Decisions Decisions... Need Advice

Hi everyone, long time lurker of this forum and need some advice in terms of our future purchase in Irvine.

A little background, we are a young family of 3 with a 4th on the way. We live in a 2 bed attached product in Irvine built within the last 3 years. We are looking to move into a larger place since we have outgrown our current dwelling. With that said we have 2 options.

Option 1:

Sell our current place and put 50% down payment on a 4 bedroom single family house with driveway.

Pros: We would have a low leveraged loan which we could afford on a single income if one of us lost our jobs. In addition this would also allows us to save money quickly.  A lot of space for a family of 4 which provides better living conditions vs shared driveways of detached condos and so forth.

Cons: Not sure if it is wise to put down such a large down payment. Can use money for other investments and grow wealth.

Option 2:

Rent our current place and buy a 3 bedroom detached condo with shared driveway.
I'm guessing we can rent our current place for about $3K/mth. Monthly cash flow after mortgage, tax, hoa, insurance will be about $300/ mth and likely grow as rental market remains strong.

Pros:  Have an investment property with renters paying down mortgage, reap long term appreciation of the rental property and have some extra cash flow per month even if only a few hundred per month. Tax benefits.

Cons: Living in a smaller house with shared driveway. 


At the end of the day it's better living conditions vs having rental property.

Hard to decide and would like to get other points of view.

I think this is more of your personal decision and preference as you have mentioned (Lifestyle vs. Less Financial Stress).  Financially and if you can stand living at a smaller place, option #2 makes more sense if the home prices in Irvine continues to appreciate. Also, you can liquidate your second home if you have future cash flow problems.  You can just live in a smaller home with a lower cost.  Both of the options you are going to be heavily invested in the real estate (either with a higher priced SFR or owning two condos).

How are your future prospects in regards to income growth potential? Are you planning to have more children?  If you have a higher income growth potential and planning to have a larger family, than Option #1 (bigger home SFR) makes more sense.  You don't want to keep on moving up every 3-4 years as transaction costs are significant (6-7% of total price).  Do you think you will be ok living in the smaller detached condo for the next 10 years?  Do you think you will grow out of it? If no, than option #1. 

Also, being a landlord is pain in the butt.  Probably Irvine is better, but my past tenant was behind on payments by six months and was a big head ache and responsibility to maintain the place (older home). 

In regards to putting 50% down, that's ok if you are a conservative person and don't feel comfortable investing heavily in more volatility investments such as stocks, commodities, etc.  However, make sure you have adequate liquidity aside for emergency purposes (6 months to 1 year minimum liquidity) and to take advantage during great opportunities (i.e. Brexit, big crash, etc.).  You can tap into HELOC for liquidity at the worst case scenario.  btw, all other asset class (RE, bonds, equity, etc.) is Frothy except commodities.  You should still have some exposure to equity markets either via retirement plan (401K, IRA) or personal accounts as it sounds like you are relatively young. 

Key is to be balanced and not stretch to either side.  However, this is your personal decision depending on what's more important to you.  Personally, I will take #1 option if you have the growth potential and have adequate liquidity on the side.

Sounds like you are in a great position either way...both sounds like great plans

Between the two, I would just advise to do the math and see which one makes more sense.  Seems you've done the math on buying the 4 bedroom

For the 2nd, do you have enough income to qualify to buy the 2nd home without selling the other?  or is that why you moved from a 4 bedroom to a 3 bedroom.  Maybe you can list your home for rent and see what kind of offers you get, say you get $3000/month...you can bring that letter to the bank and see if it's enough to keep both plus adding in that $3000/month income

Either way..being a landlord is stress worthy so don't make a decision quickly about that.  Between the two, the 1st sounds a bit better especially if you find a great opportunity for a 4 bedroom in which it sounds like you made an emotional attachment to.  Rates are at an all time low right now so it's really a great time plus I'm sure your Irvine home appreciated at least $50k in the past 3 years. 

If you wouldnt rebuy your current place as a rental, then I would say dont keep it as a rental. 
Also id be careful about estimating 3000 month for your rental.  2/2 rentals in irvine are going for a few hundred less as most 3/3's are going for around 3000-3100.  Id be more conservative and also calculate vacancy rates, maintenance costs and capital expenditure costs, which I didnt see you mention.  If you calculated 300 a month cash flow without these costs, then your actual cash flow may be negative.  If thats the case your only game would be appreciation, which may not materialize considering OC housing sales is slowing and inventory is rising.  BTW the tax benefit from the rental will not help with your earn income.  Rental income is considered passive and therefore any deductions can only be written off for other passive income.

I would do option 3: buy the smallest house you can comfortably live in and sell the current place.  Hate being a landlord and hate sinking $$$ into a primary residence.

hello said:

Also id be careful about estimating 3000 month for your rental.  2/2 rentals in irvine are going for a few hundred less as most 3/3's are going for around 3000-3100.  Id be more conservative and also calculate vacancy rates, maintenance costs and capital expenditure costs, which I didnt see you mention.  If you calculated 300 a month cash flow without these costs, then your actual cash flow may be negative.  If thats the case your only game would be appreciation, which may not materialize considering OC housing sales is slowing and inventory is rising.  BTW the tax benefit from the rental will not help with your earn income.  Rental income is considered passive and therefore any deductions can only be written off for other passive income.

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I was going to reply with the same points you mentioned.  If your income is stable and will grow in the future, I would definitely go for the 4 bdrm SFR.  I was too conservative when I bought my SFR and now am looking for a larger SFR for my growing family.  I should have gone big to begin with knowing that my job and my wife's job were stable and salaries were increasing every year.

hello said:

If you wouldnt rebuy your current place as a rental, then I would say dont keep it as a rental. 
Also id be careful about estimating 3000 month for your rental.  2/2 rentals in irvine are going for a few hundred less as most 3/3's are going for around 3000-3100.  Id be more conservative and also calculate vacancy rates, maintenance costs and capital expenditure costs, which I didnt see you mention.  If you calculated 300 a month cash flow without these costs, then your actual cash flow may be negative.  If thats the case your only game would be appreciation, which may not materialize considering OC housing sales is slowing and inventory is rising.  BTW the tax benefit from the rental will not help with your earn income.  Rental income is considered passive and therefore any deductions can only be written off for other passive income.

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I would also add that you should consider the tax benefit of appreciation in your current home.  Since you've lived there for at least 2 years, any gains in appreciation will be tax free (up to $500K for married filing joint).  You could rent it for 3 years and still take advantage of that (need to live there as primary residence for 2 of 5 years).  However, not sure if the market still has legs.  If you have significant capital gains, consider selling to keep that tax free.  I like the comment from hello about if you would buy it right now at its price for a rental. 

Marty said:

hello said:

If you wouldnt rebuy your current place as a rental, then I would say dont keep it as a rental. 
Also id be careful about estimating 3000 month for your rental.  2/2 rentals in irvine are going for a few hundred less as most 3/3's are going for around 3000-3100.  Id be more conservative and also calculate vacancy rates, maintenance costs and capital expenditure costs, which I didnt see you mention.  If you calculated 300 a month cash flow without these costs, then your actual cash flow may be negative.  If thats the case your only game would be appreciation, which may not materialize considering OC housing sales is slowing and inventory is rising.  BTW the tax benefit from the rental will not help with your earn income.  Rental income is considered passive and therefore any deductions can only be written off for other passive income.

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I would also add that you should consider the tax benefit of appreciation in your current home.  Since you've lived there for at least 2 years, any gains in appreciation will be tax free (up to $500K for married filing joint).  You could rent it for 3 years and still take advantage of that (need to live there as primary residence for 2 of 5 years).  However, not sure if the market still has legs.  If you have significant capital gains, consider selling to keep that tax free.  I like the comment from hello about if you would buy it right now at its price for a rental. 

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I like this advice...you can get a preview of whether you like being a landlord.  Market sub $800k is still strong and will probably continue to remain strong.  The rental market in Irvine is stronger than the resale/new home market today.

You should look at how many rentals are in Irvine.  There's like 500+ rentals.  Don't assume that it would be rented out for $3,000.  It might take a couple of months for it to be rented out and the tenants might move out after one year and then it'll be empty again.  There's also that liability aspect which comes with being a landlord.  I'd run a calculator on a couple of scenarios and see what works best for you. 

There's more than 2 options.  Instead of putting 50% down why not put down 15% down and put the rest in bonds and stocks?  Then you'll have lots of money on the side in case something happens. 

Personally I would sell the home and move out of Irvine to a place with low property taxes.

You're looking for a home to live in and raise your kids. What's more important is how you and your family feel about the house and not just the numbers on paper.

Don't limit your yourself to Irvine.

I completely agree with Momopi.  Not all decisions are made based on financial calculators and number crunching that generates the highest ROI.  Go with what you will be most happy for the next 10 years. 

I think you are making 50% down as you don't want to stress too much with high monthly payments and the uncertainties associated with investments in other securities and fluctuating income from passive investments that will keep you up at nights. 

Make a decision based on what will make you sleep comfortably over night and that satisfies your family's lifestyle and long-term goal. 

collected said:

You should look at how many rentals are in Irvine.  There's like 500+ rentals.  Don't assume that it would be rented out for $3,000.  It might take a couple of months for it to be rented out and the tenants might move out after one year and then it'll be empty again.  There's also that liability aspect which comes with being a landlord.  I'd run a calculator on a couple of scenarios and see what works best for you. 

There's more than 2 options.  Instead of putting 50% down why not put down 15% down and put the rest in bonds and stocks?  Then you'll have lots of money on the side in case something happens. 

Personally I would sell the home and move out of Irvine to a place with low property taxes.

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I've already rented out over half a dozen properties in Irvine this year and ALL of them rented out within 1-2 weeks with multiple applications (ranging from $2,100/mo to $3,500/mo).  Trust me, the rental market is very strong right now. I do agree that $3,000/mo in rent for a 2-bedroom is a bit must even in Irvine....newer and larger 2-bedroom condos rent out for $2,600/mo to $2,800/mo. 

Option 1 but put down less.

Option 1.

Put down less.

Pay off extra every month out of your savings which will raise your equity and give you flexibility to just pay the monthly payment if you need cash for something else. Rates are low so the added interest you would pay would be low. You can only refi for what you originally had your loan at plus $100K. You never know what might happen in the future.

Having such a young family would make me nervous with someone not paying the rent and owing on two places without the rental income and expense of trying to get the rent.

Hi guys, thanks for all the advice. My gut feeling is to go with option 1. Sell and buy a bigger place for the comfort of the family. I can continue to save and perhaps buy rental property down the road.

If I go with the option of buying larger home should I put 50% down or put less down?

If put less down what would you guys do with the extra money? I would like to have my money work for me and get a reasonable return without huge risks.

Interest rates are so low, you can use it for investment if you don't need it for your primary, as long as you have a better rate of return than the borrowed money rate.

Buying rental doesn't mean it'll have to be in Irvine, can be another city, county, state...

You can use the money to do lending, many real estate crowdfunding returns are double the current conventional 30 yr fixed rate. 

You can buy reit.

Index funds.

All comes with risks though.  Sure you can put it in CD, but the rates are useless...

House Hunting,

A lot of great advice has been given to you so far. If I can add that my primary residence is a "life style" purchase and LIABILITY whereas an investment property is an investment and an ASSET. The more expensive your primary residence your wealth building process will go the opposite direction. I would go with Bone's recommend and buy the smaller home, but again, this is a lifestyle decision where the size of the home will not meet your family's needs. Just remember one thing. Your equity in your primary residence is considered dead equity that can be potentially be generating a higher yield else where.  To have most of your wealth tied up in your primary residence is not a healthy balance sheet in my opinion. My optimal asset allocation recommendation is this: 40% real estate (this portion includes your primary residence equity + rental properties), 20-25% growth and dividend paying equities, solo 401, SEP IRA, 529, etc, and the rest in your own business through Corps and liquid cash equivalent like CD, money market etc. 

AW mentioned REITS. I prefer to invest in mortgage backed securities over brick and mortar REITS due to the high liquidity in mREITS. In my opinion a great dividend strategy since Jan 1st, 2016 was holding the largest mREITS like Annaly Ticker NLY and AGNC . Current yield on AGNC is 12.31% and 11.02% for NLY. There is however is an interest rate risk if the rates suddenly jump higher NLY and AGNC will be negatively effected. Disclaimer: Please do not invest in NLY and AGNC unless you thoroughly do your home work. Panda investing rule #1: Never buy any investments that you yourself do not understand.

As an investor, you have to ask yourself what is risk reward ratio? If you look at the S&P today, is there a 20% to the upside and 2% in the downside? or 2% upside and 20% to the downside? Anything you invest in whether it be the Real Estate market, FOREX market or Commodities, you need to ask yourself this question. 

At today's prices for a brand new home in Irvine, California what is my risk to reward ratio? This is the question you need to ask yourself.

The question to ask yourself is "Do I want to buy that brand new Mercedes Benz now for $150,000 at full market value so that I can create memories and provide a good lifestyle for my family at the cost of saving and investing your deposable income to build a passive income flow for a more financially secure future. If your answer is "Yes" I would go with option #1 like acf has recommended to you.

House_Hunting said:

Hi guys, thanks for all the advice. My gut feeling is to go with option 1. Sell and buy a bigger place for the comfort of the family. I can continue to save and perhaps buy rental property down the road.

If I go with the option of buying larger home should I put 50% down or put less down?

If put less down what would you guys do with the extra money? I would like to have my money work for me and get a reasonable return without huge risks.

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Option 1 is what I'd do. Can't discount the value of the quality of life you will have for the next 10 years.

Since it's an option in your situation, consider putting down just enough to keep your mortgage balance around two-times your household income. That feels like a reasonable ratio and should keep some cash in your savings account. There's then no rush to put that money to work. You can evaluate your options and keep building the pile 'til something interesting appears.

House_Hunting said:

Hi everyone, long time lurker of this forum and need some advice in terms of our future purchase in Irvine.

A little background, we are a young family of 3 with a 4th on the way. We live in a 2 bed attached product in Irvine built within the last 3 years. We are looking to move into a larger place since we have outgrown our current dwelling. With that said we have 2 options.

Option 1:

Sell our current place and put 50% down payment on a 4 bedroom single family house with driveway.

Pros: We would have a low leveraged loan which we could afford on a single income if one of us lost our jobs. In addition this would also allows us to save money quickly.  A lot of space for a family of 4 which provides better living conditions vs shared driveways of detached condos and so forth.

Cons: Not sure if it is wise to put down such a large down payment. Can use money for other investments and grow wealth.

Option 2:

Rent our current place and buy a 3 bedroom detached condo with shared driveway.
I'm guessing we can rent our current place for about $3K/mth. Monthly cash flow after mortgage, tax, hoa, insurance will be about $300/ mth and likely grow as rental market remains strong.

Pros:  Have an investment property with renters paying down mortgage, reap long term appreciation of the rental property and have some extra cash flow per month even if only a few hundred per month. Tax benefits.

Cons: Living in a smaller house with shared driveway. 


At the end of the day it's better living conditions vs having rental property.

Hard to decide and would like to get other points of view.

Click to expand...

I wouldn't blink twice and will happily go with option #2, get a good CPA, you will get tax benefits + less stress if you get good tenants