Thinking about 2nd primary home but current market does not make sense.

Sacramento, California
Buying & Selling Real Estate
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Thinking about 2nd primary home but current market does not make sense.

Joseph Henry
Member since 2020 · 19 posts · 13 votes

Current home valued at ~850k with 50k left on mortgage. Wife and I are interested in buying a newer home (current home is 25 years old). Wife also thinks the current home is smaller with less closet/storage space and it has been on the back of our minds for a while. New homes we are interested in the suburbs are around 1.5M. Idea is to rent the existing home. Rent should cover expenses and have an additional $1k for the new mortgage. 

However, the numbers do not make sense. With a 20% down and a 1.2M loan balance and 7% rate, the first 7 years will amount to an interest payment of $560k. Even if the rates drop to 5.5%, that will still be $450k in interest payment alone over 7 years. Add $150k for property taxes. That is $600k to $700k just for interest and prop taxes. In 7 years, if the house price goes up to 2.2M, that will just break even. 

Am I doing the math right? Selling the existing home and bringing the loan balance down would be an option. What would you do in this situation? 

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Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
2y
Quote from @Joseph Henry:
...What am I missing here?

It's your personal residence not an investment, so you can't "math" your way to an answer. The question is, does this purchase give us the space, location and amenities we want in our home? If so, can we afford it? 

It's like buying food or eating out, we don't approach every meal with a question of how we'll try to break even in 5 years. If we did it would all be lentils, brown rice and broccoli for every meal. The only other thing I'd consider is you should either sell your home now or within the next two years to get your OO 121 exclusion tax saving...I'm assuming you have close to or just over the $500k exclusion if you've owned for some time, so that's a huge one time only opportunity I'd use here.

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  • Justin BrickmanBusiness Member
    Realtor · San Antonio, TX · Member since 2021 · 502 posts · 274 votes
    2y

    Hey Joseph there are ways to get creative on this that may make you feel better about it, I wouldn't limit yourself to only those 2 options. Such as a HELOC or making it a furnished rental. (I believe you should be able to make much more than $1K on your rent on your main house if you do it correctly)

    Also, if you can negotiate seller credits (which many buyers are able to do right now) on your new house, you can use that to buy your interest rate down. Even though rates are 7-7.5 lately, my clients have been getting in around the low 6s.

    [email protected]210-827-6020
    Justin Brickman Realty4.9144 Reviews
    WebsiteView Page
    0Reply
  • Joseph Henry
    OP
    Member since 2020 · 19 posts · 13 votes
    2y
    Quote from @Justin Brickman:

    Hey Joseph there are ways to get creative on this that may make you feel better about it, I wouldn't limit yourself to only those 2 options. Such as a HELOC or making it a furnished rental. (I believe you should be able to make much more than $1K on your rent on your main house if you do it correctly)

    Also, if you can negotiate seller credits (which many buyers are able to do right now) on your new house, you can use that to buy your interest rate down. Even though rates are 7-7.5 lately, my clients have been getting in around the low 6s.


     Makes sense. But in my calculation, even with a 5.5% rate, I would be paying $450k in interest over 7 years. Prop taxes, home owners, and other upkeep will easily be $300k. That would require the property to go up by 50% over 7 years(1.5M to 2.25M) just to break even. I should be able to sell in 7 years as needed. What am I missing here?

    0Reply
  • Justin BrickmanBusiness Member
    Realtor · San Antonio, TX · Member since 2021 · 502 posts · 274 votes
    2y

    Yeah I don’t think you’re missing anything. When you’re taking a loan of the size out, that’s the interest you can expect to pay with rates right now. 

    [email protected]210-827-6020
    Justin Brickman Realty4.9144 Reviews
    WebsiteView Page
    1Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    2y
    Quote from @Joseph Henry:
    ...What am I missing here?

    It's your personal residence not an investment, so you can't "math" your way to an answer. The question is, does this purchase give us the space, location and amenities we want in our home? If so, can we afford it? 

    It's like buying food or eating out, we don't approach every meal with a question of how we'll try to break even in 5 years. If we did it would all be lentils, brown rice and broccoli for every meal. The only other thing I'd consider is you should either sell your home now or within the next two years to get your OO 121 exclusion tax saving...I'm assuming you have close to or just over the $500k exclusion if you've owned for some time, so that's a huge one time only opportunity I'd use here.

    5Reply
  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    2y

    Don't take a HELOC out, that's just predatory and repetitive nonsense on this board that needs to quit.


    If you're thinking about a new primary home, these investing economics don't really work that way. It's a primary home and if it's north of $1MM it's in a neighborhood that likely isn't attracting "investors". So either you sell yours into it, earn other capital or lower your financial budget to fit your criteria.

    You cannot always get what you want.

    1Reply
  • Joseph Henry
    OP
    Member since 2020 · 19 posts · 13 votes
    2y
    Quote from @Matt Devincenzo:
    Quote from @Joseph Henry:
    ...What am I missing here?

    It's your personal residence not an investment, so you can't "math" your way to an answer. The question is, does this purchase give us the space, location and amenities we want in our home? If so, can we afford it? 
     

    Agree but I am also trying to make sense with the investment. If it has to go up 50% just to break in, then that is not the right investment. We don't spend 100s of thousands on food or clothing so by far this is much bigger investment. Also, another interesting thing here is that, if the value of the home goes up 50% and the sale price is 2.25M, that will also trigger a sale tax since the sale price is more than 500k of the original purchase price; even though it is just break even.

    It does look like sell existing home, and move funds towards the purchase of the new home makes more sense, since that will be lower mortgage and hence lower interest, but still won't be slam dunk considering the current prices.

    0Reply
  • Justin BrickmanBusiness Member
    Realtor · San Antonio, TX · Member since 2021 · 502 posts · 274 votes
    2y

    Good luck, hope it works out. 

    Be confident in it either way. Sounds like you’re in a good position with $800K of equity 

    [email protected]210-827-6020
    Justin Brickman Realty4.9144 Reviews
    WebsiteView Page
    0Reply
  • Kingsley Thomas
    Member since 2021 · 33 posts · 29 votes
    2y

    There is a lot more math and tax strategy that you could throw into this to make it a mediocre investment.  But the correct answer is to buy the new house because a terrible investment with a happy wife is better than a great investment with a wife nagging all the time about small closets.

    4Reply
  • Noah Laker
    Real Estate Broker · Sacramento, CA · Member since 2021 · 516 posts · 408 votes
    2y

    Hey Joseph, I’m a real estate broker and investor here in Sacramento, also managing 100+ investment properties. 

    It sounds like yours is more of a lifestyle decision than a mathematical one. With that much equity, holding it as a rental makes no sense. You would be better off selling, and buying two new properties — One to live in (to fit your family’s lifestyle preferences), and another more optimized for the rental value. Probably some B class multifamily. 

    You can continue to take advantage of the market appreciation, and make some income from the multifamily, while enjoying your new living situation. 

    Just my two cents!

    2Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    2y
    Quote from @Joseph Henry:

    Current home valued at ~850k with 50k left on mortgage. Wife and I are interested in buying a newer home (current home is 25 years old). Wife also thinks the current home is smaller with less closet/storage space and it has been on the back of our minds for a while. New homes we are interested in the suburbs are around 1.5M. Idea is to rent the existing home. Rent should cover expenses and have an additional $1k for the new mortgage. 

    However, the numbers do not make sense. With a 20% down and a 1.2M loan balance and 7% rate, the first 7 years will amount to an interest payment of $560k. Even if the rates drop to 5.5%, that will still be $450k in interest payment alone over 7 years. Add $150k for property taxes. That is $600k to $700k just for interest and prop taxes. In 7 years, if the house price goes up to 2.2M, that will just break even. 

    Am I doing the math right? Selling the existing home and bringing the loan balance down would be an option. What would you do in this situation? 


     This problem is known since 1998 LOL, there's nothing new of it. It is just basic maths.

    Basically the problem is the cap rate of asset is less than interest rate.  Before, the spread is so high, that buyer is guaranteed winnng.

    The solution for this problem is this. When interest rate is low you purchase multiple properties by overleveraging.

    When rate is high like this, sell one or two property and move to another one, basically consolidation or sell everything and buy to an asset that could generate two or three rentable unit.

    IN my case, even if interest rate goes to 20 percent I still have DSCR 1.0 in my primary because I have three rentable units in my single family.

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    2y

    You aren't missing anything.  A primary home isn't going to make you any money-it gives you a place to live and overtime you build equity by paying down your mortgage.  Most mortgage payments go to paying off interest at the start of the loan and it is only towards the end of the term that you see the principal really start to go down.

    Interest rates have gone back to normal after a very long time at record lows.  Rather than focusing on a 7 year term, look at the costs each year (or each month).

    Look at your current home and see if that makes sense as a rental.  If it doesn't, then sell it and use that money to buy your new place.  If closet size is the main problem, look to see if you can enlarge the closets (or get rid of stuff!!).

    1Reply
  • Scott ScovilleBusiness Member
    Real Estate Agent · Sacramento, CA · Member since 2019 · 497 posts · 272 votes
    2y
    Quote from @Joseph Henry:

    Current home valued at ~850k with 50k left on mortgage. Wife and I are interested in buying a newer home (current home is 25 years old). Wife also thinks the current home is smaller with less closet/storage space and it has been on the back of our minds for a while. New homes we are interested in the suburbs are around 1.5M. Idea is to rent the existing home. Rent should cover expenses and have an additional $1k for the new mortgage. 

    However, the numbers do not make sense. With a 20% down and a 1.2M loan balance and 7% rate, the first 7 years will amount to an interest payment of $560k. Even if the rates drop to 5.5%, that will still be $450k in interest payment alone over 7 years. Add $150k for property taxes. That is $600k to $700k just for interest and prop taxes. In 7 years, if the house price goes up to 2.2M, that will just break even. 

    Am I doing the math right? Selling the existing home and bringing the loan balance down would be an option. What would you do in this situation? 


    Hey Joseph,

    I just DM'd you. Let me know if you'd like to chat. Looks like you're in a good spot, with plenty of options. While rates are higher, equity gives you options to make the best decision for you guys in the short term and long term. 

    [email protected]415-933-2202
    Scoville Realty & Investments LLC
    WebsiteView Page
    0Reply
  • Jake AndronicoBusiness Member
    Realtor · Reno, NV · Member since 2019 · 1k+ posts · 938 votes
    2y

    @Joseph Henry

    Some good comments in this thread. 

    When you're coming at a decision with lifestyle AND math in mind, it makes things more difficult. 

    Yes, you will pay quite a bit of interest when you're borrowing that much. If you don't want to pay interest, you could pay cash for a smaller house. 

    Or, you could get the new house you want and pay the interest (and refinance when you can). 

    In the end, it sounds like there will be some sort of a compromise with these circumstances. 

    That being said, there are many places to be that are worse than an almost paid off $850K house :)

    Best of luck to you!!

    415-233-1796
    0Reply
  • Robert PaynePro Member
    Real Estate Agent · Bowling Green, KY · Member since 2023 · 36 posts · 36 votes
    2y

    I think it would be easier to accept the high interest cost if you sit down with an investor savvy tax expert. You must have a significant income tax burden with your price range. You will have depreciation on the rental to help defer taxes, and a significant amount of the interest you pay on the new mortgage will be tax deductible as well.

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    2y
    Quote from @Joseph Henry:

    Current home valued at ~850k with 50k left on mortgage. Wife and I are interested in buying a newer home (current home is 25 years old). Wife also thinks the current home is smaller with less closet/storage space and it has been on the back of our minds for a while. New homes we are interested in the suburbs are around 1.5M. Idea is to rent the existing home. Rent should cover expenses and have an additional $1k for the new mortgage. 

    However, the numbers do not make sense. With a 20% down and a 1.2M loan balance and 7% rate, the first 7 years will amount to an interest payment of $560k. Even if the rates drop to 5.5%, that will still be $450k in interest payment alone over 7 years. Add $150k for property taxes. That is $600k to $700k just for interest and prop taxes. In 7 years, if the house price goes up to 2.2M, that will just break even. 

    Am I doing the math right? Selling the existing home and bringing the loan balance down would be an option. What would you do in this situation? 


    1. sell primary
    2. buy 500-800k 80% LTV house that you can house hack, so mortgage is covered.
    3. buy 400k-500k duplex in sacramento

    #2 and #3 you would have DSCR >0.9 at least. Free ride to 5% annually for next 10 years.

    0Reply
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