Financial Perspective

[PricklyPete]

I figure now is as good a time as any to get a berating from all the financial "experts" on ATOT.

My wife and I have been looking for houses recently and feel we have finally found the house we are interested in making an offer on. My concern is just how highly leveraged we would be.

We still own our original home and rent it out. The property is in a highly desirable location in a city (Greenville, SC) that is still growing at a decent pace. We have had the same renters there for nearly 5 years and they keep the place better than we did. They were just asking to repaint a number of rooms, so i can't imagine them moving anytime soon. So we have no motivation to sell and about 35% equity in the place.

The new place that we are thinking of purchasing here in Denver is considerably more expensive (as you can imagine), but we will have no issue making the 20% down payment and still having a 6+ month "oh shit" fund. The end result is that the new mortgage will be about 24% of our net monthly income. If my wife stops working in the next couple of years (kids), that will jump to about 30%.

Part of me hates being in that much debt (between the two houses) even if we will have reasonable equity in the houses...unless the market took a huge dive again...which is always possible.

This is our only debt. On top of that, the new house allows us to stick with one car since I can continue to ride the light-rail to work. Are my fears unfounded, or am I getting over my head? It seems reasonable, but I want to hear others opinions.

 

[Tweak155]

30% of income on the current house, but what if the renters move out (or die)? Gotta plan worst case.

 

[dullard]

Finances aren't what I would worry about on your situation. I would worry about having homes in two states that aren't even close by. You may be fine with the current renters, but you won't be able to check up often. And you won't have these good renters forever. Go ahead and buy the house you want. But be prepared to sell the other house at a moments notice if problems do arise.

 

[jagec]

30% of income on the current house, but what if the renters move out (or die)? Gotta plan worst case.

Worst case is he sells at a loss or gets foreclosed on the old house, but keeps the new house.

It's a good point, though: OP, how long could you make the payments on BOTH houses with just your income and savings?

 

[PricklyPete]

30% of income on the current house, but what if the renters move out (or die)? Gotta plan worst case.

My 6+ emergency fund includes renters moving out and me being on line for both mortgages with no income from either me or the wife.

I am was not including the rental property in my 24/30% of income since it is essentially cash flow neutral...we are making very little off the property once you include maintenance. Maybe I am looking at that the wrong way. I should be able to get out of the property easily if I needed to based on the amount of equity we have and the desirability of the area the house is in. Of course if the economy took a huge dive (fiscal cliff anyone?), things might not be as rosy.

 

[ichy]

Your situation sounds ok to me. Managing an out of state rental property isn't idea, but if it's cash flow neutral I don't think that's a bad thing. What's the interest rate on the mortgage on your old house?

 

[JTsyo]

Do still have family or friends you could trust to act on your behalf back in SC? If the house the income neutral I would just keep it. were you planning on 15 or 30 yr mortgage?

 

[PricklyPete]

Finances aren't what I would worry about on your situation. I would worry about having homes in two states that aren't even close by. You may be fine with the current renters, but you won't be able to check up often. And you won't have these good renters forever. Go ahead and buy the house you want. But be prepared to sell the other house at a moments notice if problems do arise.

My parents and a lot of close friends who help us out are close to the old house. It certainly is not ideal, but it has worked well so far. My wife and I discussed this and are thinking we will likely sell the rental if she stops working for kids. We'll probably plow that money into the principal of the new house if that is the case. We are holding on to the rental now as it seems like a good investment due to the uniqueness of the location in Greenville...which is probably a horrible guess based on my very limited knowledge of real estate.

 

[PricklyPete]

Worst case is he sells at a loss or gets foreclosed on the old house, but keeps the new house.

It's a good point, though: OP, how long could you make the payments on BOTH houses with just your income and savings?

6+ months...will hopefully have that to 12+ months by late summer.

 

[PricklyPete]

Your situation sounds ok to me. Managing an out of state rental property isn't idea, but if it's cash flow neutral I don't think that's a bad thing. What's the interest rate on the mortgage on your old house?

4.85%. I will likely look into refinancing again if we think we are going to hold on to it. Not sure what rates you can get in an investment property though.

 

[PricklyPete]

Do still have family or friends you could trust to act on your behalf back in SC? If the house the income neutral I would just keep it. were you planning on 15 or 30 yr mortgage?

Yes...family/friends have been helping us out with it for the last 5 years.

30yr on new house.

 

[ichy]

If you're already cash flow neutral then I don't think that holding onto the old house is a bad idea. Rents will go up over time but your mortgage payment will remain the same, having a small passive income stream is always nice. Also, interest rates will be going up someday and when that happens you'll be laughing as you're paying under 5%.

 

[Tweak155]

I'd keep the property as long as possible. You're not losing anything on it right now and worst case you lose a few months of mortgage / utilities trying to sell it. It sounds very low risk with your reserve.

That's how real estate people make it rich. Buy a bunch of properties and have other people pay for them, then sell!!

Overall sounds low risk if all those expenses are included in your backup fund.

 

[Pantoot]

4.85%. I will likely look into refinancing again if we think we are going to hold on to it. Not sure what rates you can get in an investment property though.

If Fannie or Freddie back it and you closed before June 2009 you can do a harp 2 loan on it. (provided it isn't FHA or jumbo)

 

[highland145]

If Fannie or Freddie back it and you closed before June 2009 you can do a harp 2 loan on it. (provided it isn't FHA or jumbo)

Even on a rental?

 

[PricklyPete]

I'd keep the property as long as possible. You're not losing anything on it right now and worst case you lose a few months of mortgage / utilities trying to sell it. It sounds very low risk with your reserve.

That's how real estate people make it rich. Buy a bunch of properties and have other people pay for them, then sell!!

Overall sounds low risk if all those expenses are included in your backup fund.

That is what I am thinking, but I guess the 24% (and possibly 30%) of Net income just seems like a lot to me.

Not that I haven't had to pay ridiculous rent in the same range before, but the mortgage just feels more permanent for obvious reasons.

 

[PricklyPete]

If Fannie or Freddie back it and you closed before June 2009 you can do a harp 2 loan on it. (provided it isn't FHA or jumbo)

I'll have to talk to my mortgage guy about it.

 

[Pantoot]

Even on a rental?

Indeed.

 

[Tweak155]

That is what I am thinking, but I guess the 24% (and possibly 30%) of Net income just seems like a lot to me.

Not that I haven't had to pay ridiculous rent in the same range before, but the mortgage just feels more permanent for obvious reasons.

Meh I used to feel the same way, but then I realized all I do is bank all that extra money. So why not invest it into a nice place? Go cheap elsewhere

 

[Naeeldar]

Not sure how you would get bashed. You've got a potentially great investment, a currently cash flow neutral property that should only go up in rent value as the years go by. 24% net is probably very little to be paying for a mortgage ocnsidering you own two houses (this is of course relative to income levels).

I mean honestly from what you listed there is nothing wrong. Only info though is what is the cost of the new house? 24% net of lets say 125k a year is really nothing. 24% net of $45k a year is something else entirely. I'm going to assume you are at 100K or or more however.

 

[PricklyPete]

Meh I used to feel the same way, but then I realized all I do is bank all that extra money. So why not invest it into a nice place? Go cheap elsewhere

Makes sense to some degree. We specifically were looking for nicer neighborhoods along the light rail to avoid sinking money into a depreciating asset like a car we really don't need and instead put the money toward a nicer house. As much as I like cars, I'd rather be in a nice neighborhood with a lot to do.

 

[PricklyPete]

Not sure how you would get bashed. You've got a potentially great investment, a currently cash flow neutral property that should only go up in rent value as the years go by. 24% net is probably very little to be paying for a mortgage ocnsidering you own two houses (this is of course relative to income levels).

I mean honestly from what you listed there is nothing wrong. Only info though is what is the cost of the new house? 24% net of lets say 125k a year is really nothing. 24% net of $45k a year is something else entirely. I'm going to assume you are at 100K or or more however.

We're doing fine money wise. I'd rather not be specific as it gets taken as an epeen thread from that point forward ( thus all of the %).

The remaining 76% should be just fine to cover expenses and continued savings. I am already taking my 401k contributions out before coming up with the Net figure.

ATOT always bashes everyone who brings up financial subjects. ;-)

Well I'm getting the feeling that the general consensus is that I'm not stepping on thin ice here.

 

[Naeeldar]

We're doing fine money wise. I'd rather not be specific as it gets taken as an epeen thread from that point forward ( thus all of the %).

The remaining 76% should be just fine to cover expenses and continued savings. I am already taking my 401k contributions out before coming up with the Net figure.

ATOT always bashes everyone who brings up financial subjects. ;-)

Well I'm getting the feeling that the general consensus is that I'm not stepping on thin ice here.

agreed. That's why I talked around it a bit but quite frankly you can make basic assumptions off the fact that you are even considering keeping the rental property.

Anyway that % for a home is extremely cheap especially if we are talking about a home costing 250k or more - the remainder net worth is obviously more than enough to cover a lot of COL type expenses and leave plenty for savings/fun.

 

[PricklyPete]

agreed. That's why I talked around it a bit but quite frankly you can make basic assumptions off the fact that you are even considering keeping the rental property.

Anyway that % for a home is extremely cheap especially if we are talking about a home costing 250k or more - the remainder net worth is obviously more than enough to cover a lot of COL type expenses and leave plenty for savings/fun.

Thanks. Feeling a bit more confident about the decision. Will likely be putting in an offer today if the property is still available.

 

[zCypher]

Sounds like you've put all the odds in your favor. The worst case scenario sounds like it would be more an inconvenience than a real disaster. I say go for it, especially since your current hassle-free tenants could be there for a long time. Besides, who knows when that house could come in handy in the future.