Purchasing new Primary Residence, keep current or rent? Thoughts?
Currently we are looking at a new Primary residence around $700k. Current primary appraises around $625k and I owe $100k on it. We currently have one significantly cheaper rental that has been working out well and has put this idea into my head. I've got at 2.29% rate on the current primary and a mortgage payment all in of about $2600. Not many comp rentals in the area of this size to compare to but I'm expecting I can get around $3,500-3,800 in rent.
The flip side of having to take a 7% rate on the new home with only a $100,000 down is weighing heavily on me. I'd imagine the appreciation on my current house over the next few years (if I rent) will wash a lot of that interest away? What would everyone do in this situation?
If it was me I'd maybe keep your current and rent it out. If you want to tap into the equity I'd do a HELOC to keep the cheap rate. You do have a ton of equity so it stinks to keep it locked in.
Already got a HELOC setup, haven't used it, rates almost 8% so wouldn't make sense to use it for DP money on new house if that was what you were suggesting.
Renting out your current home can help you make more money to cover your mortgage. But it means more work, like finding tenants and fixing things. Buying a new house can make your life better, but it might mean paying more each month because of higher interest rates and other costs when selling your old house. It's a good idea to talk to a local real estate agent and a money expert. And be sure to do the math carefully before you decide.
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Real Estate Agent Texas (#005416)
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#3 1031 Exchanges Contributor
- Investor
- Las Vegas, NV
More important than what you owe on your current home is why are you moving and what did you pay for it.
If you’re moving for a lifestyle upgrade or other non-financial reason go ahead and move. (Since it sounds like the new home is more expensive.)
Now the important question is what did you pay for it? If you have a gain over a couple hundred thousand I’d’ pry sell. Every $100k in gain up to the limits, $250k (if single) or $500k (if married) will save you $15k in federal taxes and I’m guessing $5-10k in state taxes? So if you have $200k in gains you’d have to make $50k on your rental NET, after expenses. So you can pay $10k in taxes and be back to where you would be today by selling. Except you’d also have to make up the interest expenses on that extra $500k you borrow, so you have to make that plus $2,500/mo profit (another $30k) to pay the interest.
So if you think you can net say $45k/yr in profit it will take you 3 years to break even if you ignore income taxes. Most rentals won’t bring in $4k/mo in profits. (Not rent, profits after expenses.)
Quote from @Bill Brandt:
More important than what you owe on your current home is why are you moving and what did you pay for it.
If you’re moving for a lifestyle upgrade or other non-financial reason go ahead and move. (Since it sounds like the new home is more expensive.)
Now the important question is what did you pay for it? If you have a gain over a couple hundred thousand I’d’ pry sell. Every $100k in gain up to the limits, $250k (if single) or $500k (if married) will save you $15k in federal taxes and I’m guessing $5-10k in state taxes? So if you have $200k in gains you’d have to make $50k on your rental NET, after expenses. So you can pay $10k in taxes and be back to where you would be today by selling. Except you’d also have to make up the interest expenses on that extra $500k you borrow, so you have to make that plus $2,500/mo profit (another $30k) to pay the interest.
So if you think you can net say $45k/yr in profit it will take you 3 years to break even if you ignore income taxes. Most rentals won’t bring in $4k/mo in profits. (Not rent, profits after expenses.)
Ok so I'll be netting more then $250k in capital gains. I have two questions, any home improvements I made like finishing my basement I know I can add to the cost basis of the home, do I need to have receipts for all my drywall, lumber , etc or can I just use a good faith estimate? Also, if I plan to apply that equity to the new home in a form of down payment, am I still taxed? Obviosuly trying to find a way to negate taxes on the cap gains over the $250k limit.
#3 1031 Exchanges Contributor
- Investor
- Las Vegas, NV
Get married! Then you get $500k exemption.
Putting the money towards a new home doesn’t help.
yes you can add those to basis, I do not know if you’re allowed to use estimate, ,but probably not. I would try to find receipts, at least contact credit card company or bank for checks or CC receipts. You’ll basically save 20% of every receipt you find.
But definitely means you should seriously consider selling as it would take a long long time to make up $50k in taxes.
Ps. Selling costs come off gain too, it’s your net not your gross selling price.
We have done both. The first house I bought (detailed in BP Podcast #82) I house hacked from day one, then moved out and rented the whole house for the next18 years, then sold and did a Section 1031 exchange. The second personal residence that I bought was a two unit and lived I one and rented the other. When I moved out I then rented the whole property and subdivided the back yard and did a land development plan for building 17 new houses. Then the third personal residence I bought paid $139,000 and lived there for a long time and sold for $500,000 cash in two days and used the Section 121 tax free sale. This provision allows $250,000 tax exclusion for a single person or $500,000 tax exclusion for a couple. imho the 121 and 1031 are two of the best features of the tax law benefitting real estate owners. I would highly recommend using either or bath provisions.
David Krulac
Bigger Pockets Podcast #82