Author Topic: Buying Home While Keeping First Home  (Read 5712 times)

oldtoyota

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Buying Home While Keeping First Home
« on: January 22, 2014, 09:53:43 AM »
I talked with a finance guy who said I should at least consider keeping my current home when I buy a new one.

He said he'd never recommend this if we had debt. His thinking is that my house will be worth more and I'd either 1) get to use the rent as income while waiting for the selling price to increase and/or 2) sell the house later for a profit.

By selling my current home, I can probably make $10K over what I paid. I think that is a fair/conservative estimate based on what other homes sell for around here. Our home is in good condition too.

I don't know much about real estate--just the basics like the 1 and 2 percent rules, etc.

I am not even sure I want into this business!

However, maybe I should at least consider the option. What can I go read to understand what I should look for in the numbers to make sure we can really afford to keep our current house while buying a new one?

Side note: It's funny that this guy assumes I will hire an interior designer to put up curtains (got my current ones from overstock.com for $50 LOL) and that I'll "need" to buy a lot of furniture.

The assumption that my new home will be larger is also funny to me. I actually want a smaller home...

« Last Edit: January 22, 2014, 11:04:27 AM by oldtoyota »

stevesteve

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Re: Buuying Home While Keeping First Home
« Reply #1 on: January 22, 2014, 10:11:30 AM »
I don't know much about real estate--just the basics like the 1 and 2 percent rules, etc.

I am not even sure I want into this business!

I feel like that answers most of your question.  There are plenty of resources online and some in the forum where you can read about services to run credit checks on potential renters and the like.  Then there' s making sure you can fix problems or you have a reliable contractor who can fix problems.  There's just so much that can go wrong and even when nothing goes wrong I know a few people who would have been better off investing the cash value.  To make the time and effort worthwhile I think you need to want to do it, be willing to fix things yourselves and avoid paying for outside services, have plenty of money in a cushion, and hope the house appreciates.  I would only ever do it if I were very dedicated and wanted to build up a portfolio.

_JT

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Re: Buuying Home While Keeping First Home
« Reply #2 on: January 22, 2014, 10:14:55 AM »
Your finance guy is spouting conventional wisdom he likely doesn't understand. And chances are if you didn't evaluate your home like a rental when you bought it the numbers won't be great to use it as one. But, every situation is different, so if you want to try it you'll just have to do all the homework.

Although I have to agree with stevesteve. If you don't know much about real estate and don't know whether you're interested in it, that's a pretty awful combo to enter real estate with, IMO.

Another Reader

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Re: Buuying Home While Keeping First Home
« Reply #3 on: January 22, 2014, 10:20:14 AM »
I don't agree with the premise you need to build a portfolio.  One or two rentals can be a great way to diversify and can provide some tax shelter.  However, landlording is not for everyone and you need to run the numbers on your current house to see if the house makes sense as a rental.  Read a couple of the books on Arebelspy and Brandon Turner's lists, pinned to the real estate and landlording page, and add Bigger Pockets to your blog-reading list.

stevesteve

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Re: Buuying Home While Keeping First Home
« Reply #4 on: January 22, 2014, 10:25:13 AM »
I don't agree with the premise you need to build a portfolio.  One or two rentals can be a great way to diversify and can provide some tax shelter.

I should have clarified what I meant.  You don't need a portfolio (which can balance certain risks and cross subsidize each other) but you do need to have the cash / assets to deal with an eviction / new heater / etc.   The problem I've seen is that people have their one rental property and 401(k) and they either have to dig into their personal emergency fund or their retirement savings to deal with expenses from their rental.  Whatever the case is, make sure you have a 'rental housing emergency fund' of some sort.

oldtoyota

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Re: Buuying Home While Keeping First Home
« Reply #5 on: January 22, 2014, 11:04:02 AM »
Thank you for the advice. I have to give more thought as to whether this is something I really want to do.

I'd started digging into biggerpockets.com and that is where I learned some basics.

Since we bought the current house, we've replaced a lot of the old equipment so we'd be starting with a fairly new slate.

IIRC, I ran these numbers once a while ago and the story wasn't favorable. I'll have to dig up my old notes or recreate what I did to take another look at the whole picture. However, based on what I've read, a lot of folks don't agree with whether one should use 1 percent or 2 percent. Lots of disagreement so it's hard to know what is the best course of action!

The finance guy also suggested I could pay less than 20% down without PMI. I don't know what to make of that. I'm waiting to see the overall mortgage cost on paper, and then I'll ask more questions of him.

I appreciate your help, all!



arebelspy

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Re: Buying Home While Keeping First Home
« Reply #6 on: January 22, 2014, 11:12:01 AM »
We may be able to help more if you give us some basic numbers, if you're willing.

Stuff like:
What is the house worth now?
What will you net if you sell it?
What will it rent for?

You should probably talk to a Realtor for #s 1 and 3, to get accurate numbers, not just a WAG.  :)
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oldtoyota

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Re: Buying Home While Keeping First Home
« Reply #7 on: January 22, 2014, 11:30:00 AM »
We may be able to help more if you give us some basic numbers, if you're willing.

Stuff like:
What is the house worth now?
What will you net if you sell it?
What will it rent for?

You should probably talk to a Realtor for #s 1 and 3, to get accurate numbers, not just a WAG.  :)

=-D I figured I would need the numbers on the new house, and I don't have that yet so I left it all out for now.

Sincere question: What would a realtor know that I don't since I can see all of the average sales for my area (and have probably been inside more of the houses)? I know what the foreclosure went for, what the slightly larger house went for, etc.

I also know developers have an interest in this area...which is one of many reasons why I've stuck around. I bought low.






arebelspy

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Re: Buying Home While Keeping First Home
« Reply #8 on: January 22, 2014, 11:37:17 AM »
=-D I figured I would need the numbers on the new house, and I don't have that yet so I left it all out for now.

Sincere question: What would a realtor know that I don't since I can see all of the average sales for my area (and have probably been inside more of the houses)? I know what the foreclosure went for, what the slightly larger house went for, etc.

I'm not sure why the numbers on your new house would matter - you're moving there regardless, right?

So what you do with the old one is a separate issue (unless you need the money from the sale for a down payment or something obvious like that) - cost of that, or what you could rent the new one, etc. seem irrelevant to me, but I may be missing something silly.

If you're confident in running your own comps, go for it.  You probably don't have access to rental comps though, right?
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 two 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.
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oldtoyota

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Re: Buying Home While Keeping First Home
« Reply #9 on: January 22, 2014, 11:38:26 AM »
We may be able to help more if you give us some basic numbers, if you're willing.

Stuff like:
What is the house worth now?
What will you net if you sell it?
What will it rent for?

You should probably talk to a Realtor for #s 1 and 3, to get accurate numbers, not just a WAG.  :)

Oh. I misread your question. You were telling me to ask an agent about #3. I thought you said #2. I get it. That makes total sense! The rents here are nuts and ranges from the luxury condo to the normal SFH.




tryan

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Re: Buying Home While Keeping First Home
« Reply #10 on: January 22, 2014, 11:55:14 AM »
The fact that the "finance guy" is telling you to become a landlord tells me he is NOT a landlord.

Steer clear ..... unless its something you REALLY want.  Because you need to REALLY want this one.

arebelspy

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Re: Buying Home While Keeping First Home
« Reply #11 on: January 22, 2014, 01:01:30 PM »
The fact that the "finance guy" is telling you to become a landlord tells me he is NOT a landlord.

Steer clear ..... unless its something you REALLY want.  Because you need to REALLY want this one.

Agreed, but looking at the numbers may help you immediately go "nope, not worth it" or "well, for those numbers I can want it.."  ;)
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 two 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.

oldtoyota

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Re: Buying Home While Keeping First Home
« Reply #12 on: January 22, 2014, 02:08:41 PM »
The fact that the "finance guy" is telling you to become a landlord tells me he is NOT a landlord.

Steer clear ..... unless its something you REALLY want.  Because you need to REALLY want this one.

Agreed, but looking at the numbers may help you immediately go "nope, not worth it" or "well, for those numbers I can want it.."  ;)

Thanks! I just spoke with a real estate agent and asked her if she could get me the rental info. She is going to send me something soon.

Funny. She *also* suggested I keep this home because of how the area is growing. Based on nothing...

Then, she asked me what I wanted to do...keep it to rent or sell. Um, how do I make a decision without the data? I said that I wanted the rental numbers so I could see if renting a home is a viable option for us. (shakes head)

Data...I like data!



arebelspy

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Re: Buying Home While Keeping First Home
« Reply #13 on: January 22, 2014, 02:30:57 PM »
Yeah, it's amazing how little people analyze and think things through.

They hear something is a "good idea" (or bad idea) and go with it, without actually bothering to check if it's true for them.
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 two 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.

oldtoyota

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Re: Buying Home While Keeping First Home
« Reply #14 on: January 23, 2014, 10:27:34 AM »
So far, I feel like people just want to screw me over. That is in reference to the two mortgage people I've talked with recently.

Today, I asked an agent if it would be advisable to work with a foreclosure specialist on a bank-owned home and she got snippy with me. I guess she assumed I was talking about replacing her, but I am not sure. If I was going to replace her, then why would I be dumb enough to mention it to her?

And this person came recommended to me! She said if I want a foreclosure specialist, then I should hire one and that she's been selling homes for 30 years. Then, she told me that the bank-owned home is rotten. Then, why send it to me to consider?!

After that, I decided not to work with this person. Surely, I can find a pleasant person? Or, is this just how people are in the industry?

So far, I've met two extremely stupid real estate agents.

On the bright side, I think it can only go up from here...but who knows?


« Last Edit: January 23, 2014, 10:30:38 AM by oldtoyota »

oldtoyota

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Re: Buying Home While Keeping First Home
« Reply #15 on: January 24, 2014, 06:51:19 AM »
I am getting this now! The agent was all touchy about not getting her entire commission. It's like she is thinking about having children before we've kissed. I get how this works. Her snippiness at least makes sense now.


oldladystache

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Re: Buying Home While Keeping First Home
« Reply #16 on: January 24, 2014, 09:03:38 AM »
Don't forget, landlording is a job, not just an investment. It can be a good job, but it's still a job.

For me it was a very good job but I didn't mind the occasional middle of the night phone call, and the occasional tenant who couldn't come up with the rent.

Yes, you can hire a manager for around 10% of the rent, but nobody will care about your property like you would.

So if you're considering it, don't just look at the financials. There's a lot more to it than that.

oldtoyota

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Re: Buying Home While Keeping First Home
« Reply #17 on: January 24, 2014, 10:59:55 AM »

So if you're considering it, don't just look at the financials. There's a lot more to it than that.

Thank you for the advice!

Milspecstache

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Re: Buying Home While Keeping First Home
« Reply #18 on: January 24, 2014, 06:53:05 PM »
I'm a big proponent of rentals, particularly when you don't already have one or two.  It's an excellent way to diversify and most people can handle 1 or 2 without getting too overwhelmed. 

To cover a few concerns that I would have:
Very hard to sell a rental later when instead you could sell it now.  This has to do with the fact that since you aren't living there it will be in worse shape and the new tenants will likely not show the house as well as you would while still living there.  Also you will lose tax advantages after a few years.  The way I see it, if you decide to rent it should be a long term decision.

Additionally, will you live close enough to handle the minor emergency calls?  Toilet clogged, garbage disposal clogged (my opinion is get rid of them as most tenants aren't smart enough to unjam them themselves and I don't want to pay to unclog potatoes), troubleshoot water heaters, etc.  This will allow you to save a lot of what you would otherwise spend on service calls.

Is the house set up well for a rental?  By that I mean, are you living with issues now like old plumbing fixtures, old/lead paint, etc.  These are things that will cost you more in the future.  Along those lines I have replaced old carpet with commercial grade or vinyl to reduce future replacement costs.  I've also tried to use better paint on the outside to reduce future paint costs.  In fact, once I know I am converting to a rental I always try to anticipate plumbing problems and put in new fixtures ahead of time.

Will your property taxes go up?  Most areas will raise your property taxes once they figure out you are renting.  Don't be surprised by this as it might turn a break-even or slightly positive property into a situation where you are required to input money every month.

In my opinion, the key to finding a good tenant is the credit score.  If they have a good credit score they will likely not fall behind in rent or destroy the property.  I have yet to find a good way to mitigate bad scores, other than to require a co-signer.

What is your interest rate on your mortgage?  Is it low or is it adjustable?  The ideal rate is a 30 or 15yr fixed.  I would consider anything else risky.  I believe you may have said it was paid off.  That is even better!  Another option is to do a HELOC on the rental which will give you a pool of ready-cash in the future.  The HELOC's interest is then tax deductible.

oldtoyota

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Re: Buying Home While Keeping First Home
« Reply #19 on: January 25, 2014, 12:51:46 PM »
Thanks! I have a 15 yr mortgage. I am blanking on the interest rate. It was good at the time. Maybe 4% or so.

Based on the rental numbers I received from an agent, I don't see how it would work financially. Strange though. My neighbor bought a foreclosure, had his mom as project manager to fix it up, lived in it for a bit to get the better mortgage deal, got renters, moved out into a different former foreclosure with his brother where he's probably not paying much to live, and somehow made this all work. I probably should not compare as I bet he got a better interest rate due to the timing, and I know he paid $50K less than we did since the house was a foreclosure. That said, I know he must have put tens of thousands of dollars into the house, because the contractors were there every day for months and months.

Maybe his parents are bankrolling him...

As for us, I just don't see it working out based on the numbers I see. I will run it past the spouse to make sure I am not missing anything.

I need to get my house exterior painted and the bathroom redone before we move out, and that is going to eat up a lot of my time and brain power. Also, we need a new refrigerator because frigidaires suck.

Overall, selling this house and buying a new one is challenging b/c there are multiple scenarios. If we lived here, we'd have it paid off in around 8 years. That is attractive. However, I'd have to figure out where to send the kiddo to school. We pay for private, which we can do since we live in a cheap area in DC with not-the-best public schools. Everyone else was too scared to move here years ago...but we weren't. And now is our chance to profit from that and move to an area with better schools.

It seems like I need to make a spreadsheet of all of these details to see what ends up being the best solution.