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New Home Purchase, What to do with the old one?

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  • New Home Purchase, What to do with the old one?

    We are in the process of purchasing a new home and wanted to advice on what to do with the old one. To give some context, we make about 315K combined base (up to 30K bonus). Our home is worth 350K and is paid off. The home we are purchasing is 840K with 5% down and 4.8% interest with physician loan - Monthly mortgage cost ends up ~5400. Our first home can probably be rented for $2500-$2700 of which we will net $1500-1600 after paying taxes, HOA, insurance, property management company (more of a conservative estimate). It is in a highly desirable location, great school district, close to jobs. It is a low maintenance townhouse with exterior of home covered by HOA. I tend to be extremely risk averse and we have lived very frugally, so having a mortgage of 5400 feels very scary to me (21% of gross take home pay, 37% of net take home pay as I would like to fully contribute to our retirement accounts). We have no other debt. Was wondering if retaining this property was worth it of if we should just sell and put that money towards our primary residence and bring our monthly mortgage down to ~$3600-3800 (allows for more savings/college contributions). I would love to have our primary residence paid off in the next 10-15 years and selling our first home would certainly make it easier.

    My husband thinks we should hold onto the old property and wants to benefit from the long term appreciation in addition to the rent. He's open to selling if we decide that being landlords isn't for us, but my fear is we would sell it for less in 1 year than we would now, although that is incredibly hard to predict. Thank you in advance.

  • #2
    The first question is if you even want to be landlords and it sounds like you don't. You're also not taking into account any vacancy or maintenance (although you say it is low maintenance). If you net $19,200/year ($1600/month) on a $350k value then that's 5.5% a year.

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    • #3
      To be honest, some days I am really excited about the idea and some days I am reluctant. The unknown scares me the most. And yes the maintenance and vacancies are other concerns. In my estimate of $1600/month I accounted for $200 worth of repairs, but if a big repair is needed, then obviously would be more. If I take an additional 5k off for repairs/vacancies/maintenance that's a net of $14,200/year - 4% a year. What's a good percentage for rental property income?

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      • #4
        I'm not an expert but Google 'capitalization rate' and you'll get some numbers from people who actually know what they're talking about (not me) in this area.

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        • #5
          You can write off repairs. Vacancies less of an issue since house is paid off. 2 things to make a decision- what are the comps in the area for both rent and selling. Is 1600 what you think, or is it what you know? Maybe rent should be 1800, or maybe it should be 1300- but you need to be certain.

          Other things to think about- who pays for utilities and lawn maintenance? Will you be doing repairs, or will that be hired out? Do want someone else to manage the property? Maybe get the house into an LLC. May need to increase insurance policy.

          Due diligence on finding a tenant is the most important thing, and will color how you feel about direct real estate. Income, credit, etc.

          Another thing to consider- you just need to live in the home 2 of the last 5 years to qualify for the tax free profits. So, you can try out the rental thing for a year or 2 and see how it goes from there. If you don't mind it, you can use the equity from the existing home to potentially buy the next one.

          So- I'd say go for it, but get your numbers down first. It's not completely passive, but it's not as big of a headache as people make it out to be if you do due diligence on the front end.

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          • #6
            “The home we are purchasing is 840K with 5% down and 4.8% interest with physician loan”
            Care to share where you got this mortgage rate?
            Fixed/variable length?

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            • #7
              You didn't buy your old house to be an effective rental property, you bought it for a place for your family to live. There's virtually no chance that your old house is the most effective place to deploy the amount of your current home equity as capital for an investment in rental property (more likely properties).

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              • #8
                Originally posted by Tim View Post
                “The home we are purchasing is 840K with 5% down and 4.8% interest with physician loan”
                Care to share where you got this mortgage rate?
                Fixed/variable length?
                10/6 ARM. Initially we locked in for 5.125% but recently floated down to 4.8% since the interest rates slightly dropped over the past week.

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                • #9
                  Originally posted by pandabamboo84 View Post

                  10/6 ARM. Initially we locked in for 5.125% but recently floated down to 4.8% since the interest rates slightly dropped over the past week.
                  “As of November 29, 2022, the 10-year fixed mortgage rate is 6.02% and 10/6 ARM is 6.84%. ”

                  Source Investopedia. Really interested in the lender and if points were paid to buy down the rate. 2% less is a really big deal.


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                  • #10
                    Real estate returns sound less desirable without the leverage. Sell the house, take your $350k, buy $1.75M worth of rental properties with 20% down, and then really be a landlord. Go big or go home.

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                    • #11
                      I have never understood why people consider paying off a mortgage with savings to be a method to increase savings by lowering their house payments. It is counterintuitive to me. Why not just put the money to work instead of “investing” in debt pay down, especially when said debt is at a (currently) reasonable rate (fixed, by the way, no upside)? And why not put the money to work in the market while it is down?

                      This is no slam on the OP by any means, who is almost surely far more intelligent than I, just musing. This comes up often, though.

                      The comment by Brains428 is quite valid. Be sure to consider (what I would presume to be) the incredible opportunity - one of the last great tax breaks available - to avoid paying tax on gains up to $250k/spouse by selling within 3 yrs of moving out of “a highly desirable location“. Surely you will have capital gains on this property and you have 3 yrs for the market to rebound, if you choose to wait that long, Rent it out in the meantime or find someone interested in rent to own, maybe even consider owner financing, You are in a good position - think it through and make it work to your advantage..
                      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                      • #12
                        Assuming you’re EF and retirement as in order, I’d favor selling it and putting it towards the mortgage. For $350k, you’re making 5.5% plus appreciation (assuming your $1600 is right) vs 4.5% guaranteed on the mortgage.

                        Presumably, the best financial move it to sell it and invest it all in the stock market. My suggestion is probably the “worst” financial move you could make - but comes with additional security and a guaranteed rate of return. You’ve then got a mortgage of $450k which should be super easy for you.

                        If you’re behind on retirement savings, your emergency fund or kids college, is consider topping those off then putting the remainder towards the down payment.

                        That’s what I’d do. Not the “best” movie, but if you make $300k+ you can sometimes pay extra to simply and destress your life.

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