Should I buy another house?

[Aiming_4_55]

I'm wrestling with the idea of buying/upgrading my current house if I can purchase a short sale or foreclosure. Just like everyone, I'm wondering when the real estate market will recover, but realistic that could take 5 - 10 years.

Should I buy a newer larger house and convert my current home into a rental as it'll pay most of my new mortgage payment?

Overall the change will not impact FIRE. I still predict retiring by 55 (a long ways off) or earlier either way. Just another responsibility.

Thoughts?

 

[obgyn65]

It is going to take more than 10 years for the real estate to recover, IMO.

Just like everyone, I'm wondering when the real estate market will recover, but realistic that could take 5 - 10 years.

 

[tryan]

Should I buy a newer larger house and convert my current home into a rental as it'll pay most of my new mortgage payment?

You won't be happy carrying a a negative cash flow for 5-10 years. I wouldn't consider buying unless your mortgage can be paid with HALF the rents. The other half will cover : taxes, maintenance, vacancy, water/sewer, insurance (fire and liability) ... and maybe a little PROFIT (for your effort).

 

[GregLee]

I say buy. I have no relevant experience in the matter at all, but my reasoning is just that you seem to have an opportunity which may slip away if you wait until there is a clear prospect of the real estate market recovering.

 

[RockyMtn]

a few questions...

1. I assume since you state that the rents could pay your new mortgage that your current mortgage is paid off? If that is in fact the case not having a mortgage expense on the old house is going to mean that you will have to show the rental $$ as income with no offsetting expenses other than taxes, insurance, maintenance, etc. Suppose you could refi the rental property and in essence take "cash out" to put towards the new house but keep in mind rates on rental mortgages are nowhere near as good as those on homes that are your primary residence.

2. How long do you plan to be in the new house?

3. What's the market like in your area? That is the real determining factor in how quickly the market will return.

 

[Aiming_4_55]

I would agree 10+ years to get back to above the peak of the real estate bubble.

Perhaps, I can better phrase: Will the real estate market bottom out any further after 2011? I still see 5 - 10% steady drop over 2011/2012 in real estate in my area, however can it drop another 25%? I personally hope not. If so, alot of people are/will be hurting.

It is going to take more than 10 years for the real estate to recover, IMO.

 

[Aiming_4_55]

The curent home is 2300 sq ft and the new home would be 3200 - 4000 sq ft, so I personally won't expect rent to cover 100% of the new house.

However the older house rental income would cover 100% of the new mortgage (not new insurance/taxes) and rental home taxes, insurance, water/sewer, and vacancy of 10%).

Basically, I'll get a 50% increase in living space for about $4500 - 5000 a year. Given there will be an increase in cleaning/utilities in the larger house too.

You won't be happy carrying a a negative cash flow for 5-10 years. I wouldn't consider buying unless your mortgage can be paid with HALF the rents. The other half will cover : taxes, maintenance, vacancy, water/sewer, insurance (fire and liability) ... and maybe a little PROFIT (for your effort).

 

[Aiming_4_55]

I somewhat view it as trying to perfectly time the market. I've never been great at it.

As long as the real estate market isn't going to drop another 25 - 40%, I feel my risk is limited as my kids are young and we're staying for 12 - 15 years.

I say buy. I have no relevant experience in the matter at all, but my reasoning is just that you seem to have an opportunity which may slip away if you wait until there is a clear prospect of the real estate market recovering.

 

[Aiming_4_55]

Good points RockyMtn.

1. Yes, no current mortgage. I was thinking of refinancing before buying the new place so I can secure the best rate available. I have a loan officer that can offer investment loans at about 1% more than normal loans, but that remains to be seen. I previously paid at least 2% above the best rates for personal residence vs. rental.

2. New house = at least 10 years, but probably 12 - 15 years since my youngest won't be in college for another 14 years or so.

3. Market in my area = good and bad pockets, new rental is strong as I listed for a friend and got good response. As for buying, it's a buyers market, sellers are hurting, typical decline in value, not as bas a Detroit, Vegas or Orlando, but bruised by the dip.

a few questions...

1. I assume since you state that the rents could pay your new mortgage that your current mortgage is paid off? If that is in fact the case not having a mortgage expense on the old house is going to mean that you will have to show the rental $$ as income with no offsetting expenses other than taxes, insurance, maintenance, etc. Suppose you could refi the rental property and in essence take "cash out" to put towards the new house but keep in mind rates on rental mortgages are nowhere near as good as those on homes that are your primary residence.

2. How long do you plan to be in the new house?

3. What's the market like in your area? That is the real determining factor in how quickly the market will return.

 

[RockyMtn]

Good points RockyMtn.

1. Yes, no current mortgage. I was thinking of refinancing before buying the new place so I can secure the best rate available. I have a loan officer that can offer investment loans at about 1% more than normal loans, but that remains to be seen. I previously paid at least 2% above the best rates for personal residence vs. rental.

2. New house = at least 10 years, but probably 12 - 15 years since my youngest won't be in college for another14 years or so.

3. Market in my area = good and bad pockets, new rental is strong as I listed for a friend and got good response. As for buying, it's a buyers market, sellers are hurting, typical decline in value, not as bas a Detroit, Vegas or Orlando, but bruised by the dip.

Seems to me that, assuming you can refi current house at a reasonable rate and get a good price on the new house, then it is time to buy!

 

[Aiming_4_55]

Here's an example:

Just 12 months ago, I helped my BIL (found the listing/he tagged along for the viewing) upgrade from his townhome (1600sq ft, purchased for 195k during the bubble, current value 140ish, underwater on loan) to a single family home. The new home, 3800 sq ft, was tax value of 360k, appraisal 320k, probably can sell for 300k. His closing price was 239k included closing cost & loan. About a month of sweat equity (evenings and some weekend time), 15k invested for paint, new carpet & laminate flooring, new kitchen countertops, and 1 new window.

He got lucky and rented his townhome to cover 98% of his existing mortgage with a 2 year lease.

Because of better interest rates, his current payment is about $250 higher than his previous note plus 20% down payment.

All in all, he needed the extra space and will be there for 15 - 20 years as he started his family (3 kids in 5 years) after purchasing the townhome.

 

[W2R]

From what I understand, sometimes being a landlord is no picnic. I wouldn't want to do it, anyway. So I guess that is something to consider.

 

[Aiming_4_55]

Good point W2R! My family/I've been a landlord for a few years. I view it as a part time job, i.e. flexible schedule with the emergency. My DW is supportive as it allows her to be a SAHM without a change in lifestyle. After starting the family, I changed full time jobs which reduced travel from 50% to 5%. I also do most of the minor maintenance/repairs but I schedule them around the kids nap time.

From what I understand, sometimes being a landlord is no picnic. I wouldn't want to do it, anyway. So I guess that is something to consider.

 

[tryan]

Didn't realize the current house has no loan ... why not pull a first position on the house (while you're in it) then use the cash to buy a larger second home (short sale or REO).

This keeps the primary house free n'clear and gives a great rate on the soon-to-be rental.