Keep $2M house while buying another $2M house *Conclusion*

[InvestandChill]

Hello Forum-People,

Long-time fan, first-time poster (yes, yes, I'm a lurker)

The Plan:
Buy a $3M 3Bed/2Bath w/ 10% down, this requires a 2.7M mortgage

Liabilities to Overcome:
a $2M 2Bed/2Bath with 900K mortgage on it

Assets:
Amazing Credit Score
$300K cash
40K investment in a hot pre-ipo startup
150+ ISO in other pre-ipo equity
Parents who are qualified renters with 5+ yrs of rental history in their 6-unit building

Other
Income: 245K/yr

Plan A
In the past, banks have been hesitant to give me a mortgage using pre-ipo equity due to the risk. I need to know what banks or strategies you guys recommend that will allow me to leverage my equity while going into a higher debt-to-income ratio.

Plan B
I have discussed that I would rent out the $2M home but since I lack renting history, I couldn't really use this as part of my expected income. My current idea is to utilize my parents history as landlords but then I would need to check how their income (low) and debt ratio (high) would make my overall picture appear to a bank.

Any other strategy I should investigate?

In advance, thanks!

*Conclusion*

I ended up going with Plan C! Sold our home and will now lay low for another few months before making the next move. Thanks everyone for the reality checks and the solid tips.

[Jeremy E.]

I would think having 90% of your money/debt in San Francisco housing is not very diversified and is riskier than I would go. What if the housing market in San Francisco tanked?

[soupcxan]

Ignoring everything else, how can you qualify for a $2.7M loan on $245k income? Makes no sense.

[webcat86]

I don't understand. Your parents being established renters has what significance? And how does investment in (seemingly early days) startups offer security? San Francisco startups are a dime a dozen and the vast majority go out of business

Maybe there's more to your story than you've so far explained, as it currently seems quite fanciful

[webcat86]

Also if banks are hesitant to loan to you, there's good reason. That equity in startups is risky and if the company goes you no longer have that money. A bank is not going to consider that as liquid cash should you run into trouble repaying the mortgage - and if it's a hot stock, you probably wouldn't take it out for the mortgage, so the bank is right to worry on both counts.

[BarkyardBQ]

The fact that you list a credit score and your parents as assets indicates you do not have enough experience or knowledge to do this.

[seattleite]

I would be very worried if a bank is worried about giving you money.

Is your pre-ipo equity liquid? What is the market for this equity like? Can you cash out right now? It's basically funny money until you can cash it out. Believe me, I know, I've been through this myself.

If you need to show the bank that you can rent your house, then rent out your house. Move back in with your parents. How much will be be able to rent your house out for? Will you be able to cover both mortgages with that income?

You make only $20k/month and you are planning on taking on $17k/month in debt. I'll let that sink in a moment.

Your only assets are $300k in cash and equity in a house that's in an insane bubble right now.

Even if the bank would give you money you are playing with fire.

[RWD]

Assuming you listed gross income and you file your taxes as single it looks to me that this house alone would exceed your income.

Estimated income after federal and state taxes: $161,158

Mortgage payment (30-year fixed at 4%): $12,890/month = $154,680
Property taxes estimate: $35,478
Maintenance estimate: $30,000
Insurance estimate: $13,800
Total annual cash flow required: $233,958 (almost $80k over your income, before you've even thought about food, utilities, etc...)

With your income you should be looking at a house priced $500k - $750k tops. A quick check on Zillow leads me to believe that isn't impossible in San Francisco. I think most of the forum members on here would rather retire on $3 million than buy a house with it.

[JLee]

Sell the $2mil house for $1mil profit and retire in a LCOL area. 

Done.

[soupcxan]

The troll-fu is strong with this one.

[InvestandChill]

Thanks for the reality check guys. I have some responses but right now my baby is being impossible. I'll reply soon as I can.

[dragoncar]

holy shit, what forum is this?

ok seriously, maybe a hard money loan plus read this http://forums.redfin.com/t5/Bay-Area/RSU-income-as-part-of-mortgage-calculation/m-p/523090/highlight/true#M125683

[Jack]

Ignoring everything else, how can you qualify for a $2.7M loan on $245k income? Makes no sense.

I read the original post yesterday. My first thought was "WTF, how did he even qualify to buy the first house, let alone a second, even more expensive one?" My second thought was "maybe HCOL areas are somehow different and my assumptions about sustainable debt vs. income don't apply," so I decided to wait and see what others wrote. I'm glad y'all have validated my first thought!

[justajane]

You don't make enough money to afford that much real estate.

Is your main motivation in keeping both properties potential appreciation? Why are you moving?

I'm glad I don't live in a place where an extra bedroom costs $1M! Please tell me you're gaining a better location and a nicer house overall with that.

[Freedom2016]

Assuming you listed gross income and you file your taxes as single it looks to me that this house alone would exceed your income.

Estimated income after federal and state taxes: $161,158

Mortgage payment (30-year fixed at 4%): $12,890/month = $154,680
Property taxes estimate: $35,478
Maintenance estimate: $30,000
Insurance estimate: $13,800
Total annual cash flow required: $233,958 (almost $80k over your income, before you've even thought about food, utilities, etc...)

With your income you should be looking at a house priced $500k - $750k tops. A quick check on Zillow leads me to believe that isn't impossible in San Francisco. I think most of the forum members on here would rather retire on $3 million than buy a house with it.

Yes, the math here makes the scenario look impossible. What info did you forget to provide (i.e. huge inheritance or spousal income greater than yours)? Because otherwise I don't see how this is even possible.

[InvestandChill]

Hi Everyone,

Thank you so much for the feedback. I yield to the point- $3M is impossible. Now let's work on keeping the $2M house while buying a second $2M house.

RWD- let me use your same format to start my investigation

Estimated yearly income after federal and state taxes, married filing jointly: $180,000.00
Monthly Gross Income: $15,000.00
Mortgage payment (30-year fixed at 4%): $8,593/month = $103,116
Property taxes estimate: $23,652
Maintenance estimate: $10,000 (not worried about extensive maintenance)
Insurance/HOA estimate: $13,000
Total annual cash flow required: $149,768

Previously, I only listed assets I was willing to allocate to this project. Those are not my only assets. Retirement and a few other items are off-limits so I failed to include them, thus causing confusion. I'll try to be more clear.

Dragoncar- You nailed one of my issues. That was a helpful link. From what I understand, only assets that can be shown on a W2 can be considered as part of income. If I have RSU's that I sell at a regular pace, then yes, they can be included. Now I'm trying to find a bank that will do something similar with ISO/private equity.

Lol, yes, I had a reason for placing my parents in the post. Part of the plan is to potentially create an LLC to bring in their landlording history into the equation. Otherwise, I'm not sure I will be able to rent out my current house and that rental income count towards my DTI ratio. Assuming, I can use this income. Then I can add some income:

Estimated Rental Income from First House: $60K
+ after tax income $180K
Total Cashflow is : $240K

Putting me at a distance to total annual cash flow required: $149,768

[InvestandChill]

There goes my attempt to be more clear.....

I did a mortgage calculation assuming 10% down on a $2M home. I used 4% on a 1.8M loan.

[InvestandChill]

Justajane- That's a very good question. Sometimes I feel like I need to keep moving or I risk permanent stagnation. I also really enjoy increasing my potential Net Worth through calculated leverage and arbitrage opportunities.

Yes, haha, extra bedrooms here can cost an extra $1M. It would be an upgrade of sorts, so we would definitely be getting something from this.

seattleite- You bring up a good point! I will ask if I can show a lease for the current house and if that will satisfy any potential lenders despite the fact that I don't have history being a landlord.

My pre-IPO investments are semi-liquid...is that a real term? I could cash out in 2-4 months through private equity exchanges that are out there. Of course, 15% or more of the value would be lost in the exchange.

These are all great points and ideas.

[soupcxan]

You're in the wrong place for this question.

[undercover]

Justajane- That's a very good question. Sometimes I feel like I need to keep moving or I risk permanent stagnation. I also really enjoy increasing my potential Net Worth through calculated leverage and arbitrage opportunities.

If this is your primary motivation for a second $2M home, please do some serious reading before you make a huge mistake. You'd probably be better off dumping everything from this point on into a savings account yielding 1% if you think you're ever going to come out ahead trying to buy retail properties in the Bay area to rent out. That's like trying to milk a cow by wearing 10 pairs of gloves. And if you're hoping for appreciation, may God rest your soul when things go sour.

Banks are not going to be amused by short term rental income. You usually need at least 2 years, though you might find a more lenient bank. So, in that case, there's no way a bank is going to lend you another ~$1.6 million. Your DTI ratio is too high from your current mortgage. They usually require 45% if you didn't know.

[RWD]

Hi Everyone,

Thank you so much for the feedback. I yield to the point- $3M is impossible. Now let's work on keeping the $2M house while buying a second $2M house.

RWD- let me use your same format to start my investigation

Estimated yearly income after federal and state taxes, married filing jointly: $180,000.00
Monthly Gross Income: $15,000.00
Mortgage payment (30-year fixed at 4%): $8,593/month = $103,116
Property taxes estimate: $23,652
Maintenance estimate: $10,000 (not worried about extensive maintenance)
Insurance/HOA estimate: $13,000
Total annual cash flow required: $149,768

[...]

Estimated Rental Income from First House: $60K
+ after tax income $180K
Total Cashflow is : $240K

Putting me at a distance to total annual cash flow required: $149,768

Shouldn't that last number be $90,232?

Even assuming $60k positive cash flow from a rental this is still committing over half your income towards a single property. A third of your income or less would be recommended. Also, with only putting 10% down I suspect you will be paying mortgage insurance (I estimate this would be about $8-9k the first year).

Overall this strikes me as unnecessarily risky. There are too many things that could go wrong that would probably be okay if you weren't so heavily leveraged. Extended vacancy on the rental. Large unexpected repairs in one year (even if the average ends up being as calculated) on either or both houses. Sudden housing market drops. Loss of employment. Et cetera. If you owned 10 houses for $400k each you would be mitigating a lot of risk, but by concentrating that much money into just two houses you're going to have to rely on some luck.

[waffle]

Here's a crazy idea...

Sell your current house and pull out that 1.1 million in equity. Do not buy a house in the bay area bubble. Rent instead. By your own numbers you should be able to rent a comparable house for about 60k a year. Stay there and work as long as you like.

In the mean time if your heart is set on investing in real estate take that 1.1 million and buy a boat load of rental houses in an area where it makes sense. Find the right deals and a good property management company to manage them for you. If you put 25k down on each one you have enough cash to buy 40 rentals (give or take depending on the purchase price) plus have a good chunk left over for maintenance. I would probably diversify more than that but that's just one scenario that shows how silly renting out a single house with that much money tied up in it.

[zephyr911]

Sheeyit, if you brought $1.1M to my town you could lock in six figures (and rising) in tax-advantaged rental income, forever. Add some leverage and you do even better.

What you're talking about is high-risk speculation, with a questionable upside.

[NorCal]

This sounds like a horrible idea, on every level.  Leaving aside the real estate questions (which I'm not an expert on), using pre-IPO shares for anything is absolutely stupid.

Most employees don't realize how heavily leveraged these hot tech companies are.  Even if you're at Uber or (particularly) Square, those shares could easily be worthless.  Learn how Participating Preferred shares with full-ratchet protection works first.  Even a small cut in valuation for a tech firm could effectively wipe out 100% of the value of common options and nearly all of the value of common shares.

With Square's IPO being priced below their last financing round, it is a fair bet that employees will walk away with very little. 

http://www.forbes.com/sites/petercohan/2015/11/07/unicorn-squares-ipo-triggers-terrifying-talk-of-ratchets/

Now imagine your real estate investment if your ISO and RSU's go up in smoke.

[InvestandChill]

Waffle, I like how you think. I'm going to crunch through some numbers with exactly that in mind.

Undercover, I don't think it's possible to come out ahead renting a house out in my area. At least not one in these price ranges (we've tried and couldn't do it).  But interesting that you mentioned milking a cow using 10 gloves. I *am* able to milk myself with a single pair of gloves so...that makes me 10% of the way there, right?

If I don't mind a hungry baby, I can also manage the second pair of gloves.... just you wait and see ;)

[Argyle]

Isn't anyone hearing the troll alarm here?  The eagerness to talk about milking just confirms it for me.  New poster...  I am thinking we have seen the OP before under a different name.  The doula thread comes to mind.

[InvestandChill]

Hi Argyle- I'm not denying I'm a troll. I'm also not denying that I will post about feeding my child again. Perhaps in a forum with more pragmatic parents who would consider me "motherly" as opposed to "eager."

On the topic of trolling, how does one monetize these efforts? It would be awesome to increase my income. As always, ideas on strategies are welcomed.

[Mr. Green]

This reeks of 2006.

[dragoncar]

Hi Argyle- I'm not denying I'm a troll. I'm also not denying that I will post about feeding my child again. Perhaps in a forum with more pragmatic parents who would consider me "motherly" as opposed to "eager."

On the topic of trolling, how does one monetize these efforts? It would be awesome to increase my income. As always, ideas on strategies are welcomed.

PM me your LULZ and I will convert them to cash money

100 LULZ = $1

p.s. of course I will also need your account and routing no.

[justajane]

Isn't anyone hearing the troll alarm here?  The eagerness to talk about milking just confirms it for me.  New poster...  I am thinking we have seen the OP before under a different name.  The doula thread comes to mind.

Nah. It would be closer to SanDiegoFIRE, although IIRC he made 500K a year.

[Bearded Man]

Sell the $2mil house for $1mil profit and retire in a LCOL area. 

Done.

That's what I was thinking. Buy three houses in Tampa, rent two out, live in one, and live off the rental money which is far more than I need. Stick the other 600K in index funds and hit the beach.