Does this make sense?

Question

In a nutshell:

I want to sell my primary residence and rent a larger home to live in, while using the cash from the sale to buy one or two multi-family homes for rental income.

Detail:

My family is outgrowing our primary residence which we purchased in 2000 and have about 5 years to go on our 15-year mortgage at 5.125%.

We need a larger home, but our town just reassessed recently and even though our tax bill remained about the same, all the recently renovated homes and new constructions were hit with massive tax increases. If we sell our home and move to a bigger house, we will expect to pay between $17k-$22k in annual property tax.

I noticed that our monthly mortgage payment including property tax escrow is about $3,200. We could rent a decent house at that price.

I don't want to fix up our current home; there are too many things that could be done better if only the previous owners didn't cut corners. I'd rather just sell it than put any more money into it.

Instead of buying a new primary residence and restarting with a bigger mortgage, I'm thinking of buying multi-family homes with the sales proceeds that will offset or cover our rent.

Do you think this makes sense? Can I make this work?

Thanks!

Account Closed · Answer

Thanks for all your feedback. The truth is I'm not sure I want to stay in my current town if the taxes keeps going up. I may stay another few years until my kids finish up elementary school then find another town that's more affordable. I will not buy investment properties in this town, but other areas more convenient for commuters and with better tax rates. That's why I consider renting my primary residence since I don't want to buy and have to sell in a short time if my personal housing and education plans change. On the other hand, I would hold on to good investment properties for as long as possible.

John Evan Miller · Answer

If your existing property is in a desirable location where values are stable to increasing and rental demand is high, you could still make some good money holding on to the property.

A refinance would get you cash in hand and a low interest rate. Compare your mortgage payment + expenses such as taxes, insurance, maintenance etc. with the market rent.

If property values have been hit hard by the recession, it may be in your best interest to wait for them to recover before selling and use the rental income while you wait.

Before you hurry and sell a property that is so close to being paid off, take the time to count all your financial options to see what will be your most profitable plan of attack.

Lynn McGeein · Answer

Lily, we did something similar, although we had to move for work, anyway, so made the decision easier.  We took the proceeds from the sale of our home and used some of it for down payments on 3 investment properties.  So far, it's working out well, but mainly because our youngest entered college when we sold, so not really disturbing their lives much, and we did all right being gypsies for a while due to renting.

What I would suggest is making sure you are okay with renting, possibly moving each year if they don't renew your lease or being locked into a home with problems if you want a longer-term lease but get a bad owner or property manager.   Some people really like renting.  We didn't, as you just never get that settled-in feel we were used to, and really annoying when you find a place you want to renew, but they raise the rent $200/month if you want to stay.  Also, keep in mind that in a few years, you may want to buy but prices may have risen in neighborhoods you want more than they would in the areas where you are buying investment property.

John Evan Miller · Answer

If your house will be paid off in 5 years, have you thought about refinancing at the current market rate of around 3.5% and renting out your property?  You could use the refinance money to invest in a multi-family.

Another consideration is that if you purchase an investment property in your tax district, the real estate taxes for a rental property are going to be even higher than for a homestead property. Ouch!  You could help this by finding a multi-family property where you could live in one unit and rent out the others.

Dale Osborn · Answer

Sounds like a very solid plan. We started out by buying our first investment home while still residing in an apartment. After you have good passive cash flow from your rentals - then you can look for a home for yourself to live in. We bought a nice home and the tenants paid it off for us in only 6.5 years. It is great to have rental income coming in to pay your own bills with as well as all of the business bills.

Jon Klaus · Answer

I like the plan. Would you buy a home for your family in the future?  I'd hate to rent myself indefinitely if there is inflation in the future.