We have been looking to move for numerous reasons. We have found a home that is obnoxiously large and more expensive then anything we would ever consider buying to live in long term. However this home is in a very expensive neighborhood, and great location but needs TLC. It was a one owner home, where the wife recently passed. Her son is selling. Although it appears solid & has a good layout, it needs an updated kitchen, vanities in bathrooms, and painting. They have pulled out most the carpet and just left the subfloor. I believe we could do the work needed ourselves over time while we live there (5-7 years). Honestly, its so big we could just live on the first floor and not be in any hurry to update the upstairs.
I had our agent pull comps - current value on low end is $548,000 - the high end is 623,000. The house is currently on the market for $475,000. I don't think we would feel comfortable paying much more then $410-420,000. To cover the much larger down payment we would sell our current home and one of our least profitable rentals. We would have to put it in a 30-yr loan to keep our 401K's maxed out and save the cash to update. The mortgage payment would be approx. $400/month more then our current mortgage payment.
Is this too far out of reach, or just plain crazy?
I agree with most others about not doing it unless... you have taken a lot of depreciation of your current rentals already. Let me explain, because this would only be worth it if this criteria is met:
1) You are looking to invest in an expensive property to live in
2) You have a rental portfolio where the basis (book value) of your investments has went down a lot
- this means that you would have to pay a lot of money in taxes if you were to ever sell
3) You do not have to move into this place right away, and are willing to rent it for a couple of years
If you sell a few of the rentals that have depreciated on paper, and do a 1031 exchange to buy this house, then move into it after 2 years of renting it out, then you will never have to pay taxes on the part that you depreciated (as long as you live at least another 2 years in the property, which sounds like you would.)
For example, say you have 4 properties with a combined basis of $100,000 but market value of $400,000. With the 1031 exchange you could bi-pass paying taxes on the $300,000 of gains. So basically you would pocket another $60,000 (assuming tax rate of 20%.) Once you sell the house then you can buy the investments back and have the depreciation start over from the beginning, or you can diversify and buy stock with that money as well, which you can't do now because if you sell your properties then you will get hit with an enormous tax bill.
Not saying this is the way to go, but I just want to throw out this option of using this house as a potential tax shelter. I hear about it from Harry Border's class (I am guessing you heard of him, he is a closing attorney in Louisville who specializes in rental RE)