Author Topic: Buy a house cash, live in it a few years, then what?  (Read 4327 times)

Lolavy

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Buy a house cash, live in it a few years, then what?
« on: March 15, 2014, 07:55:29 AM »
Hello, I have been reading the MMM posts for a while now, but never really looked at the forum. There is a ton of information here!

My husband and I are currently renting, and are tired of throwing money away. We would like to buy a house, and have enough savings to pay cash for a cheap house (the idea we had was to find a $50K foreclosure, there are a few around here) and make the needed repairs. Of course it depends what the condition of the house is, and while I really like the idea of doing repairs myself, I have zero experience at this point, so would need to learn everything... So we may end up buying something with less repairs but a bit more expensive. But the goal is to pay cash, and still have enough savings for repairs, future child (hopefully in the near future), medical bills, etc.

Here is the thing. I am not from the USA and we are not planning on spending our whole life here. At this point we do not know when we would leave, but it could be in 3 years or in 10 years.

Everybody always says that you shouldn't buy a house if you aren't going to stay in it for at least 5 years, because of the associated costs. But people who say that always assume you will buy with a mortgage. If one pays cash, does the same rule apply?

Then I started thinking that when we leave, if that is in the near future, we could keep it but rent it. Of course, since we wouldn't live in this country anymore, we would need a property manager. From what I read, they take about 10-15%, although it depends on the property manager.
Obviously, it would depend on where the house is located, what its rental potential is, how much rehabbing needs to be done, ...

Would it even be worth it? Is this one of these ideas that sounds really good in my mind, but once in real life, after adding property taxes, closing costs, insurance, maintenance, then later property management costs, more maintenance, we will just end up wasting money?

My husband's view is that even if we buy something, live in it a few years then sell it, we would end up wasting less money than what our current rent would have cost us for that number of years. But I doubt it is that simple.

Any advice would be very appreciated!

arebelspy

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Re: Buy a house cash, live in it a few years, then what?
« Reply #1 on: March 15, 2014, 08:35:19 AM »
Everybody always says that you shouldn't buy a house if you aren't going to stay in it for at least 5 years, because of the associated costs. But people who say that always assume you will buy with a mortgage. If one pays cash, does the same rule apply?

The cash instead of mortgage may make a small difference, because you'll have less closing costs when purchasing.

My husband's view is that even if we buy something, live in it a few years then sell it, we would end up wasting less money than what our current rent would have cost us for that number of years. But I doubt it is that simple.

It's not. Due to transaction costs while buying and selling, along which opportunity coat of the money sitting in the house instead of in investments, as well as other costs (taxes, insurance, maintenance, etc.) you could come out well behind renting. Or ahead. It depends.

Play around with the NYT buy vs rent calculator, changing around some assumptions to see what would be best:
www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0

Then I started thinking that when we leave, if that is in the near future, we could keep it but rent it. Of course, since we wouldn't live in this country anymore, we would need a property manager. From what I read, they take about 10-15%, although it depends on the property manager.
Obviously, it would depend on where the house is located, what its rental potential is, how much rehabbing needs to be done, ...

Since you are in the situation of knowing ahead of time it may turn into a rental in a few years, you can take the advantage of purchasing it with a rental in mind.  Make sure the numbers will work. Then live in it.  In other words, look at it through the eyes of an investor, and don't focus on the stuff you might want as an owner occupant that are potentially unhelpful as a landlord.

Welcome to the forums!
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Lolavy

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Re: Buy a house cash, live in it a few years, then what?
« Reply #2 on: March 15, 2014, 05:03:46 PM »
Thank you for the NYT buy or rent calculator. I saw a link for it on a different page, but that link was broken.

I have already noticed a difference in how I look at houses, knowing that it may be short term/rental. I am not looking for the "perfect for me" house anymore. It sure opens up a lot more possibilities. It also brings new constraints, such as which location could bring the best rent income, etc.

So basically, it is not necessarily a crazy idea, but we need to play with different scenarios to see whether it would actually be good or not. At least it is reassuring to know that it could work! I started looking up all kinds of costs (houses, closing costs, insurance, repairs/maintenance/replacing various things), to get an idea of what to expect. Still need to research how renting from an owner's point of view works, what things to focus on. Then I will try to put everything together.

Cheddar Stacker

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Re: Buy a house cash, live in it a few years, then what?
« Reply #3 on: March 15, 2014, 09:12:55 PM »
Lolavy, where are you looking? I'm from the same general area and I have one rental in south city where I grew up. There are some very low cost homes in certain areas, but I haven't pulled the trigger on anything else yet.

Good luck with your rent vs. buy decision, and welcome to the forum.

Willbrewer

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Re: Buy a house cash, live in it a few years, then what?
« Reply #4 on: March 16, 2014, 12:05:10 AM »
You could just plan to live in it for two years, fix it up and sell it for the tax-free profit. There are no federal capital gains tax owed (up to a certain amount of gains) if you live in a house for at least two years out of the previous five years. I've done that a couple of times in my life. But I'm not sure how often it can be done.

To those in the know, could a person sell a house they've lived in every two years free of cap gains tax, or is there some frequency limit to the deal?

Argyle

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Re: Buy a house cash, live in it a few years, then what?
« Reply #5 on: March 16, 2014, 03:29:16 AM »
Renting out a house while you live in a different country can be doable, but the potential hassles are great.  They include possibly having to fly over to deal with problems if your property manager proves unreliable and leaves a mess on your hands.  Even the best-vetted managers can be no as good as advertised.  I speak from experience.  I wouldn't go this route, personally.  If you're going to live in another country for an appreciable amount of time, use the money to buy a rental house over there if you want a house you can rent out.

Lolavy

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Re: Buy a house cash, live in it a few years, then what?
« Reply #6 on: March 16, 2014, 08:33:41 AM »
Lolavy, where are you looking? I'm from the same general area and I have one rental in south city where I grew up. There are some very low cost homes in certain areas, but I haven't pulled the trigger on anything else yet.

We currently live in Richmond Heights, so we thought we would look in RH/Maplewood/Dogtown first, but there aren't that many low cost houses around here. Too bad, because we really like the area, it is very walkable, very central. We started looking around Tower Grove. We aren't against South City, there seems to be more choice there, but that puts us further away from where my husband works. (We both work from home but he has to go to the office once in a while, and if he were to get a different job in the company, he most likely would have to drive there every day)
At this point, the only area that we would prefer to avoid is anything North City, Overland, etc.

You could just plan to live in it for two years, fix it up and sell it for the tax-free profit. There are no federal capital gains tax owed (up to a certain amount of gains) if you live in a house for at least two years out of the previous five years. I've done that a couple of times in my life. But I'm not sure how often it can be done.
That is good to know! This is what you are talking about, right? http://www.nolo.com/legal-encyclopedia/the-250000500000-home-sale-tax-exclusion.html
From what that page says, "If you meet all the requirements for the exclusion, you can take the $250,000/$500,000 exclusion any number of times. But you may not use it more than once every two years."

Renting out a house while you live in a different country can be doable, but the potential hassles are great.  They include possibly having to fly over to deal with problems if your property manager proves unreliable and leaves a mess on your hands.
That is what scares me. Being away means that we would have a lot less control over what happens. So unless we find somebody really reliable, it could become problematic. Thank you for your advice.

Cheddar Stacker

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Re: Buy a house cash, live in it a few years, then what?
« Reply #7 on: March 16, 2014, 11:00:56 AM »
You could just plan to live in it for two years, fix it up and sell it for the tax-free profit. There are no federal capital gains tax owed (up to a certain amount of gains) if you live in a house for at least two years out of the previous five years. I've done that a couple of times in my life. But I'm not sure how often it can be done.

To those in the know, could a person sell a house they've lived in every two years free of cap gains tax, or is there some frequency limit to the deal?

I thought about mentioning this as well but wasn't sure OP's tax situation as she is not from the US. I guess they are still paying taxes though while here on a work visa maybe.

I'm not aware of any limit on how many times you can do this, it just has to be your principal residence for at least 2 of the 5 years prior to the sale. I've often wanted to do this every few years but I know my wife wouldn't be on board with moving that often and constantly living in a work zone. Bummer.

Lolavy, where are you looking? I'm from the same general area and I have one rental in south city where I grew up. There are some very low cost homes in certain areas, but I haven't pulled the trigger on anything else yet.

We currently live in Richmond Heights, so we thought we would look in RH/Maplewood/Dogtown first, but there aren't that many low cost houses around here. Too bad, because we really like the area, it is very walkable, very central. We started looking around Tower Grove. We aren't against South City, there seems to be more choice there, but that puts us further away from where my husband works. (We both work from home but he has to go to the office once in a while, and if he were to get a different job in the company, he most likely would have to drive there every day)
At this point, the only area that we would prefer to avoid is anything North City, Overland, etc.

I would think RH has some good deals. My sister lives there, and you're right it's very central. Good luck!

Lolavy

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Re: Buy a house cash, live in it a few years, then what?
« Reply #8 on: April 14, 2014, 05:38:48 PM »
Wow, I hadn't noticed that so much time had gone by since I last logged on here! Just to follow up and answer your last comments...

People with a work visa still have to pay taxes to the USA, so it would not change anything. In my case, I am actually a US citizen now (dual citizenship). So it really would not be any different than for US-born citizens, except that I can still go back to my country if I want to (and would still have to pay taxes to the USA

Back to the house conversation, there really wasn't anything interesting in RH, but we found a house near Tower Grove that we both like, in decent condition, meaning still needing some improvements but not a total renovation, and for a really good price! Our offer was accepted a couple of weeks ago, we have not gotten the keys yet but it is all looking good.
How long we stay, whether it will end up being rented or sold back, remains to be seen. For the time being, we are happy with our decision.

Thank you to everybody who answered my questions!
« Last Edit: April 14, 2014, 05:42:16 PM by Lolavy »

tryan

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Re: Buy a house cash, live in it a few years, then what?
« Reply #9 on: April 15, 2014, 01:33:26 PM »
I wouldn't buy with 3 year horizon ... you might find your self "stuck".  Being "stuck" - unable to sell - will negate any cost saving.

mpbaker22

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Re: Buy a house cash, live in it a few years, then what?
« Reply #10 on: April 15, 2014, 07:04:14 PM »
Which side of Tower Grove Park is your prospective property in?  I'd be leery of owning property in certain neighborhoods if you're going to rent from overseas.