Author Topic: investment in high end home - MMM minded opinions requested  (Read 1785 times)

bye-bye Ms. FancyPants

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investment in high end home - MMM minded opinions requested
« on: August 04, 2016, 08:59:57 AM »
We have been looking to move for numerous reasons. We have found a home that is obnoxiously large and more expensive then anything we would ever consider buying to live in long term. However this home is in a very expensive neighborhood, and great location but needs TLC.  It was a one owner home, where the wife recently passed. Her son is selling. Although it appears solid & has a good layout, it needs an updated kitchen, vanities in bathrooms, and painting. They have pulled out most the carpet and just left the subfloor. I believe we could do the work needed ourselves over time while we live there (5-7 years). Honestly, its so big we could just live on the first floor and not be in any hurry to update the upstairs. 

I had our agent pull comps - current value on low end is $548,000 - the high end is 623,000. The house is currently on the market for $475,000. I don't think we would feel comfortable paying much more then $410-420,000.  To cover the much larger down payment we would sell our current home and one of our least profitable rentals. We would have to put it in a 30-yr loan to keep our 401K's maxed out and save the cash to update. The mortgage payment would be approx. $400/month more then our current mortgage payment.

Is this too far out of reach, or just plain crazy?

jviska89

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Re: investment in high end home - MMM minded opinions requested
« Reply #1 on: August 04, 2016, 09:21:25 AM »
I would think that would not the best situation to get yourself into. If it were me I would be more inclined to buy a home that fit my needs and another rental rather than a large cash drain with 5-7 year return timeframe all while paying a higher mortgage, utility bill, property taxes. If you picked up another rental at least it would be paying for itself.
Forget the five year plan and retire instead

bye-bye Ms. FancyPants

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Re: investment in high end home - MMM minded opinions requested
« Reply #2 on: August 04, 2016, 10:36:08 AM »
The increased taxes and electric is a concern. I do think we would probably block off rooms that weren't in use to save. We could really turn around and sell the home sooner if we wanted. But honestly, I probably wouldn't want to move again sooner then 5 years.


chesebert

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Re: investment in high end home - MMM minded opinions requested
« Reply #3 on: August 04, 2016, 10:39:37 AM »
You can't afford it.

v10viperbox

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Re: investment in high end home - MMM minded opinions requested
« Reply #4 on: August 04, 2016, 10:44:28 AM »
I am doing something similar right now and honestly even though I have made on paper darn near 250K in the last 2 years its been a drain on a personal level. Plus another 50-60K that I have been dumping in on extra payments. That is after sales costs and updates I know the real numbers of flipping houses. Wish I had just bought another rental and stayed where I was with a semi paid off house. I was doing it to tap the increase do a cash buy in a cheaper neighborhood that was closer to my parents after the 2 maybe 3 years was up.

But the whole market out here has moved up and the houses that were 600K or so that I was hoping to buy in cash and now 700K and while I have the equity now its taking a bit out of the plan. So now I am in a house that my wife really likes and that is not a huge burden in cost but definitely not mortgage free like I thought we were moving towards. Honestly moving sucks, if I had just stayed put and dumped the cash I had into the house I was in I would be in a worse place by maybe 140K or so in net-worth. But I would sleep easier with a 1100$ 20 year mortgage instead of a darn near 7K one with the extra payments I putting into the new place at 30 years.

If I can truly cash out might feel different.

bye-bye Ms. FancyPants

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Re: investment in high end home - MMM minded opinions requested
« Reply #5 on: August 04, 2016, 11:07:02 AM »
I am doing something similar right now and honestly even though I have made on paper darn near 250K in the last 2 years its been a drain on a personal level. Plus another 50-60K that I have been dumping in on extra payments. That is after sales costs and updates I know the real numbers of flipping houses. Wish I had just bought another rental and stayed where I was with a semi paid off house. I was doing it to tap the increase do a cash buy in a cheaper neighborhood that was closer to my parents after the 2 maybe 3 years was up.

But the whole market out here has moved up and the houses that were 600K or so that I was hoping to buy in cash and now 700K and while I have the equity now its taking a bit out of the plan. So now I am in a house that my wife really likes and that is not a huge burden in cost but definitely not mortgage free like I thought we were moving towards. Honestly moving sucks, if I had just stayed put and dumped the cash I had into the house I was in I would be in a worse place by maybe 140K or so in net-worth. But I would sleep easier with a 1100$ 20 year mortgage instead of a darn near 7K one with the extra payments I putting into the new place at 30 years.

If I can truly cash out might feel different.

Interesting. I do worry about how it will feel to basically triple our debt for a bigger return profit down the road. I can say, right now, even though the house we are currently in does not work for us & if we put money into fixing it, we will NEVER get it back, it does feel good to have a semi-paid off house.

acroy

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Re: investment in high end home - MMM minded opinions requested
« Reply #6 on: August 04, 2016, 11:14:17 AM »
Taxes, utilities, realtor buy/sell fees, etc all add up - be very complete with the cost estimates!
If you look at it as an investment, what kind of return do you think you could get out of it?
How much of your portfolio would it be?
The only way I'd see doing it is if you already have NW over $1M or so, minimal transaction fees, low tax area, finance it cheap, and are very certain (80% or more) you could do the work yourself within cost estimate and timeline. Otherwise I'd say the downside risk is too high, stash the $$ in another opportunity.

Best of luck!!!
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bye-bye Ms. FancyPants

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Re: investment in high end home - MMM minded opinions requested
« Reply #7 on: August 04, 2016, 11:37:42 AM »
I think you guys are right. The risk is too high.  Thanks for all the input!

humbleMouse

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Re: investment in high end home - MMM minded opinions requested
« Reply #8 on: August 04, 2016, 12:10:51 PM »
I think it's a bad idea.  Especially in up-markets like this, the $500k/expensive homes are the ones that get the most burned in a down market. 
"Everybody in this room is wearing a uniform - don't kid yourself." - Frank Zappa.

mishek01

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Re: investment in high end home - MMM minded opinions requested
« Reply #9 on: August 08, 2016, 03:14:26 PM »
We have been looking to move for numerous reasons. We have found a home that is obnoxiously large and more expensive then anything we would ever consider buying to live in long term. However this home is in a very expensive neighborhood, and great location but needs TLC.  It was a one owner home, where the wife recently passed. Her son is selling. Although it appears solid & has a good layout, it needs an updated kitchen, vanities in bathrooms, and painting. They have pulled out most the carpet and just left the subfloor. I believe we could do the work needed ourselves over time while we live there (5-7 years). Honestly, its so big we could just live on the first floor and not be in any hurry to update the upstairs. 

I had our agent pull comps - current value on low end is $548,000 - the high end is 623,000. The house is currently on the market for $475,000. I don't think we would feel comfortable paying much more then $410-420,000.  To cover the much larger down payment we would sell our current home and one of our least profitable rentals. We would have to put it in a 30-yr loan to keep our 401K's maxed out and save the cash to update. The mortgage payment would be approx. $400/month more then our current mortgage payment.

Is this too far out of reach, or just plain crazy?

I agree with most others about not doing it unless... you have taken a lot of depreciation of your current rentals already. Let me explain, because this would only be worth it if this criteria is met:
1) You are looking to invest in an expensive property to live in
2) You have a rental portfolio where the basis (book value) of your investments has went down a lot
   - this means that you would have to pay a lot of money in taxes if you were to ever sell
3) You do not have to move into this place right away, and are willing to rent it for a couple of years

If you sell a few of the rentals that have depreciated on paper, and do a 1031 exchange to buy this house, then move into it after 2 years of renting it out, then you will never have to pay taxes on the part that you depreciated (as long as you live at least another 2 years in the property, which sounds like you would.)

For example, say you have 4 properties with a combined basis of $100,000 but market value of $400,000. With the 1031 exchange you could bi-pass paying taxes on the $300,000 of gains. So basically you would pocket another $60,000 (assuming tax rate of 20%.) Once you sell the house then you can buy the investments back and have the depreciation start over from the beginning, or you can diversify and buy stock with that money as well, which you can't do now because if you sell your properties then you will get hit with an enormous tax bill.

Not saying this is the way to go, but I just want to throw out this option of using this house as a potential tax shelter. I hear about it from Harry Border's class (I am guessing you heard of him, he is a closing attorney in Louisville who specializes in rental RE)

bye-bye Ms. FancyPants

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Re: investment in high end home - MMM minded opinions requested
« Reply #10 on: August 09, 2016, 06:49:26 AM »
interesting option I have not heard of @mishek01 - Something to think about in the future. Thanks!