #14 on: February 08, 2019, 08:46:19 PM »
@robartsd - Thanks for that. It's good to get different ideas. Are you in the Bay area?

Tuskalusa

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #15 on: February 09, 2019, 09:48:39 AM »
You’ve got a nice bit of equity there that you could use towards a paid off house or retirement, for sure. The only big challenge I see is that the Bay Area market is super competitive at the price point you’d be looking in. You’d have better opportunities with an all cash offer, or if you wait until the next downturn.

Another challenge is property taxes. If you are looking at buying a house in the $900k range, you won’t see much savings from your current home because of Prop 13.

I think the idea of exploring recasting or refinancing to a 30-year mortgage might be an economical option. Then you do one big sale when you retire and move out of the valley. Heck. I might check into this myself!

Let us know what you’re ide to do. We are in the Bay Area and in a similar situation.


lifeplus

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #16 on: February 10, 2019, 08:43:48 AM »
Hey @Tuskalusa thanks for reaching out. Send me a private message, perhaps we could meet up and chat about FI stuff.

You shared some great points, ones that we have been contemplating as well. I have a spreadsheet where we've run many different scenarios and here are our current top 3:

1. Keep our home, refinance to a 15 year fixed and take out no cash.
2. Keep our home, refinance to a 30 year 10/1 ARM with interest only payments for 10 years and take out $225k cash to invest in Index/Bonds.
3. Keep our home, refinance to a 30 year fixed and take out $200k cash to invest in Index/Bonds.

After running the numbers on sales commissions, new prop tax (as you noted), closing costs on a new place and then doing it all again in 10 years just doesn't really work out math wise. Plus the emotional factor is big in moving the family. In short, we've decided to stay.

The difference between Option 1 and 2 is that opt 1 yields about 60k more in the ten years, but that puts the majority of our portfolio in our home 75/25. Opt 2 is a 60K less overall yield but the balance between our stocks and equilty in our home is close to 50/50. 

The dif between Option 2 and 3 is that we keep about $1k per month in option 2 vs option 3. However we do have some equity pay down during the ten year time frame in opt 3, which, psychologically feels good, but I'd love some input on that.

I just listened to the most recent eposode (113R) of the ChooseFI podcast where they talked about paying off home vs not so, yeah, I was always in the camp of pay it down, now I'm split.

Any input on these scenarios is welcomed. Thanks.
« Last Edit: February 10, 2019, 08:47:09 AM by lifeplus »

soccerluvof4

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #17 on: February 10, 2019, 11:23:47 AM »
I would downsize because from my experience it worked out best for us! It helped us become Fire'd and put 450k in the bank. All the other costs should become less as well in owning the home on top of your profit.

Tuskalusa

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #18 on: February 10, 2019, 12:44:11 PM »
Thanks for sharing your analysis!

Another option we’re looking at is a 7-10 year ARM with no cash out. Interest only for the ARM period. Our thinking is that we’d reduce our monthly payments and invest the difference. I hadn’t thought of borrowing extra to invest. How youyou feel about the risk of investing borrowed funds?

lifeplus

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #19 on: February 10, 2019, 02:37:12 PM »
@soccerluvof4 - Downsizing "sounds" ideal, but where we live downsizing still has a hefty price tag. Plus, we're not as urgent on the FIRE train as most. I already have a very FIRE style life having created my own company with total flexibility (hiked in Peru for 3 weeks this past May and hiking the JMT this August for 20 days), unlimited vacation, work remote (we lived in France for a month this past summer all together), etc. so staying close to where we are, in the school we're in (for our daughter) is best for us and our happiness. It's all about happiness level. So, downsizing in the area we want to be means still spenind at least $1M on a home as something priced at $850k will  bid up to $1M so we'd be looking at that price range and, trust me, what you get for that is a MAJOR downsize from what we have now. So much so that it shifts the happiness meter way too far on the negative side.

@Tuskalusa - I have a Google sheet I'd be happy to share with you where you can change the ratios of investment in Index funds vs house, refinance, etc and it recalibrates the 4% ratio in 10 years. I currently have it set year by year for 10 years.

Using "borrowed" money shows the best result when investing in anything as the compounding grows SO much faster when the pool is larger at the start. I really don't have any issue with borrowing money from myself (in this case from our home). What would be your concern/reservation? 

For us it comes down to not being so leveraged in our home for our retirement and spreading that out. I didn't use to think that way, but the numbers, even conservative planning, feels like it works well. Of course I can't predict a downturn in the economy, etc, so I just use smaller return % to account for the ups and downs in the market.

Yes the interest only payment works great for us too so that we keep more, invest it, but having more up front to invest shoots the growth curve up much more.

With all that being said, the market is volatile right now so we currently plan to refinance shortly (next 30 days), pull out the $200/225k, put that into CIT Bank at 2% interest (that's what we're currently getting), and riding the cycle a bit. With all the speculation with the market, even within the FIRE community, I think it makes sense for us to ride it out a bit before we throw down that money into the Index.

Edit/Add: We'll most likely dollar cost average over 6 months until the full amount is in. This will allow us to hedge our bets a bit without waiting TOO long to just get going.

These are my current thoughts. Open to other ideas, too.
« Last Edit: February 11, 2019, 10:43:47 AM by lifeplus »

soccerluvof4

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #20 on: February 11, 2019, 04:22:57 AM »
@soccerluvof4 - Downsizing "sounds" ideal, but where we live downsizing still has a hefty price tag. Plus, we're not as urgent on the FIRE train as most. I already have a very FIRE style life having created my own company with total flexibility (hiked in Peru for 3 weeks this past May and hiking the JMT this August for 20 days), unlimited vacation, work remote (we lived in France for a month this past summer all together), etc. so staying close to where we are, in the school we're in (for our daughter) is best for us and our happiness. It's all about happiness level. So, downsizing in the area we want to be means still spenind at least $1M on a home as something priced at $850k will  bid up to $1M so we'd be looking at that price range and, trust me, what you get for that is a MAJOR downsize from what we have now. So much so that it shifts the happiness meter way too far on the negative side.

@Tuskalusa - I have a Google sheet I'd be happy to share with you where you can change the ratios of investment in Index funds vs house, refinance, etc and it recalibrates the 4% ratio in 10 years. I currently have it set year by year for 10 years.

Using "borrowed" money shows the best result when investing in anything as the compounding grows SO much faster when the pool is larger at the start. I really don't have any issue with borrowing money from myself (in this case from our home). What would be your concern/reservation? 

For us it comes down to not being so leveraged in our home for our retirement and spreading that out. I didn't use to think that way, but the numbers, even conservative planning, feels like it works well. Of course I can't predict a downturn in the economy, etc, so I just use smaller return % to account for the ups and downs in the market.

Yes the interest only payment works great for us too so that we keep more, invest it, but having more up front to invest shoots the growth curve up much more.

With all that being said, the market is volatile right now so we currently plan to refinance shortly (next 30 days), pull out the $200/225k, put that into CIT Bank at 2% interest (that's what we're currently getting), and riding the cycle a bit. With all the speculation with the market, even within the FIRE community, I think it makes sense for us to ride it out a bit before we throw down that money into the Index.

These are my current thoughts. Open to other ideas, too.



Why not put the money in VMMXX and get 2.47% and have just as easy access to your money? Far better than 2%

lifeplus

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #21 on: February 11, 2019, 10:46:35 AM »
@soccerluvof4 - I didn't know about the Vanguard MM fund. I'll look into it. I just finished moving all of our emergency funds from previous savings from ING/Cap One to CIT per the Birds of a Fire blog post. Okay, gearing up for another move over to VMMXX. No worries. It's all for the best. Thanks for the tip.

Blog post I'm referring to: https://www.birdsofafire.com/the-step-by-step-guide-to-where-your-money-should-be-invested/

robartsd

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #22 on: February 11, 2019, 11:24:13 AM »
@robartsd - Thanks for that. It's good to get different ideas. Are you in the Bay area?
No, I'm closer to Sacramento. $900k buys 2-3 decent homes here.

Tuskalusa made a good point about property taxes implications. On the other hand, new federal tax law limits the tax interest deduction a cash out refinance.

1. Keep our home, refinance to a 15 year fixed and take out no cash.
2. Keep our home, refinance to a 30 year 10/1 ARM with interest only payments for 10 years and take out $225k cash to invest in Index/Bonds.
3. Keep our home, refinance to a 30 year fixed and take out $200k cash to invest in Index/Bonds.
Welcome to the don't pay off the mortgage club.

You indicated that option 1 had the highest yield (60k vs option 2), but I'm having difficult seeing how this is possible. Your home value will be the same in 10 years regardless of which option you choose and option 2 provides the most funds to move into other investments (with the highest amount of debt) in 10 years. Option 2 clearly has the most risk, but I don't see how it doesn't also have the highest expected return.

@soccerluvof4 - I didn't know about the Vanguard MM fund. I'll look into it. I just finished moving all of our emergency funds from previous savings from ING/Cap One to CIT per the Birds of a Fire blog post. Okay, gearing up for another move over to VMMXX. No worries. It's all for the best. Thanks for the tip.

Blog post I'm referring to: https://www.birdsofafire.com/the-step-by-step-guide-to-where-your-money-should-be-invested/
Note that VMMXX is not FDIC insured whereas I assume your CIT Bank account is.

lifeplus

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #23 on: February 13, 2019, 04:36:52 PM »
@robartsd - How option 1 comes out $60,123k ahead is in the overall stock/house scenario I devised.

But let's look at the house just on its own: apples to apples (Just the house part) option 1 comes out ahead by: $548,493. How. Well the principle on option 1 would be our principle now $410k and it would be a 15 year loan at 3.75%. Principle paydown on that over the 10 years would have a balance remaining of $135,268k vs $635k for option 2.

Option 1 shakes out like this: Total estimated property value in 10 years ($2,280,452) minus the principle remaining ($135,268k) minus capital gains tax ($415,226 - I used 50% to er on the conservaitve side as I'm in a high tax bracket) = $1,865,359

Option 2 shakes out like this: Total estimated property value in 10 years ($2,280,452) minus the principle remaining ($635,000k - $410k plus the $225k) minus capital gains tax ($415,226) = $1,230,226

Different between 1 & 2 = $548,493

Let me know if something is off here. I didn't factor in sales commission in the above example but did in my spreadsheet.


Good to kno about VMMXX. Thanks for that.

robartsd

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Re: Keep our house or sell it and save/invest 40% of our income?
« Reply #24 on: February 14, 2019, 08:42:51 AM »
@robartsd - How option 1 comes out $60,123k ahead is in the overall stock/house scenario I devised.

But let's look at the house just on its own: apples to apples (Just the house part) option 1 comes out ahead by: $548,493. How. Well the principle on option 1 would be our principle now $410k and it would be a 15 year loan at 3.75%. Principle paydown on that over the 10 years would have a balance remaining of $135,268k vs $635k for option 2.

Option 1 shakes out like this: Total estimated property value in 10 years ($2,280,452) minus the principle remaining ($135,268k) minus capital gains tax ($415,226 - I used 50% to er on the conservaitve side as I'm in a high tax bracket) = $1,865,359

Option 2 shakes out like this: Total estimated property value in 10 years ($2,280,452) minus the principle remaining ($635,000k - $410k plus the $225k) minus capital gains tax ($415,226) = $1,230,226

Different between 1 & 2 = $548,493

Let me know if something is off here. I didn't factor in sales commission in the above example but did in my spreadsheet.


Good to kno about VMMXX. Thanks for that.
BTW, the highest federal capital gains tax is current 20%. You'd have to have your state tax the gains at 30% to expect a 50% net capital gains tax under current law. While I think corporate tax rates should be nearly nothing and capital gains and dividends should be taxed as ordinary income so that the wealthy are subject to the same progressive taxes that the high earners are; I wouldn't plan my finances on it happening.

Sure, Option 1 has more equity in the house, so more cash on sale; however, your expected return in investment accounts should more than make up for it. Monthly payments on option 2 should be about $865 less (assumed 4% interest). Investing 225,000 now and $865/mo for ten years with assumed 7% return yields about $590k at the end of 10 years; so the expected return of option 2 is about $40k more than the expected return of Option 1. Of course option 2 involves much more risk due to the increased stock exposure (they both have the same RE exposure). If markets do very well over the 10 years you could see much higher returns; or returns could be less than expected where option 1 would have resulted in a better outcome. Option 3 lands somewhere between the two.

 

Wow, a phone plan for fifteen bucks!