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!