pay off new 15 yr refi or sell and go big with a $1M+ mortgage to trade up

O

OCtoSV

Active member
I'm contemplating selling to take advantage of maximizing the married tax free cap gain of $500K and taking a $1M+ mortgage to buy a bigger house. Figure 70% LTV jumbo, versus staying put and paying off my current residence. It's nice but small, and it seems that if money is this cheap and I have the income this wouldn't be a bad bet on continued appreciation in my area. This would reduce the surplus I currently invest in my taxable account.

What would you do?
 
Buy a property similar to the current property you own.
Move to your new house.
Rent out your current house.

Now you have prop 13 protection
Now you have a 2% mortgage on current property.

Your new property is also around 2% mortgage.

It beats buying an investment property @ 3.5% mortgage and staying put.

If you wanna better life with less money, then your plan is fine, but I would collect houses.
 
My life plan is to have more investment properties. I am perfectly happy not living in a $2M+ SFR even though I can afford it. I rather take all that extra down or loan into a rental where my tenant is helping me build wealth.
 
Take advantage of the $500k capital gains exclusion and sell your current primary.  Buy a bigger house to enjoy while the kids are still young enough to enjoy it as well.  Remember that you won't be able to deduct mortgage interest over $750k now.

If you want investment properties, buy ones that make sense as investment properties.  The trade-up properties that turn into investment properties rarely make sense if you factor in the equity in the property.
 
woodburyowner said:
If you want investment properties, buy ones that make sense as investment properties.  The trade-up properties that turn into investment properties rarely make sense if you factor in the equity in the property.
Click to expand...

I'm not sure I follow what you mean by factoring in the equity in the property? The more equity you have the assumption is that rents are higher and you have more cash flow. If you are concerned about equity then do a cash out refi and pull equity out.
 
Cares said:
woodburyowner said:
If you want investment properties, buy ones that make sense as investment properties.  The trade-up properties that turn into investment properties rarely make sense if you factor in the equity in the property.
Click to expand...

I'm not sure I follow what you mean by factoring in the equity in the property? The more equity you have the assumption is that rents are higher and you have more cash flow. If you are concerned about equity then do a cash out refi and pull equity out.
Click to expand...

Most people think only about their PITI when figuring out if they should rent out their current primary instead of selling it when trading up.  For example.

Someone bought SFR 8 years ago for $900k (say $200k down).  PITI + HOA is $3700.  They can rent out their property for $4000 so they are happy since they are "cash flow positive".  However, what they don't factor in is their property is now with $1.3M (600k in equity now).  At 1.3M, the numbers don't look very good.  They should sell and purchase 2x smaller townhomes and their rental income will be much higher than $3700.  You also need to factor in MR + HOA cost to determine if the property will make a good rental or not. 
 
woodburyowner said:
Cares said:
woodburyowner said:
If you want investment properties, buy ones that make sense as investment properties.  The trade-up properties that turn into investment properties rarely make sense if you factor in the equity in the property.
Click to expand...

I'm not sure I follow what you mean by factoring in the equity in the property? The more equity you have the assumption is that rents are higher and you have more cash flow. If you are concerned about equity then do a cash out refi and pull equity out.
Click to expand...

Most people think only about their PITI when figuring out if they should rent out their current primary instead of selling it when trading up.  For example.

Someone bought SFR 8 years ago for $900k (say $200k down).  PITI + HOA is $3700.  They can rent out their property for $4000 so they are happy since they are "cash flow positive".  However, what they don't factor in is their property is now with $1.3M (600k in equity now).  At 1.3M, the numbers don't look very good.  They should sell and purchase 2x smaller townhomes and their rental income will be much higher than $3700.  You also need to factor in MR + HOA cost to determine if the property will make a good rental or not.
Click to expand...

That SFR is likely assessed at 1M for taxes and the tax bill is $12k a year.
Two smaller properties purchased today will be assessed at 1.3M and the combined tax bill $15.6k

Subtract that 3.6k tax expense from increased rent collected annually. Oh, while you are on the spreadsheet, do not forget to factor in selling costs, buying costs, potentially higher interest rate on investment purchase etc....

In the end, either choice would be only marginally better/worse. That's my bet.
 
Cornflakes said:
woodburyowner said:
Cares said:
woodburyowner said:
If you want investment properties, buy ones that make sense as investment properties.  The trade-up properties that turn into investment properties rarely make sense if you factor in the equity in the property.
Click to expand...

I'm not sure I follow what you mean by factoring in the equity in the property? The more equity you have the assumption is that rents are higher and you have more cash flow. If you are concerned about equity then do a cash out refi and pull equity out.
Click to expand...

Most people think only about their PITI when figuring out if they should rent out their current primary instead of selling it when trading up.  For example.

Someone bought SFR 8 years ago for $900k (say $200k down).  PITI + HOA is $3700.  They can rent out their property for $4000 so they are happy since they are "cash flow positive".  However, what they don't factor in is their property is now with $1.3M (600k in equity now).  At 1.3M, the numbers don't look very good.  They should sell and purchase 2x smaller townhomes and their rental income will be much higher than $3700.  You also need to factor in MR + HOA cost to determine if the property will make a good rental or not.
Click to expand...

That SFR is likely assessed at 1M for taxes and the tax bill is $12k a year.
Two smaller properties purchased today will be assessed at 1.3M and the combined tax bill $15.6k

Subtract that 3.6k tax expense from increased rent collected annually. Oh, while you are on the spreadsheet, do not forget to factor in selling costs, buying costs, potentially higher interest rate on investment purchase etc....

In the end, either choice would be only marginally better/worse. That's my bet.
Click to expand...

There will definitely be a short term hit, but long term, you will come out ahead by selling and purchasing 2 rental properties.  Especially if you purchase out of state.  Anyway, my point is that you should not give up the $500k capital gain exclusion and turn your current primary into a rental without giving it a lot of thought.  Maybe the hassle isn't worth it. 

I was in the same boat a few years back and sold and bought multiple rental properties that cash flowed better. 
 
zovall said:
If you are confident about your income, I'd go big.
Click to expand...

you only live once. sometimes you need to enjoy nicer bigger things in life...

for the OP, I would keep the current house and rent out, and buy a much bigger second house as primary.
 
OCtoSV said:
I'm contemplating selling to take advantage of maximizing the married tax free cap gain of $500K and taking a $1M+ mortgage to buy a bigger house. Figure 70% LTV jumbo, versus staying put and paying off my current residence. It's nice but small, and it seems that if money is this cheap and I have the income this wouldn't be a bad bet on continued appreciation in my area. This would reduce the surplus I currently invest in my taxable account.

What would you do?
Click to expand...

Nice but small.  How small? 

If small is foreseeable too small at some point go.

That said, bird in hand, buy the step up first, honestly I?m highly thankful I?m not trying to buy now.  The market isn?t how much is it worth, it?s how much is the most desperate willing to pay.

My mortgage isn?t paid off.  I know people with theirs paid off. They express the same almost perverse pleasure in not making a monthly mortgage payment as I feel when my negative electric bill shows up for July while running the AC at max comfort. 

Wealth is maximizing your asset production.  Real wealth is being able to afford dead money.
 
great feedback everyone - much appreciated.

I look at the big house as a long term store of wealth that I also get to enjoy. I'm shooting for single level with pool + grass yard. Right now I know I'll overpay so am ambivalent on the choice.

Levering up to buy income property feels like a lot more work to derive the same income as I can plan for long term from the market with the 4% withdrawal rule from the pile I'll have saved and invested. It seems to most of my friends it's either income real estate or a conventional retirement portfolio of securities and fixed income where the name of the game is minimizing taxes.
 
OCtoSV said:
great feedback everyone - much appreciated.

I look at the big house as a long term store of wealth that I also get to enjoy. I'm shooting for single level with pool + grass yard. Right now I know I'll overpay so am ambivalent on the choice.

Levering up to buy income property feels like a lot more work to derive the same income as I can plan for long term from the market with the 4% withdrawal rule from the pile I'll have saved and invested. It seems to most of my friends it's either income real estate or a conventional retirement portfolio of securities and fixed income where the name of the game is minimizing taxes.
Click to expand...

I would recommend keeping your current home if you can for another 1-2+ years as you have up to 3 years to sell it and capture your tax free gains after you move out.  See where the market is in 2+ years and then decide if you want to sell it. 

I'm in the same boat as I'm looking to buy the ultimate unicorn home (single story view lot with enough yard space for an infinity pool) as I believe that home prices will continue to appreciate in the intermediate term and money is cheap to borrow (lower than the rate of inflation).  I'm going to wait until I file my 2021 taxes so that I can increase my budget in 2022 to buy as I'm using my money to help clients out now.
 
USCTrojanCPA said:
OCtoSV said:
great feedback everyone - much appreciated.

I look at the big house as a long term store of wealth that I also get to enjoy. I'm shooting for single level with pool + grass yard. Right now I know I'll overpay so am ambivalent on the choice.

Levering up to buy income property feels like a lot more work to derive the same income as I can plan for long term from the market with the 4% withdrawal rule from the pile I'll have saved and invested. It seems to most of my friends it's either income real estate or a conventional retirement portfolio of securities and fixed income where the name of the game is minimizing taxes.
Click to expand...

I would recommend keeping your current home if you can for another 1-2+ years as you have up to 3 years to sell it and capture your tax free gains after you move out.  See where the market is in 2+ years and then decide if you want to sell it. 

I'm in the same boat as I'm looking to buy the ultimate unicorn home (single story view lot with enough yard space for an infinity pool) as I believe that home prices will continue to appreciate in the intermediate term and money is cheap to borrow (lower than the rate of inflation).  I'm going to wait until I file my 2021 taxes so that I can increase my budget in 2022 to buy as I'm using my money to help clients out now.
Click to expand...

You're using your money to assist clients in purchasing homes?  :eek:
 
CLB_srA said:
USCTrojanCPA said:
OCtoSV said:
great feedback everyone - much appreciated.

I look at the big house as a long term store of wealth that I also get to enjoy. I'm shooting for single level with pool + grass yard. Right now I know I'll overpay so am ambivalent on the choice.

Levering up to buy income property feels like a lot more work to derive the same income as I can plan for long term from the market with the 4% withdrawal rule from the pile I'll have saved and invested. It seems to most of my friends it's either income real estate or a conventional retirement portfolio of securities and fixed income where the name of the game is minimizing taxes.
Click to expand...

I would recommend keeping your current home if you can for another 1-2+ years as you have up to 3 years to sell it and capture your tax free gains after you move out.  See where the market is in 2+ years and then decide if you want to sell it. 

I'm in the same boat as I'm looking to buy the ultimate unicorn home (single story view lot with enough yard space for an infinity pool) as I believe that home prices will continue to appreciate in the intermediate term and money is cheap to borrow (lower than the rate of inflation).  I'm going to wait until I file my 2021 taxes so that I can increase my budget in 2022 to buy as I'm using my money to help clients out now.
Click to expand...

You're using your money to assist clients in purchasing homes?  :eek:
Click to expand...

Yes, I've stepped in to buy homes on behalf of my clients or buy their exit properties for cash since they were contingent buyers (which have no chance in this market). 
 
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