Use equity on 1st home to purchase 2nd home?

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Hello finance forum readers.
I own a home (Home1) that is worth about $500k today.  It the local market, it would rent for about $2500 to $2800/ month.
I paid $230k for it in 2012 so equity has increased quite a bit. (~$280k). 
Home1 mortgage details: Currently we are locked in at 3.5% and are 2 years in to a 30 year loan. We are paying around $1300/month on the mortgage.  
I was considering either refinancing or getting a HELOC to purchase another home (Home2) in the same area for around 400k, with the idea that my family and I could relocate to Home2, while renting out Home1.  
Benefits would be that we would net ~$1000 or so to help offset the Home2 mortgage, while renters are fully paying the mortgage on Home1.  

Potential pitfalls include the housing values dropping in the future, but even if that were the case, I would think that rental rates would largely stay unchanged, or at least be high enough to cover the mortgage on Home1....
Thanks for your advice. 


 

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Getting $2500/month on a 500k house isn't a great return. At $1300/month your loan value is what, around 180k? So you have 320k in equity if you sold today. I think you would be better off selling House 1, putting 20% down on house 2, then investing the remaining 240k.

You've got $270k in appreciation that is potentially tax free now if you sell home1 as your primary residence.
If you convert that property into a rental you lose that tax benefit (in a few years) and you'd be paying taxes on that gain. Right now thats typically ~40k or up to ~$54k in taxes.

In addition to what's already been said, you would be leveraging quite a bit in the housing market. I recently sold my home to buy another and the new place is ridiculously expensive, but my cost basis is low since the first place was purchased cheap and appreciated.

If something happens which makes house prices go down you could be potentially underwater on the second place, and potentially lose both houses. It could be something as simple as tenants not leaving, and turning it into a multi-year long legal battle to try and get them out. All the while you don't get a penny in rent.

anglr200 said:   Hello finance forum readers.
I own a home (Home1) that is worth about $500k today.  It the local market, it would rent for about $2500 to $2800/ month.
I paid $230k for it in 2012 so equity has increased quite a bit. (~$280k). 
Home1 mortgage details: Currently we are locked in at 3.5% and are 2 years in to a 30 year loan. We are paying around $1300/month on the mortgage.  
I was considering either refinancing or getting a HELOC to purchase another home (Home2) in the same area for around 400k, with the idea that my family and I could relocate to Home2, while renting out Home1.  
Benefits would be that we would net ~$1000 or so to help offset the Home2 mortgage, while renters are fully paying the mortgage on Home1.  

Potential pitfalls include the housing values dropping in the future, but even if that were the case, I would think that rental rates would largely stay unchanged, or at least be high enough to cover the mortgage on Home1....
Thanks for your advice. 


 


Sell the house. Now.

Would you buy this house for $500k to rent it for $2500? Very likely not.

You've done well here....don't screw it up. And I love rental property....just not at those awful ratios.

anglr200 said:   Hello finance forum readers.
I own a home (Home1) that is worth about $500k today.  It the local market, it would rent for about $2500 to $2800/ month.
I paid $230k for it in 2012 so equity has increased quite a bit. (~$280k). 
Home1 mortgage details: Currently we are locked in at 3.5% and are 2 years in to a 30 year loan. We are paying around $1300/month on the mortgage.  
I was considering either refinancing or getting a HELOC to purchase another home (Home2) in the same area for around 400k, with the idea that my family and I could relocate to Home2, while renting out Home1.  
Benefits would be that we would net ~$1000 or so to help offset the Home2 mortgage, while renters are fully paying the mortgage on Home1.  

Potential pitfalls include the housing values dropping in the future, but even if that were the case, I would think that rental rates would largely stay unchanged, or at least be high enough to cover the mortgage on Home1....
Thanks for your advice. 


 

  
Just wondering, hasn't your property tax increased as well? Doesn't seem like your cash flow would warrant keeping "Home1" Your insurance will increase too once you declare it a rental property, ask how I know.

Thanks for all the advice everyone.
I will see what I can do. I am currently looking at relocating to a more inexpensive locale to a similar home that is 40% cheaper.



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