I'm going to describe my scenario in general terms for the sake of simplicity - here it goes!
My wife and I are currently living in a house that we enjoy very much. The house was purchased May 2014 and the mortgage balance is $800,000 - thankfully houses in our area have appreciated nicely and we can probably sell the house for $1,250,000 for a profit of $450,000 (now this is an inflated profit considering the purchase price was $912,000 and we spent $150,000 in remodeling).
Prior to getting married in 7/2012 my wife purchased a property that she has been renting for the last 4 years. That rental income has mostly just covered the mortgage. The mortgage balance for the property is approximately $312,000. Her tenants will be vacating the property this month so then I had the idea to consider the following. What if we were to sell the house we live in and then use that profit to pay off the outstanding mortgage of her rental property?
I mostly see this as a win-win but just wondering what anyone else may think? We are fairly good at saving money so my intention would be to save the money we normally pay for our current mortgage - $5000 for 2 years then go out and purchase another primary residence for us. In the meantime we would have lived in her rental property "mortgage free" and once we move out we can rent that property which generates $2500 of monthly rent.
I'm a bit confused. You say the mortgage balance IS $800,000 and you can sell it for $1,250,000. Did you purchase it for $800,000 or is that what you owe on it? How much did you put down? I'll assume 20%.
Down Payment: $200,000
So you've put $350,000 into the property, held it for two years and you have $450,000 in equity.
Closing costs will likely be around $60-70,000.
If you sold it your profit would be roughly $75,000. Am I missing something?
What is the value of the property that your wife is renting.
Based only on the fact that she owes $312000 I assume it is worth more. With rent at 2500/month this is a negative cash flow property and a terrible rental income investment property. You should sell it.
If you really want to save money sell them both, rent a place for yourself to live in and invest the profits from the sales.
Renting as far less expensive that owning and a much better route to save for investing.
@Gustavo Gonzalez I encourage you to consider the return you could generate by pulling equity from your current primary residence and deploying it elsewhere. If you just pull the equity out and payoff another mortgage, that money is not working for you as well as it could from investing in another rental property, flip, etc.
Another thought is refinancing your wife's property if it is not near current mortgage rates.
As Archie said, you don't have that much in profit.
In 2 years are you going to purchase the same kind of house? What is the price is going up to 1.4 mil in 2 years? It can also go down, so it's a gamble.
What is your long term plan?
If you refinance the 312k you should get a mortgage around 2k. Is your 2.5k rent, the market rent? The rents went up in the last few years.
The answer is, depends :)
Thanks for the breakdown.
Purchase price was $912,000 with 10% down, so my down payment was roughly $90,000 so I put in approximately $240,000. I didn't take into consideration closing costs so you bring up a good point that I totally missed.
My wife's property is valued at $550,000. I'm all for selling the house and using the equity to purchase/exchange a rental property with more cash flow. This was her first ever house purchase so she has a hard time letting go of it...I'm working on her.
Renting would have been great prior to the birth of our first born son who is only 4 months old.
Pulling equity from our primary house for other investments is a good option but one that still makes me nervous.
We are practically neighbors!
My long term plan is to move up to a primary residence in the $1,500,000 to $2,000,000 range using the equity from my primary residence. Ideally I would wait until we reach the sweet spot $500,000 tax fee benefit to use towards the purchase of that dream property.
My wife's property mortgage is actually $2000 and some cents so we may just consider riding the market rent and see if we can maximize that in the meantime.
The 500k tax benefit is a nice thing and doable in our area, I plan to take advantage of it in the future also.
Last year, after my inherited tenant of 4 years left, I was able to raise the rent by 50%. It was a nice surprise to see that the rental market went up so much.
Good luck neighbor!
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