Author Topic: Downsize home "too early" costs a bit much?  (Read 5290 times)

fiveoclockshadow

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Downsize home "too early" costs a bit much?
« on: June 25, 2013, 10:21:43 AM »

I've got a bigger more expensive house than really necessary.  However, I also suspect we will move in the next 5 to 7 years anyway (when I can convince my wife to work less/somewhere else).  So the question is, would it make sense to downsize sooner than that?

Scenario #1 - Buy a less expensive house now, sell current home

Surprisingly this doesn't seem to work out very well.  The rub is since we will likely relocate in the nearish future (and could downsize then) that downsizing now creates an additional real estate transaction.  Transacting real estate is expensive, around 10% where I live (MD).  So, lets say we ditch a 800K home for a 500K home now - that effectively creates 50K of transaction costs that otherwise wouldn't exist.  Also, given where mortgage rates are going the new home would likely be at a rate of 0.5 to 1.0 higher than our present mortgage.  Naturally taxes would be lower and if we chose the right house we might save on upkeep as well.  But when I run the numbers I get break even time-spans of 4 to 8 years.  Doesn't seem sensible, unless of course we do end up staying here for a very long time which is one possible outcome (though I honestly hope not).

Scenario #2 - Sell current home and rent

This gives quite a bit of flexibility.  The downside is I'm not seeing particularly great rentals on the market right now.  Our current house is a six mile commute for my wife and I work from home.  Walking distance to a grocery store.  0.5 mile from day care.  So good location.  Most rentals would be less convenient.  More to the point right now with our low mortgage rate and decent equity our effective "rent" is quite low for our too big house.  We have high incomes and state tax so every bit of mortgage interest and property tax sees our full marginal tax rate reduction on Schedule A (i.e. just our state income taxes take us beyond the standard deduction).  End result, we'd have to downsize quite a bit to get into a rental that actually substantially saved us money.

Scenario #3 - Rent current home out and purchase new smaller home

Hmmm... Honestly I haven't given this one that much thought.  I understand MMM is all hot to trot on rentals as are others.  I am, however, a rather conservative guy and like diversification.  Let's say I took this route, got a 500K house to live in, rented the 800K one.  That's 1.3M in assets in real estate in the exact same geographic area - likely neighborhood.  That's crossing over the 50% threshold in assets for us.  But maybe this is the only sensible short/medium term "downsizing" option?  Maybe I'm being a wussypants/complainypants not going this route? 

I also have slight concerns about buying a second home in this market.  Things are moving quite fast in this area (inventory low, time on market for good houses very short with multiple offers).  Since the second home is one we would live in I suspect it would be many months before we found something appropriate and we would need to be able to move on it quickly.  In Scenario #1 that means some sort of bridge loan or HELOC ready and waiting.  In scenario #3 I guess I really don't know how that works exactly and need to do some research.

Thoughts? Comments?

Oh and as to other financial details - I'd expect a very comfortable FI sometime in the next 5 to 7 years - as you can probably guess from the numbers being tossed around above.  So the question is really about doing an extra "downsizing" in our local area before we likely move to a better FI/RE location at some point in the not too distant future.

Thanks for taking the time to read this far!

Another Reader

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Re: Downsize home "too early" costs a bit much?
« Reply #1 on: June 25, 2013, 11:16:38 AM »
You didn't say how old you are and what you intend to do eventually.  However, the current situation works well for you.  If the market stays healthy, you should realize some appreciation over your remaining ownership period.  Cash flowing a rental is probably not likely with the values you cite.  Based on what you said, I would lean towards staying.

jrhampt

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Re: Downsize home "too early" costs a bit much?
« Reply #2 on: June 25, 2013, 11:25:44 AM »
We have also thought about downsizing (house isn't super huge by US standards but is more than we need at 2200 sq ft), and have elected against due to transaction costs.  We have lived in it for almost 5 years so far and will likely continue to work and/or live in the area at least for the next 5 years because of family.  By then the house will be paid off, anyway.  Instead we have focused on optimizing our home for energy efficiency, and in fact we have lower utility bills now than we did when we were renting much smaller spaces.

Bank

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Re: Downsize home "too early" costs a bit much?
« Reply #3 on: June 25, 2013, 12:58:33 PM »
I'd keep it.  On top of the math (which tilts toward staying put), you don't need this headache.

fiveoclockshadow

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Re: Downsize home "too early" costs a bit much?
« Reply #4 on: June 25, 2013, 01:34:38 PM »
Thanks for the input, I've been thinking staying put is probably the sensible option but glad to have bounced the idea off of the forum.

@Another Reader - Late 30's, could really be FI right now in the right location with a little bit of lifestyle adjustment.  At this point plan on maintaining our current income/jobs for the next five years (wife has a career she likes that is full time only, I enjoy my work and can scale down hours at will).  I think at that point we will be ready to make changes (location, jobs, work hours all on the table).  We've got a one year old daughter in the mix as well.  Good point on the cash flows, I'm doubtful option #3 is a realistic option as I'm not sure our existing house is a good candidate for rental.  Too pricey, too big, too much yard to deal with.

@jrhampt - Good idea on energy efficiency.  I need to look into that.  House is "reasonable" in that it has no obviously awful heat leaks (late 80's construction, well maintained, double panes) but I suspect more could be done to help with winter/summer.  I may in source more of my yard care which will add quite a bit of savings (stupidly expensive and as MMM points out would be free exercise).  We are in a similar situation with house nearly paid off by the time we might leave.  Thanks for sharing your similar experience.

@Bank - Yeah, the "headache factor" is a good one.  I'm happy to do something if it seems to make a significant difference but at the moment the math doesn't seem to work out.

Thanks again folks!

Another Reader

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Re: Downsize home "too early" costs a bit much?
« Reply #5 on: June 25, 2013, 01:42:32 PM »
Although you are looking at 5 to 7 years, with a one year-old (and possibly more in the future?), you need to think about schools.  My guess is the schools in the $500k neighborhood may not be as well regarded.  If you are happy with the options where you are now, this is something to consider for future moving decisions.

fiveoclockshadow

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Re: Downsize home "too early" costs a bit much?
« Reply #6 on: June 25, 2013, 02:36:54 PM »
Yes, schools are most definitely a factor and would be important to any housing decision.  The difference between free public school and 25K/yr private school leaves a lot of room for housing costs!

Fortunately the district we live in (and some adjoining districts which are also excellent) has quite a wide variety of housing available in it.  House prices range from about 400K up to 3M as there is a tremendous variety in lots sizes on account of sub-dividing (area was originally 30 to 60 acre estates in the late 19th century now zoned to densities anywhere from 1 house/acre to 5 houses/acre with many of the larger 19th century houses still on up to 4 acres).  There are even some higher density town homes and apartments in the mix.

Really though, by the time she is in early to mid elementary school I'd really hope to be out of MD and back out west some place.  At that point in time we'd choose a location based on lifestyle, schools and whatever situation my wife decides is necessary for her work goals.  So if my "ideal vision" were to pan out our daughter would only attend in this district for a few years anyway. (Oh, and it is almost certain she'll be an only child)

Thanks again for bringing up good things to consider!

randymarsh

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Re: Downsize home "too early" costs a bit much?
« Reply #7 on: June 25, 2013, 05:38:57 PM »
Trying to wrap my head around a 500K home being in a bad school district. Wow.

Another Reader

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Re: Downsize home "too early" costs a bit much?
« Reply #8 on: June 25, 2013, 05:48:12 PM »
How about a 3 bedroom, 1 bath 1,118 sf home in a bad area (Seven Trees) of San Jose for $435,000?

http://www.mlslistings.com/ML81312139/13197-potts-dr-san-jose-ca-95111/

Or 1,128 sf in Tropicana Village in East San Jose for $470,000.  Lots of gang activity in this area.

http://www.mlslistings.com/ML81303170/1580-pensacola-dr-san-jose-ca-95122/

Homes in decent areas start in the mid-600's.....

randymarsh

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Re: Downsize home "too early" costs a bit much?
« Reply #9 on: June 25, 2013, 07:15:59 PM »

fiveoclockshadow

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Re: Downsize home "too early" costs a bit much?
« Reply #10 on: June 25, 2013, 08:36:35 PM »
Trying to wrap my head around a 500K home being in a bad school district. Wow.

Much of CA - unfortunately.  High income tax, high sales tax, modest property tax rates but values are through the roof so still high property tax. And for all that in many urban and suburban areas you get awful schools.

When MMM mentions where you live is key to FI this is why.

We moved from CA to AZ mid 2000s and the housing cost differences were insane. Salary differences weren't nearly as big. I grew up in CA and there is a lot to love about the state, but living Bay Area or So Cal will negatively impact anyone's path to FI. That said, I really would like to move to the boondocks of CA when we RE. Though NV, UT or CO might be a more sensible choice. I love the Eastern Sierra and Mojave though...  Fortunately if you get into the boonies CA is much more livable (and beautiful) than the coastal metropolises.