Author Topic: Big house or small house?  (Read 7881 times)

JT

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Big house or small house?
« on: October 30, 2012, 12:36:53 PM »
Hi

I currently have half equity in a big house, in a good area, close to work and school, in an environment of low supply/high demand.  It has two kitchens, two living areas, and five bedrooms.  It's possible to lock up the downstairs area (1 kitchen, 1 bathroom, 2 bedrooms) and rent it out.  (Probably just need to reorganise the electrics - there's two metres but only one is being used currently).

My query is: what would mustachians do?  get a loan for the other half of the house?  Or, should purchase a smaller place (an apartment could be purchased mortgage free).

I am quite torn, as the big house needs a bit of maintenance but the rent from downstairs would cover the mortgage interest and property rates, and the proximity of facilities is within walking/cycling distance. 

If things got really bad (ie I lost my job), I could move downstairs and rent out the top for a higher rent, which would cover the loan repayments.

Alternatively, I could commence investing if the smaller apartment was purchased.

I am a little concerned about the smaller apartment because it would be a shoebox (I can swallow that frog though! But my son's another matter) and there would be no place to store the push bikes.  Also, the smaller apartment comes with body corp fees and wouldn't appreciate as much as the house would. 

Here's the figures:

Whole house value: 700,000
Half the house: 350,000
Mortgage required: 180,000
Current interest rates: 5,25%
Rent expected from downstairs: 350 per week (gross)

Currently saving: 44,000 p/a (after tax)
Currently living off: 20,000 p/a (after tax)
Total income: 64,000 p/a (after tax)

Currently have no debt - pay off credit cards in full

Thanks for reading





« Last Edit: October 30, 2012, 11:13:15 PM by JT »

Karl

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Re: Big house or small house?
« Reply #1 on: October 30, 2012, 12:46:40 PM »
What portion(s) of the house do you currently own (jointly with the mortgage holder)?  I feel confused by the situation.


jpo

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Re: Big house or small house?
« Reply #2 on: October 30, 2012, 12:50:10 PM »
I would go small if you can keep the good location. Personally I dislike apartments and the idea of having my tenants in the same building and would try to find a smaller less expensive house.

If you stay, it is probably worth it to try to refinance to a lower rate.

Done by Forty

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Re: Big house or small house?
« Reply #3 on: October 30, 2012, 12:58:05 PM »
If I were in your situation, I'd go small.  The rent ($350) is not enticing enough to me to stay with a $180k mortgage, especially if the alternative is owning a smaller place, mortgage free. 

There are myriad benefits of living in a small space -- for one, it's typically a lot cheaper.  And, you have a built in buffer against purchasing stuff, as you have fewer places to put it.

freelancerNfulltimer

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Re: Big house or small house?
« Reply #4 on: October 30, 2012, 01:14:31 PM »
If I were in your situation, I'd go small.  The rent ($350) is not enticing enough to me to stay with a $180k mortgage, especially if the alternative is owning a smaller place, mortgage free. 

There are myriad benefits of living in a small space -- for one, it's typically a lot cheaper.  And, you have a built in buffer against purchasing stuff, as you have fewer places to put it.

The way I read that was $350 per WEEK. So it's actually $1400 per month.

totoro

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Re: Big house or small house?
« Reply #5 on: October 30, 2012, 01:19:41 PM »
I would keep the larger place as long as you expect it to appreciate over time and rent out the suite.  The suite income should more than cover the mortgage plus if you refinance at a lower rate.   The tenant will be paying off the $180 000.00.  I would be sure that you have adequate soundproofing:  two layers of drywall with resiliant channelling works for us.

Angelfishtitan

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Re: Big house or small house?
« Reply #6 on: October 30, 2012, 01:22:25 PM »
If the house is worth $700K (I can't tell, your summary is a little confusing) and you can only get ~$1.5K/month in rent from the lower half (at $350/week) then I would say move. That amount of rent does not justify your cost, at $350K for that half of the house you are barely getting .5%/year gross and most likely negative net.

Is there a reason you couldn't just get a smaller home instead of an apartment in the area? If it is just you and your son you wouldn't need anywhere that much space.

Done by Forty

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Re: Big house or small house?
« Reply #7 on: October 30, 2012, 01:24:12 PM »
If I were in your situation, I'd go small.  The rent ($350) is not enticing enough to me to stay with a $180k mortgage, especially if the alternative is owning a smaller place, mortgage free. 

There are myriad benefits of living in a small space -- for one, it's typically a lot cheaper.  And, you have a built in buffer against purchasing stuff, as you have fewer places to put it.

The way I read that was $350 per WEEK. So it's actually $1400 per month.

Ah, that makes quite a difference.

I think the real answer has to involve more specifics on the current mortgage (e.g. - 15 or 30 year, total monthly payment (taxes & ins), breakdown of current payment's principle/interest, etc.), maintenance costs, and an estimate on the figures on the smaller place.

needmyfi

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Re: Big house or small house?
« Reply #8 on: October 30, 2012, 03:38:14 PM »
I bought a multifamily house  when I was in my twenties and it worked out very well for me.  I kept my rents a little bit lower than market and never had much turnover,in fact had one tenant for 12 years. It helps to be handy and somewhat easy going.  My older brother started out in his twenties with a duplex and it was not ideal for him since he is a perfectionist.  Tenants drove him crazy. He put in a kitchenette in his basementt to make a little apt for my mom who passed shortly after. Now that his daughter is grown, he often tells me he knows he should rent it out but 30 plus years later he is still reminded of the tenants who stained his carpet, scuffed his paint etc

Owner occupied is a different game from remote rental property imho.  I have done both.  Insurance is cheaper, taxes cheaper depending on the state since some have favorable homestead exemptions, plus you can watch what is going on better.


If you are in a strong rental market and feel you would do well with tenants go for it. If you are making 60's and living 20's you rock!  Collecting almost 18k a year in rent will get you to fi in no time.  Add that to what you are already saving and you will pay off that house in no time and will be sitting on some nice equity.


I bet that the internal wiring is already set up for the meter, it is hard for mustachians to subsidize the spendy and can lead to hard feelings.  Also make sure the apt is a legal one.





Jamesqf

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Re: Big house or small house?
« Reply #9 on: October 30, 2012, 08:46:17 PM »
I'd make the decision on non-financial grounds, since either option seems to leave you in pretty good financial shape.  Do you want to live in the current house, or would you prefer to live somewhere else?

I'd also think you should be able to refinance the mortgage at a rate significantly lower than 5.25%

JT

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Re: Big house or small house?
« Reply #10 on: October 30, 2012, 10:58:35 PM »
What portion(s) of the house do you currently own (jointly with the mortgage holder)?  I feel confused by the situation.

Hi Karl  thanks so much for your response.  The house is completely mortgage free with two owners.  I'm thinking of buying out the other owner (which is why the mortgage would be required.)

JT

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Re: Big house or small house?
« Reply #11 on: October 30, 2012, 11:01:43 PM »
I would go small if you can keep the good location. Personally I dislike apartments and the idea of having my tenants in the same building and would try to find a smaller less expensive house.

If you stay, it is probably worth it to try to refinance to a lower rate.

Hi thanks for your reply.  You raise some good points.

JT

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Re: Big house or small house?
« Reply #12 on: October 30, 2012, 11:04:54 PM »
If I were in your situation, I'd go small.  The rent ($350) is not enticing enough to me to stay with a $180k mortgage, especially if the alternative is owning a smaller place, mortgage free. 


Thanks for your reply.  If I chose the mortgage route, the rent would pay all the interest plus the property rates, after tax.  What I'm currently saving could be used to pay off the principal.  Just to clarify the situation.

JT

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Re: Big house or small house?
« Reply #13 on: October 30, 2012, 11:11:48 PM »
I would keep the larger place as long as you expect it to appreciate over time and rent out the suite.  The suite income should more than cover the mortgage plus if you refinance at a lower rate.   The tenant will be paying off the $180 000.00.  I would be sure that you have adequate soundproofing:  two layers of drywall with resiliant channelling works for us.

Thanks for your reply.  A good point re the sound proofing.  I agree with getting help with the mortgage - that's one thing that makes the big house attractive.  The loan could be paid off in 5 years (or less) - top ups coming from the amount currently being saved.

JT

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Re: Big house or small house?
« Reply #14 on: October 30, 2012, 11:40:06 PM »
If the house is worth $700K (I can't tell, your summary is a little confusing) and you can only get ~$1.5K/month in rent from the lower half (at $350/week) then I would say move. That amount of rent does not justify your cost, at $350K for that half of the house you are barely getting .5%/year gross and most likely negative net.

Is there a reason you couldn't just get a smaller home instead of an apartment in the area? If it is just you and your son you wouldn't need anywhere that much space.

Thanks for your reply and maths.  Sorry if the figures were confusing.  The full house is worth $700K, the mortgage required would be $180K (after my equity of $350K plus savings are applied).  The rent from downstairs would be $350/week, but the rent upstairs could be $550 - $600/week.  Unfortunately, smaller homes are costing between $500K and $650K (which would wipe out my savings and may require a mortgage with no help from tenants).  Basically, I agree with you in relation to the room my son and I require.  It's just that normal houses are so expensive and apartments with body corp are $300K to $450K with rates and body corp fees to pay ($2400 + $2700 were the annual fees for one $350K apartment we looked at).   I'm hesitant to walk away from the house because it will appreciate, can partially pay for itself and only has rates to pay (plus maintenance). It also saves on heating costs because it gets a lot of sun. We're already seeing remarkable upward movements in suburbs closer to the CBD and it's only a matter of time when that sort of movement happens here too (we're only two train stages away from CBD). This is not the effect of a bubble - but the simple case of high demand/low supply.  The big push away from the house though is I really don't fancy getting a mortgage, or tying up all that money in one asset.  Which is why fellow mustachians were invited to comment - I'm struggling to see the wood for the trees!

JT

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Re: Big house or small house?
« Reply #15 on: October 30, 2012, 11:52:46 PM »
I bought a multifamily house  when I was in my twenties and it worked out very well for me.  I kept my rents a little bit lower than market and never had much turnover,in fact had one tenant for 12 years. It helps to be handy and somewhat easy going.  My older brother started out in his twenties with a duplex and it was not ideal for him since he is a perfectionist.  Tenants drove him crazy. He put in a kitchenette in his basementt to make a little apt for my mom who passed shortly after. Now that his daughter is grown, he often tells me he knows he should rent it out but 30 plus years later he is still reminded of the tenants who stained his carpet, scuffed his paint etc

Owner occupied is a different game from remote rental property imho.  I have done both.  Insurance is cheaper, taxes cheaper depending on the state since some have favorable homestead exemptions, plus you can watch what is going on better.


If you are in a strong rental market and feel you would do well with tenants go for it. If you are making 60's and living 20's you rock!  Collecting almost 18k a year in rent will get you to fi in no time.  Add that to what you are already saving and you will pay off that house in no time and will be sitting on some nice equity.


I bet that the internal wiring is already set up for the meter, it is hard for mustachians to subsidize the spendy and can lead to hard feelings.  Also make sure the apt is a legal one.

Thanks so much for the insight into your own situation.  Yes the rental market is strong - my $350/week estimate is conservative (as that's how I like to look at my figures!)  A rental appraisal assessed the downstairs unit at $400/week.  Thanks so much for saying I rock - that's lovely feedback to receive :)   I'm definitely more of the laid back, easy going type and have dealt with bad tenants before (we won the court case!)  Will have to work on the handy (but look forward to it!)  I hope your brother gets over the tenants one day. 

JT

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Re: Big house or small house?
« Reply #16 on: October 31, 2012, 12:02:14 AM »
I'd make the decision on non-financial grounds, since either option seems to leave you in pretty good financial shape.  Do you want to live in the current house, or would you prefer to live somewhere else?

I'd also think you should be able to refinance the mortgage at a rate significantly lower than 5.25%

Thanks for your reply - it was quite a relief reading it.  My calculations have been long and thorough and it does seem that either option will work out similar after five years.  I've been sooo focused on the finances that the non financial factors plum escaped me.  Your comments are appreciated.