This kicks me new thinking, risky but doable. He can continue rent it, ignoring tax benefit, until 2021 (when arm ends). He can sell around 2021 and by a cash flow multiplex (higher cap rate) with 1031 exchange locking new arm or fixed. There are pros and cons doing that as higher prop tax hits.
It needs to be carefully planned to avoid paying tax and benefit himself. I tried once, but did not invoke 1031 exchange as mortgage rate for investment is way higher than primary home, at least 1% basis.
An investor who does not believe in the market is a mediocre investor at best, and a foolish one at worst.
There is no fortune in disguise for people who donāt take risk. They are the ones who work their entire lives earning a paycheck salary with no hope of moving up the net worth ladder.
Too related to my scenario, so wanted to see if I could get some comparative analysis.
Home A. ~$800k LTV ~50%. Lived only 1.5 yrs, though weāre married. Mortgage Fixed at 3.5% Highly rentable area. Gained about $200k after buying.
Home B. ~$1.3M LTV ~70%. Mortgage 7ARM @ 3.2%.
The thinking was to rent out Home A, since the rate is fixed. With the rent, weāll be breaking even or slightly under water, like $100~200 a month. I figured if I sell, Iād get pro-rated capital gain exemption (could someone confirm this?), but with agent fee 6% and remaining capital gain tax, weāre not really getting back all that much. So weād rather keep trading up Home A for rental properties over time thru 1031 exchange.
For Home B, Like most millennials, we like to move around every few years, so we opted with 7yrARM. After 7 yrs, Iām not even sure weād want to be in Bay Area any more.
Do you think selling Home A is a better for this scenario? If we do sell, Iād rather take the proceed and pay off Home B.
I am in the never sell camp. The 500K gift is not really 500K. The only āsavingsā is 500K x tax rate, so around 200K. But then you have to pay commissions and all those sales costs like transfer tax. For a 1.2M house that can easily be 60K or more.
Scenario Keep: 1.2M house asset, 600K loan = 600K equity.
Scenario Sell: 1.2M - 600K - 60K = 540 cash. Pay tax on the 40K over 500. So around 525K cash.
What do you do with the cash? Do you invest in stocks? But you will be hard pressed to find similar leverage. Do you buy another house? An inflated price would increase your property tax bill right away. Plus you will be paying some of the transaction cost again.
By doing nothing you money is invested in real estate at 2x leverage. By selling you now have 525K cash that you need to find a place to invest.
I did my calculation last summer and my conclusion was to leave my money invested in the old house. Now that I work for myself my tax rate has never been lower. Even less of a reason to sell.
House 1 in average school district: bought in 2009 for 700K, still living in it, present value 1.2M, outstanding loan 600K, 5/1 ARM until May 2021, 2.75%, Monthly PITI = $3500, Projected rental monthly income = $3500
House 2 in good school district ā bought in 2017 for 1.95M, plan to move in August 2017, loan 1.35M, 5/1 ARM until March 2022, 3.25%, Monthly PITI = $8400
What will be your scenario by 2023 with two ARMs? Assume rates reset at 4.75% house 1 and 5.25% House2.
By around 2023, his home loan 1 will be 535k and payment resets (4.75% assumed in ARM) at $2831/month+property_tax+Insurance. He looses long term capital gain exemption. He has to continue to hold on to it with a kind of ARM !
If the rent adequately appreciates with such rate, he is likely to hold on. With flexible ARM, unless rate reduces, he will continue to hold the property with minor cash flow, but home value appreciates. It is too complex to actually calculate the ROI or P/L.
However, it is possible to work around with positive ROI as rent always increases over a long term and home always appreciates over a long term.
By around 2023, his home loan 2 will be around 1.205M and payment resets (5.25% assumed in ARM) at $6657.59. He can refinance or continue to hold ARM.
The only negative (I am still biased against ARM) I see is ARM risks or refinance challenges, which is difficult to account. Still rental workable for Home 1 with some risk.
It depends on the amount (conforming, Jumbo and super jumbo) and the time you applied.
During 2011, I refinanced rental with 4.25% fixed 30 year mortgage 340k and at that time I refinance primary home at 3.5% fixed 30 year mortgage.
Now, I had the quote recently for 1.25M loan (30% down payment) fixed 30 year for rental at 5.375%+no cost+no points.
At the same time, same amount of loan 1.25M (20% down payment) fixed 30 year for primary at 4.25%+no cost+no points.
I checked with 4 finance people, almost all of them quoting the similar rates. Wellsfargo does not provide loan at this level for investment property.
One lender quoted 1.25M (25% down payment) fixed 30 year at 5.625%, another lender said minimum down payment is 30%.
2011 I locked 3.25% fixed rate with 60% LTV
2012 I locked 3.5% fixed with 80% LTV
2016 I locked 3.625 fixed with 75% LTV
2017 I locked 4.25% fixed with 80% LTV
I guess we will not get a fixed rate 3.5% in our future years. This is historic low fixed mortgage !
Here, I do not need to calculate, close my eyes and can confidently say, if you hold on to your property 30 years, tenant pays your mortgage+expenses and you will get your home free of loan at the end of mortgage ! why do you need to sell and pay 6% expenses or think about capital gain or exemption?
What is your 10 or 20 year rent appreciation YOY rate and home appreciation YOY rate?
Agree with Manch.
Nsj, as long as you believe in Bayarea, RE is still the best way to invest and to maximize your assets as you are young. Risk is very high for equities without proper researches and your hourly rate should not worth the effort. By the way, how can you believe in stock and without bullish on Bayarea?
Assuming you are convinced and are in the Bayarea RE camp with us, Proposition 14 (low property tax at old house) and 1031 will easily offset the 500k exemption in very long term. The major risk is your ARMs. You may rent it out for now and try to refinance to a fix rate within the 2 years. Once you are out, then keep it forever. If you cannot, you can still consider taking the exemption last min as there is nothing in the future is certain except increasing variable rate after you ARM expires .
Agree. Thatās how most Singaporeans invest too many donāt believe in stocks and talk like ed-lo.
elt1 - How HWNIs invest, in North America 12.3% in RE, 33.9% in Equities, 23.7% in cash (I know many think holding cash is stupid but rich thinks otherwise, trust me, those who think holding cash is stupid is not there yet).
Iām in the āinvest today and spend tomorrowā camp, therefore, I hold on to almost no cash and invest everything. If I needed the cold hard cash I can always borrow on margin or draw from a HELOC.
When is your tomorrow? At the point youāre about to die?
Jack Ma implies that point is 60 years old, ahem, ahem, ahemā¦ now you know why I am not so keen in investing anymore Btw I canāt find the article, but it says the rich usually holds 10-25% in cash.
You misunderstoodā¦ I donāt mean spending money like a miser today in order to invest money. Thatās no way to live! All I meant was donāt hold on to any extra cash. If you have to draw money to sustain your lifestyle just incur more debt.
I donāt think holding cash is stupid (but obviously I am not there yet too). Once I have enough cash Iād deploy to RE and use the remaining for stock if there is something I want to buy. Thatās the way it works for me.
I donāt think you read the whole sentence. I said āonly if there is something I want to buyā. If I think shares are being overvalued I donāt. Itās great that your buy buy buy strategy works for you, but itās not for everyone.
I have 90% real estate and 10% on stocks. IMO, it depends on comfort.
Most of RE bought during 2008-2011 and all are almost doubled and locked at low rate.
It is mainly about Volatility and Liquidity issue.I am comfortable in holding real estate than stocks.
āHouse 1 in average school district: bought in 2009 for 700K, still living in it, present value 1.2M, outstanding loan 600K, 5/1 ARM until May 2021, 2.75%, Monthly PITI = $3500, Projected rental monthly income = $3500ā
With this NSJ can carefully plan and still make it provided he should not be disturbed when RE goes down or Rent goes down. His advantage is low cost during 2009, and appreciation rate in santa clara county.
It is very likely he will manage just small cash flow and hold on.
I am not comfortable on holding RE with ARM, esp growing interest rate and FED is not going to let down the Rate hike as well as winding down QE money. This makes mortgage lender hard on refinances or interest rate.
I hate going to appraiser revaluation, refinancing just for the sake of ARM. At that time, they appraise conservatively, allow low DTI and Low LTV ratio etc, esp on rental property.
I am in such situation one property with 3.25% ARM, finding a good opportunity to sell instead of holding it as the lenders quoted 5.375% for fixed 30 year. Rent is cash flow negative.
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many donāt believe in stocks and talk like ed-lo.
Btw I canāt find the article, but it says the rich usually holds 10-25% in cash.