[edit: updated with case study info] Just exploring an idea... renting our home (in Los Angeles) and buying a second a few miles away. In theory, is it a good investment opportunity?
Market Value: 550k
Original Purchase price: 410k
Original Mortgage Amount: 328k
Interest Rate: 3.875%
Mortgage Term: 30 years
Term remaining: 25 years
Amount remaining on mortgage: $280k
Gross Rents: $2500-3000 (no utilities)
Principal and Interest (the P&I of your PITI - should match with the above info): 1425/month
Taxes and Insurance (the T&I of your PITI): 600/month
HOA costs: 0
Deferred maintenance notes: needs new roof (some point in the next 5 years.)
Second home would probably be $450-600k range, less than 10% down (if we did it now)
Reasons we're considering:- We need a house with more space for a growing business, but we already have 50% LTV in our current house
- We've got a low interest rate and very low payment relative to rental prices in the area. After basic costs (mortgage, insurance, tax), we could net $500-1k/month (plus tax write-offs)
- We qualify for an FHA loan. I looked into a piggy back HELOC loan for the 2nd, but prefer FHA (fixed rate)
- Mortgage insurance on 2nd home would be $400/month at most (high, but likely net positive with rental income)
- The broker I spoke with said if you think of MIP like a mortgage rate, the MIP would be the equivalent of paying a 4.4% loan vs 3.6%
- I haven't done the math, but good chance we could refinance within a few years (having 20% into the new house). This is assuming rates are still below 4.4%.
- Being a landlord isn't an issue, and our house is in great condition (new AC, water heater etc), so a pretty good idea of expected maintenance and major expenses.
Reasons not to do it:- Second home will be over 90% LTV (if we buy in the near future)
- I've always viewed PMI/mortgage insurance as wasted money... but is it leveraging debt in this case?
- A second house is a lot of eggs in one basket (SoCal real estate). The ratio of our home equity to retirement/investments is about 3:1 (which is already high - I'd prefer more in investments just for diversity)
- Earthquakes. We'd have insurance on both homes, but the deductible is 15%. The two houses would probably be within 5 miles of each other, so a big one could be costly. At least in the stock market, you aren't paying 15% just to recover after a huge loss.
- It's SoCal, where homes are stupid expensive (although the homes we are talking about here are under $600k, and demand for the area is rising).
- Signs of housing bubble (starting to see frantic "gotta buy" behavior like we saw in 2006-07. But maybe it's always been like that)
- 2nd home in SoCal could be a lot of work (and risk) relative to investing in the stock market (indexes are easy!). Our first home was purchased pretty close to the bottom - it's gone up 35% since 2009, which is still less than S&P returns.
What other considerations am I missing? My initial instinct is to wait til we have 20% to really consider it, and just power invest in the meantime. It doesn't help the business growth issue, but it's manageable (for the time being).