Author Topic: In two years- rent out house and buy another out of state, or have low mortgage?  (Read 491 times)

LivesForever

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Hi, I'm not very deep yet in figuring out the particulars of my financial strategy, but my wife and I have been pretty decent savers.  I'm trying to decide whether to keep my current house and buy another (in two years or so, and likely out of state) or sell and have a low mortgage o  another.  I'm hoping you all can help me gain a little perspective.

Property info:
Market Value:  315k
Original Purchase price:  185k
Original Mortgage Amount:  165k
Interest Rate:  3.875
Mortgage Term:  30 years
Term remaining:  26 years
Amount remaining on mortgage:  115k
Gross Rents:  Zillow says 1600/month
Principal and Interest (the P&I of your PITI - should match with the above info):  About 700/month, I believe
Taxes and Insurance (the T&I of your PITI):  About 200/month
HOA costs: 0
Deferred maintenance notes:  Might need a new roof in the next couple years, or at least a new layer of shingles.


In the next 2 years or so, I'm planning to get a better paying job, likely out of state.  I see two options for our home:

1) Rent out our current house and buy another in our new area.  Estimated realistic equity right now: 200-220k.  Current mortgage is 900/mo, but we put in 1100/mo.  Zillow says we could get around 1600/mo in rent.  If we live out of state, we'd have to hire someone to manage it. Also, my house may not be a great rental property.  The furnishings are far from tenant proof- they may beat up the nice kitchen we put in ourselves, and flooring is almost certain to get destroyed (just laminate, carpet, and tile, though).  If I were local, I'd manage and maintain it myself, but that likely won't be an option.

We have about 80k saved up for down payment, apart from other savings, budget categories, retirement funds, etc., So we could buy a decent house without selling.  We've been saving about 1100/month for that budget cateory, and could continue to do so.

2) Alternately, we could just sell it and have a low mortgage on the new house.  If we got 210 k from selling, plus the 80-100 k we've saved by that point, we wouldn't need much more to buy a really nice house in most areas (or a snack with a long commute in SoCal or Seattle, where much of my industry is).

Can you please help me identify some pros and cons of these strategies, and any good alternatives I may have missed?

More info-
37 year old single bread winner with family.  We have approximately 310k in our retirement accounts.  I make about 105k/year.  I expect I could make 15-20k more if I get a great new job.  I had great offers elsewhere during my last job search, but stayed here to be closer to family.

I'm maxing out my 401k.  My wife and I both have IRAs, but we haven't been contributing since we had a kid.  We are also saving for their college funds.  We have no other debt besides the house, and I think we are pretty good budgeters and savers, but may not hold a candle to some frugality experts here!

I would really appreciate your feedback!  Thank you all!

« Last Edit: November 03, 2019, 01:15:30 PM by LivesForever »

Jon Bon

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All advice I give here assumes market conditions today, im not fooling with "well two years in the future" nonsense.

So the question is to sell this house or rent out this house... today.

The answer is stupid easy, you sell the house, its a bad rental! To sell you would net ~100k in capital gains tax free, that's crazy. And you would consider giving that up for a measly $500 (at best) a month in rental profit? Your house is a poor rental, and that is fine! you made your money in appreciation, congratulations. Time to cash in on that sweet sweet tax free return. I don't know anything about your situation and I am just a random internet person. However generally speaking SFH make terrible rentals.

So lets say you make $500 a month or $6,000 a year. Well as you said you have ~200k in equity in the house. So the return would be 6,000/200000 = 3%

Does a 3% return on your 200k investment sound good to you? Not to mention increased liability risk, service calls, losing the capital gains exclusion, and the generally PITA of being a landlord (ask me how i know!).

Lastly, I probably would not put a large down payment down on the next house either. Money is cheap right now, just do the traditional 20% down and dump the rest into your stache. The only reason I see to do a decent DP is if you struggle to make the payment, but that is a whole different topic.

I get wanting the security of a low mortgage balance or a paid off house. However you are still pretty young, I don't think you need to worry about that. Worst case take your massive windfall from selling the house and put it in a blue chip fund or something with a decent return and lower risk. That way if you feel the need to pay off your future house you probably would still be able too in nearly any market.








Papa bear

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All advice I give here assumes market conditions today, im not fooling with "well two years in the future" nonsense.

So the question is to sell this house or rent out this house... today.

The answer is stupid easy, you sell the house, its a bad rental! To sell you would net ~100k in capital gains tax free, that's crazy. And you would consider giving that up for a measly $500 (at best) a month in rental profit? Your house is a poor rental, and that is fine! you made your money in appreciation, congratulations. Time to cash in on that sweet sweet tax free return. I don't know anything about your situation and I am just a random internet person. However generally speaking SFH make terrible rentals.

So lets say you make $500 a month or $6,000 a year. Well as you said you have ~200k in equity in the house. So the return would be 6,000/200000 = 3%

Does a 3% return on your 200k investment sound good to you? Not to mention increased liability risk, service calls, losing the capital gains exclusion, and the generally PITA of being a landlord (ask me how i know!).

Lastly, I probably would not put a large down payment down on the next house either. Money is cheap right now, just do the traditional 20% down and dump the rest into your stache. The only reason I see to do a decent DP is if you struggle to make the payment, but that is a whole different topic.

I get wanting the security of a low mortgage balance or a paid off house. However you are still pretty young, I don't think you need to worry about that. Worst case take your massive windfall from selling the house and put it in a blue chip fund or something with a decent return and lower risk. That way if you feel the need to pay off your future house you probably would still be able too in nearly any market.

This 100% exactly.  I donít want to write out the same conclusion with different words. 


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LivesForever

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Haha, this advice is surprisingly unambiguous!  Thank you, thank you for the feedback.  To be honest, I don't really love the idea of being a landlord, much less a long distance one.  So, this is pretty much exactly what I wanted to hear.

Assuming I'm going sell, then, and not put the extra savings into the next house, I need to answer two new questions.

1) Should I NOT dump most or all of the equity from the sale into my new house, except for the 20 percent down payment?  Wouldn't I lose a bunch to capital gains tax that way?  Admittedly, putting less down may encourage me not to get something that's too expensive.

2) What should I do with the money I'm not putting into the house?  Can you point me to some resources that can help me with that?  I am already maxing out my 401k, and I could dump some into our IRAs (Roth or traditional) that we haven't been funding, but beyond that, I had figured landlording was about my best option.

Papa bear

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You get an awesome tax free capital gain exclusion on your house.  See here:
https://www.irs.gov/taxtopics/tc701

As for what to invest in? Thatís on you. Most here would say:

Follow your investment plan
Lump sum into index fund
DCA into index funds

Thatís up to you.


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LivesForever

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Crazy, I had misunderstood that.  I thought I had to roll the gains into another house to get the exclusion!  Thanks for this info!  I guess I can max out our IRAs and then figure something else out.  Anyone else have suggestions for learning best investing practices?

Jon Bon

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It is sometimes referred to as the 2/5 rule. If you have lived in a house 2 years out of the last 5. You are allowed to sell it with zero tax the gain up to 250/500k.

In my option and experience buying a house with leverage, and super cheap money paired with renovation/appreciation/inflation/etc while using the capital gains exclusion is the best way to build wealth. I sometimes refer to it as the "slow flip" because you have to live there for 2 years.

The rolling the gains into the next house roughly equates to a 1031 exchange and is for income properties. Does not apply here.

LivesForever

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Got it.  Thanks again!