Second house buying options

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We own a condo in SF Bay Area, balance is 220K for 15 years, worth 800K. All monthly payments are about 2800. Can rent it for about $3500. We'd like to buy a house nearby. 
We have around 250K cash, and ~100K 401K balance. Combined annual income is ~300K.

Starting price in the area for a 3br house is around 1.3M, so our down payment is not enough for 20% down. There is an option of 15% with 18 months reserve fund, which we don't have. 
How sane is the option to refinance the condo for 30 y and get 200K out. In 6 months buy a house, then repay first mortgage?
What are non obvious risks? Thanks!

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I don't need to move back for the next three years if I decide to sell it during that period, right?

fantomas12 (Jan. 31, 2017 @ 1:23p) |

I did similar without too many issues about 1.5 years ago, although I had far less equity in the first home. The other ... (more)

Dus10 (Jan. 31, 2017 @ 2:31p) |

correct, unless of course they change the law in the next 3 years.

solarUS (Jan. 31, 2017 @ 3:05p) |

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Why not sell the condo?

Keeping it as a rental doesn't seem like a great investment to me. $3500/mo rent on ~600k equity plus a mortgage payment? Thats not a good return.

Be cautious about how you word things. When talking to lenders I wouldn't call it a second house. This doesn't mean that you don't disclose the current house. Instead of saying second house/home, you are looking at purchasing a house as a primary residence and then using the house that you currently reside in as a rental. It changes some things https://www.quickenloans.com/blog/understanding-your-property-cl...

jerosen said:   Why not sell the condo?

Keeping it as a rental doesn't seem like a great investment to me. $3500/mo rent on ~600k equity plus a mortgage payment? Thats not a good return.

  We bought it for 384K in 2011. My thought was that it is some positive cashflow and we can always sell it later, if we feel tight in the budget. As I am roughly 200K short, my thought was it wouldn't make sense to cash it all out for no reason..

taylor0987 said:   Be cautious about how you word things. When talking to lenders I wouldn't call it a second house. This doesn't mean that you don't disclose the current house. Instead of saying second house/home, you are looking at purchasing a house as a primary residence and then using the house that you currently reside in as a rental. It changes some things https://www.quickenloans.com/blog/understanding-your-property-classification
  Yea, thanks for the tip. That's why I mentioned buying in 6 months.

You're not going to qualify for a second home, especially with the refi cash out, unless you have a lease agreement and a tenant or have enough income to support both mortgage payments.

Would you buy the condo for $800k now and rent it out, or $800k-selling costs? If not you should sell it instead of renting it out.

Check SoFi for a mortgage quote. There are other banks in the area that will do loans with less than 20% down that are competitive with traditional loans.

fantomas12 said:   
jerosen said:   Why not sell the condo?

Keeping it as a rental doesn't seem like a great investment to me. $3500/mo rent on ~600k equity plus a mortgage payment? Thats not a good return.

  We bought it for 384K in 2011. My thought was that it is some positive cashflow and we can always sell it later, if we feel tight in the budget. As I am roughly 200K short, my thought was it wouldn't make sense to cash it all out for no reason..

  
Do you live in the condo now?

If you sell it now you get tax free gains.     If you turn it into a rental you lose that tax break.

You may have cash flow net but $700/mo net on a 800k house is not a great return after work involved considering you've got 600k equity.   Thats 1.4% return on your equity.      You can beat that in a ton of other ways.    If you turn that condo into a rental then you're really just speculating on real estate values in an over priced market, tenant friendly market.
Have you been a landlord or do you want to have rental investments in the bay area?   If you know what you're getting into and want to speculate on SF area real estate then fine.  But don't do it cause you've got cash flow.    

 

jerosen said:   Do you live in the condo now?
 

    I do live in the condo now. I don't think I put title correctly. What I want is to buy a house and convert condo into rental property.
jerosen said:   If you sell it now you get tax free gains.     If you turn it into a rental you lose that tax break.

You may have cash flow net but $700/mo net on a 800k house is not a great return after work involved considering you've got 600k equity.   Thats 1.4% return on your equity.      You can beat that in a ton of other ways.    If you turn that condo into a rental then you're really just speculating on real estate values in an over priced market, tenant friendly market.
Have you been a landlord or do you want to have rental investments in the bay area?   If you know what you're getting into and want to speculate on SF area real estate then fine.  But don't do it cause you've got cash flow.    

 

Why is that? Why would I lose it? 

I am not running after making money on the property. The way I am looking at it is that I got "free" equity, I locked great property tax rate. I can get some equity out, and not bother selling it as it pays for itself. 
In a very long term, my daughter will have a place to stay when she moves out.
I've never been a landlord, but don't mind become one. What would be a better plan? 

fantomas12 said:   
jerosen said:   Do you live in the condo now?
    I do live in the condo now. I don't think I put title correctly. What I want is to buy a house and convert condo into rental property.
jerosen said:   If you sell it now you get tax free gains.     If you turn it into a rental you lose that tax break.

You may have cash flow net but $700/mo net on a 800k house is not a great return after work involved considering you've got 600k equity.   Thats 1.4% return on your equity.      You can beat that in a ton of other ways.    If you turn that condo into a rental then you're really just speculating on real estate values in an over priced market, tenant friendly market.
Have you been a landlord or do you want to have rental investments in the bay area?   If you know what you're getting into and want to speculate on SF area real estate then fine.  But don't do it cause you've got cash flow.    

 

Why is that? Why would I lose it? 

I am not running after making money on the property. The way I am looking at it is that I got "free" equity, I locked great property tax rate. I can get some equity out, and not bother selling it as it pays for itself. 
In a very long term, my daughter will have a place to stay when she moves out.
I've never been a landlord, but don't mind become one. What would be a better plan? 

  If you lived in the condo for two of the last five years all capital gains are tax free. If you convert the property to a rental, capital gains would become taxable once you no longer meet the "two out of five" rule.

The above applies to federal income taxes -- I have no clue what the rules are for California state income taxes.

When you own a home as your primary residence and it gains in value you do not owe taxes on the property when you sell it (up to limits you'd be under as married). So your ~416k in gains is tax free if you sell it.

If you turn that property into a rental then you lose that tax break and you'll pay taxes on the gain in the property. i.e. a tax bill on your $416k currently tax free gains.

At 15% we're talking about $60k in taxes.

jerosen said:   When you own a home as your primary residence and it gains in value you do not owe taxes on the property when you sell it (up to limits you'd be under as married). So your ~416k in gains is tax free if you sell it.

If you turn that property into a rental then you lose that tax break and you'll pay taxes on the gain in the property. i.e. a tax bill on your $416k currently tax free gains.

At 15% we're talking about $60k in taxes.


OP can always move back in before he sells. Its obvious you arent from here. No one sells bay area real estate due to cash flow considerations. Nothing in the world is more lucrative than real estate here.

yhfjdd said:   
jerosen said:   When you own a home as your primary residence and it gains in value you do not owe taxes on the property when you sell it (up to limits you'd be under as married). So your ~416k in gains is tax free if you sell it.

If you turn that property into a rental then you lose that tax break and you'll pay taxes on the gain in the property. i.e. a tax bill on your $416k currently tax free gains.

At 15% we're talking about $60k in taxes.


OP can always move back in before he sells. Its obvious you arent from here. No one sells bay area real estate due to cash flow considerations. Nothing in the world is more lucrative than real estate here.

  Crystal ball is strong in this poster!

 
jerosen said:   
If you turn that property into a rental then you lose that tax break and you'll pay taxes on the gain in the property. i.e. a tax bill on your $416k currently tax free gains.

 

not really true. OP has 3 years to sell it and get the homeowner cap gains exclusion.  OP will pay some for the depreciation claimed during the rental years, but it more or less evens out. plus the FMV at time of conversion is taxpayer-determined, to an extent.

yhfjdd said:   
jerosen said:   When you own a home as your primary residence and it gains in value you do not owe taxes on the property when you sell it (up to limits you'd be under as married). So your ~416k in gains is tax free if you sell it.

If you turn that property into a rental then you lose that tax break and you'll pay taxes on the gain in the property. i.e. a tax bill on your $416k currently tax free gains.

At 15% we're talking about $60k in taxes.


OP can always move back in before he sells. Its obvious you arent from here. No one sells bay area real estate due to cash flow considerations. Nothing in the world is more lucrative than real estate here.

hahahaha 

I agree with the hesitation around converting to a rental. It's a real job, and SF does not seem like a great market for it lately. Isn't most new construction for condos instead of apartments? I know rents are crazy, but they're pretty low compared to purchase prices. You also need to come up with a pile of cash and would still have a big investment in SF real estate if you sell to pay for a house.

But, part of the way we converted our first home to a rental and bought another house was by taking out a heloc on the first home well before moving. We used a big draw on that for our down payment. It's quick and cheap to set up a heloc, but the rate is surely variable and I think very likely to increase significantly over 5+ years. You may still want to consider a cash-out refi with a fixed rate.

I don't think a lease is going to help qualify for the new loan. Our lenders only want to see tax returns for two years on the rental. Before you have that, your other income must be sufficient to make both payments within their DTI ratio limits. That may not be a problem with your income if you have little other debt. If it's close, paying off credit cards just before statements close can be an easy way to reduce what lenders will consider monthly debt payments.

Just do the math on the rental. If you sold now, and incurred 7% closing costs/fees you would be left with around 540k after you paid it off. Currently your renting approach will leave you with 700/month, or 8400 for a year. That is before any maintenance, and vacancy.

That is a 1.5% return on your 540k. Even if you factor in part of your payment going to principle, you are still getting under 4% return. Now add in maintenance and the occasional missed payment/vacancy, and you could easily get a better return just sticking that money into an investment account. You also dont have the headache of being a landlord.

Find an employer that will let you telecommute or find the same job in a area of the country that has normal home prices.
Sell condo.
Invest all that money you just made.
Move to normal area.
Retire early.

Uh, based on your replies, i decided to go ahead and refi with cash out. It will give me cash I need now, and I still have 3 years to sell it without significant loss.

fantomas12 said:   Uh, based on your replies, i decided to go ahead and refi with cash out. It will give me cash I need now, and I still have 3 years to sell it without significant loss.
  
I think the overwhelming replies were to sell the property.. so this isn't based on our replies.  It seems to be clearly what you wanted to do before you even posted this thread.

pie99 said:   
daw4888 said:   
fantomas12 said:   Uh, based on your replies, i decided to go ahead and refi with cash out. It will give me cash I need now, and I still have 3 years to sell it without significant loss.
  
I think the overwhelming replies were to sell the property.. so this isn't based on our replies.  It seems to be clearly what you wanted to do before you even posted this thread.


That's because FWF people are primarily middle Americans who only know how to make money on cashflow since its "predictable" and regard capital appreciation as pure speculation. OP is from here so he knows the way to make real money here. FWF is a terrible place to ask advice about high cost of living real estate.

umm...you clearly posted under 2 different screennames, yhfjdd.


sf re
Disclaimer
yhfjdd said:   OP can always move back in before he sells. Its obvious you arent from here. No one sells bay area real estate due to cash flow considerations. Nothing in the world is more lucrative than real estate here.
 

tell that to everyone who bought in 2006 and 2007 who wanted to sell in 2008, 2009, 2010, 2011 or 2012.

it's obvious you aren't "from here" otherwise you'd know that. or you just have a sh1t memory. 

pie99 said:   
That's because FWF people are primarily middle Americans who only know how to make money on cashflow since its "predictable" and regard capital appreciation as pure speculation. OP is from here so he knows the way to make real money here. FWF is a terrible place to ask advice about high cost of living real estate.
 

  Middle Americans? WTF is that?

I'm in the Bay Area and asked this exact question 6 months ago. I ended up selling my place and while it's appreciated due to the market, I don't regret it. I'm still saving money and will be able to buy a place once inventory picks back up in the summer, even if houses go up another 15-20%, I'd be comfortable with it. If it goes down, great, but I'm not hurting to buy a new place.

The market is truly insane here and I don't know when it will end. My wife really (really) wants to buy another place. A recent conversation I had with her:

"Let's wait until Spring/Summer"
"No, buy a place now, prices keep going up!"
"Well, that 850k place won't go up that much more next year"
"Yes it will, it might be 1M!"
"We could still afford it"
"But it might be even more than 1M!"
"...do you think it would go up to 1.5M next year?"
"Maybe!"
"...2M?"
"Maybe!"
"..."

The Bay Area has had a lot of "silent" layoffs recently and a bunch of companies are doing cost cutting now. I think it will be a matter of time before we see the true impact, but I'd sell again if I could.

MrSamsung said:   The Bay Area has had a lot of "silent" layoffs recently and a bunch of companies are doing cost cutting now. I think it will be a matter of time before we see the true impact
 

multiple reports are showing decreasing rents in SF also.

"Things that can't go on forever, won't"

Rubl said:   
pie99 said:   
That's because FWF people are primarily middle Americans who only know how to make money on cashflow since its "predictable" and regard capital appreciation as pure speculation. OP is from here so he knows the way to make real money here. FWF is a terrible place to ask advice about high cost of living real estate.

  Middle Americans? WTF is that?

  
People who live in the middle of America, duh.  All FWF'ers are from Iowa.  I thought you knew?

Sofi has a 10% no PMI option. Check it out

fantomas12 said:   Uh, based on your replies, i decided to go ahead and refi with cash out. It will give me cash I need now, and I still have 3 years to sell it without significant loss.
How much do you expect the condo to appreciate over the next few years? Based on the numbers you've provided, you really need it to appreciate $50,000/year to make renting worthwhile.  I don't have a crystal ball or a time machine, but that seems too optimistic to me.  I'd sell.

fantomas12 said:   
jerosen said:   Do you live in the condo now?
    I do live in the condo now. I don't think I put title correctly. What I want is to buy a house and convert condo into rental property.
jerosen said:   If you sell it now you get tax free gains.     If you turn it into a rental you lose that tax break.

You may have cash flow net but $700/mo net on a 800k house is not a great return after work involved considering you've got 600k equity.   Thats 1.4% return on your equity.      You can beat that in a ton of other ways.    If you turn that condo into a rental then you're really just speculating on real estate values in an over priced market, tenant friendly market.
Have you been a landlord or do you want to have rental investments in the bay area?   If you know what you're getting into and want to speculate on SF area real estate then fine.  But don't do it cause you've got cash flow.    

 

Why is that? Why would I lose it? 

I am not running after making money on the property. The way I am looking at it is that I got "free" equity, I locked great property tax rate. I can get some equity out, and not bother selling it as it pays for itself. 
In a very long term, my daughter will have a place to stay when she moves out.
I've never been a landlord, but don't mind become one. What would be a better plan? 

  That's the wrong way to look at it. You're not looking at your cost basis of the property, but the current value.The easiest way to approach this is to separate everything into separate transactions.
A) I receive rent on a property.
B) I have a property worth X.

If you did not have the property, would you buy it today for $800K, or keep 800K. If not, sell it.

vegas4x4 said:   
yhfjdd said:   
jerosen said:   When you own a home as your primary residence and it gains in value you do not owe taxes on the property when you sell it (up to limits you'd be under as married). So your ~416k in gains is tax free if you sell it.

If you turn that property into a rental then you lose that tax break and you'll pay taxes on the gain in the property. i.e. a tax bill on your $416k currently tax free gains.

At 15% we're talking about $60k in taxes.


OP can always move back in before he sells. Its obvious you arent from here. No one sells bay area real estate due to cash flow considerations. Nothing in the world is more lucrative than real estate here.

  Crystal ball is strong in this poster!

  
Real question: yhfjdd is being ridiculed due to his crystal ball comment - OP is still able to move back into his townhome to meet the 2 out of 5 year rule in the future?

I don't need to move back for the next three years if I decide to sell it during that period, right?

I did similar without too many issues about 1.5 years ago, although I had far less equity in the first home. The other factor being, I live in a different market with drastically different costs. So, primary residence was $125k purchase price with $97k left and a value of $150k. New resident $350k with only 5% down (new construction) and already appraises for $380k (with many homes selling within a couple of weeks of being on the market).

It is doable. Is it the most optimal financial decision? By the math, maybe not. But it depends on your long-term goals, the direction of the market, etc. For those immediately dismissing the "return," keep in mind that you get special depreciation on a home that is rented out, so it isn't always so black and white. Besides, if the thing appreciates more in a short order, that return could just up rather quickly.

fantomas12 said:   I don't need to move back for the next three years if I decide to sell it during that period, right?
correct, unless of course they change the law in the next 3 years. 



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