My fiancee and I just had the first anniversary of being in our first home. My fiancee chose the home (he bought it just before I moved here) because it was in a well-established neighborhood with good schools and custom built homes with nice trees. Good home values with slow, but steady appreciation.
The suburban dream, really.
Only problem is, we’re both 24. We don’t care about school systems and lots of space. In fact, once our roommate moves out, 2,800 sq. ft. is entirely too big for us. We want a younger, hipper part of town where people are more active and we can walk to a restaurant.
More urban, if you will.
The previous owner did a lot to update the home, but he never touched the most important part - the kitchen. And some of the other things he did, like the bathroom renovation, are ghastly. So, now here’s my question: do we move out, rent it, and rent downtown for a year, then buy downtown? Or do we renovate now, stay for an extra year, then sell?
We want to make some changes before we sell, regardless. The question is, sell now or later?
We bought this home for $135,000 (gotta love cheap homes in Texas!). If we were to rent this house, we can make it cashflow for about net $200-300 per month, so let’s say $3,000 over the year. Plus, if we were renting downtown, we figure we can knock our expenses down somewhere between $100-250/mo. or about $1,800 in a year because we are renting and our power would not be as much. So in a year, we could save around $4,800 in a year by moving and renting.
We figure we have about $10,000 to put it in to get this bad boy up to snuff, so really, I guess our break-even is somewhere around $153,000 for closing costs, etc.
Homes in the area are starting to list (and sell) for around $155,000+. I think it would be worth our while if we could get somewhere in the neighborhood of $175,000 or more for this. We want to be out within five years (for the statute of limitations for rolling capital gains), so I guess we just need to watch the prices to figure this out.
Any thoughts?
People seem to go batty over the fact that the interest on your mortgage is deductible. They also seem to do the same thing over the the capital gains deferral for your primary residence. But just because you can sell your house, take a profit, and buy a bigger house to have *more* of a tax deduction, that is not necessarily a good thing.
Let’s say you have a $200,000 house. You put 20% down, so you have a $180,000, 30-year fixed mortgage at 5% (for the purpose of round numbers). Your payment is: $966.
Suddenly, your house appreciates. You can now sell it for $250,000. Rather than taking the capital gains and paying down a mortgage on a similar house, you decide to capitalize on this, sell your home, and trade up. After closing costs and fees, you have about $60,000 to put towards your next house. So you buy another home with 20% down, the new home being worth $300,000 with a 20% downpayment = a 30-year mortgage of $240,000.
At the same interest rate, your payment is now $1,395. You have just increased your overall debt by some $60,000, and your monthly cashflow has been stretched an additional $400/month. That is a 44% increase in your mortgage payment.
For what? A bigger house? Do you really need that much more room?
Let’s look at another scenario. Say you capitalized on your gains and rolled it into another, similar priced house. You take the $60,000 to pay down your mortgage, so your total mortgage on a $200,000 home is now $140,000. Your payment on a 30-year 5% fixed rate mortgage is now $751. That is a 22% decrease in your payment.
Now, here is why trading up really is dumb sometimes:
If you took that extra $200 per month and put it into a high-yield savings account at 5%, the compounding interest would give you $167,448 in 30 years! That is more than your new mortgage! And if you took the money you would be saving by not “trading up” to the bigger house ($1395 - $751 = $644) you would have $535,970 in 30 years. So, even if you can afford the bigger house, if you decide to save the money, rather than dump it into a bigger home (with higher costs of heating, etc.) you can have almost half a million dollars. Just see what you are giving up!
