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Buying Before I'm Ready

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Money Talk > Real Estate

What should I do about neighbor's house going up for sale?
Cash out refinance on primary mortgage
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Cash out investments then build over time
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Borrow for a new mortgage and rent out current place
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Borrow for a new mortgage, then sell my place and pay off remainder in a year
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Don't buy the place at all
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None of the above. See my reply for my idea.
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Wino
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Buying Before I'm Ready  Reply with quote  

Normally, I'd know what to do, but in this case, I'm not sure. I want to buy the lot next to mine, but I'm not sure how to go about it.

My next-door neighbor must sell his house. It is a tear-down, so will only get lot value. Lot value is approximately 2X my annual income. I have not quite yet finished paying off my own mortgage. I expect to finish my current mortgage within 8 months, probably within 6 months.

I have enough assets to pay for the house/lot outright, but as it will be my primary residence after I finish the construction, I'd really prefer to pay it off. What I am considering is to do a cash-out refinance on my current primary residence. Credit score and income are sufficient for whatever the best Texas rate is right now. I can then use this money to purchase the lot outright.

My second choice is to cash out some of my non-retirement savings. These are really earmarked for retirement, but they are not in any type of penalizable (new word that I just coined) account. I'm up about 18% so far this year in these accounts, so I'm torn between pulling it out while it's up and leaving it there as I think it will be up over 50% before year's end. I am doing equity investing, as well as some sector mutual funds in these accounts.

Third choice is to get a loan outright, including a construction loan, and just do the whole buy and build at one time.

I guess the last choice is to sell my current place to pay for all of this. I love my current place, and it's about as energy efficient as a 50 year old house can be. I pay about $60 per month, in Texas, unless the temp goes over about 95 degrees for a whole month, at which point I pay about $100 per month. I've done a ton of energy improvements so I'd get long-term payback on the upgrades. I've been saving roughly $200 per month, on average, for about 10 years, which more or less pays back all my upgrade costs. I will be able to add the upgrade costs to my cost-basis, so I could keep this place as a rental, and make about $1200 per month. The rental option sounds good, but that's really only about a 4% return on the value of the house - though more than double-digits on what I paid for it.

So, choices are:

A. Cash out refinance on primary to pay for it, and construct the place in two to three years.
B. Pull money out of investments to pay for it, and construct the place in two to three years.
C. Borrow the whole amount for buy and build, and move into new place within 6 months without selling current place, and rent out current place afterwards.
D. Borrow the whole amount for buy and build and move into new place within 6 months, then sell my current place to pay for lot and build on new place, owing about 1/2 my current salary in remaining mortgage afterwards (about a year to pay back full amount after).
E. Forego the purchase altogether and wait to save up enough earmarked for the house.
F. Something else.

I make good money, and other than the 6 months remaining on my current mortgage, I owe nothing. Even with a new mortgage and until my present mortgage is paid off, my total payments will be below 25% of my monthly income, and I anticipate paying off everything within 6 to 8 years, maximum. The only "real" impact will be a slowdown in my rate of investment. As real estate is really an investment, I figure I'm really just moving my investment from equities and mutual funds into real estate, so it's more of a diversification if I do purchase this place.

I'm really interested in everyone's opinion. My neighbor is getting in dire straits, so I will need to make this decision on the spur of the moment when he finally proclaims he must sell. He isn't the type of person to plan ahead, though he has already told me I get the right of first refusal on the purchase.
Post Sun May 31, 2015 4:46 am
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oldguy
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quote:
I will be able to add the upgrade costs to my cost-basis, so I could keep this place as a rental, and make about $1200 per month. The rental option sounds good, but that's really only about a 4% return on the value of the house - though more than double-digits on what I paid for it.


It doesn't make a lot of difference how you finance it, all the methods cost about the same, ie 4% or 5% on the capital. But I'm wondering about the goal - a rental house next door. I buy my rentals at least a mile from home, most of them were 4 or 5 miles. It's important to keep a business-like arrangement with your tenants - and it's nice to be friends with the folks next door.

The First Law of Landlording - never rent to an acquaintance, a friend, a coworker, and never ever to a relative, you need an arm's length formal agreement with a STRANGER.

As for paying everything off in 6 or 8 years - unless you are a Ramsey-ite, probably not a good plan. There are far better places for your available investment capital than locking it into a 4%/yr house.
Post Sun May 31, 2015 5:53 pm
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Wino
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Time is running short. He's made the decision and wants to move quickly. I'm applying for mortgages, but I don't know which way I'll go when all is said and done. I don't even want to pull the down payment out of my accounts right now.

We'll see. I'm still up for other opinions. Thanks for your input, oldguy. It is quite likely I'll borrow everything I can, per the oldguy method, but my primary (as it sits today) will be paid in full. Whether I borrow for whichever I rent, is still the question.

As far as having neighbors as renters, your caveat only applies if I don't have the ability or willingness to say, "You're behind in your rent. Either pay by (date), or I'll start eviction proceedings per our contract." I'm quite willing to do that, even if it's my kid (who it won't be).
Post Mon Jun 01, 2015 3:44 am
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oldguy
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quote:
your caveat


lol - not a caveat, it's a rule that ALL landlords either know from the start or soon learn it from bad experiences. You don't want to live where you (and your tenant) see each other daily - to & from work, see what car each other is driving that day, watch when each other mows their grass, trim their trees, waters the grass, meet in the store regularly - ie, become a part of each others daily lives.

Just trying to give you a heads-up. Tenants usually stay 2 or 3 years, then either move away to a new job or buy their own house. So somewhere in your 20+ year string of tenants, you will encounter the nightmare-tenant and you'll wish that they weren't next door.
Post Mon Jun 01, 2015 3:19 pm
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Wino
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I had to go offshore for an emergency job, so I have had poor connectivity. I was really hoping to have more input from some of the regulars. The process is stalled while I'm stuck floating in the middle of nowhere.

Oldguy, I really don't want to lose my old place. That means I'll be renting it. I guess what I could do is shield myself from them knowing I'm their landlord. I could get an agent to do the preliminary paperwork, and then I'm just "the guy next door."

Also, the place is still going up in value at about 10% per year over the last 10 years. It is at about 3 times its purchase price, which includes the 2007-2009 time period. Even if I only break even on rent, etc., it's still growing by tens of thousands in value each year. Part of the reason for that is the upgrades and the appearance of the place. With renters, I can see appearance going down if we're not close by to keep it under observation.
Post Thu Jun 04, 2015 7:35 am
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littleroc02us
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I own rental property myself, but if you want my opinion, I'd pass on all of those options. #1, I would never buy a rental property next door. I can't imagine my tenants being right next door and the lack of privacy. #2, I saved up for a 25% DP on my duplex by working extra jobs and trimming back in other areas of my budget. It's been very rewarding because I cash flow $500 after all expenses and it's appreciated 40k since purchase. I have around 90k equity in the duplex and it's fully rented in a desirable location. Remember, there's always another home you can buy.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Thu Jun 04, 2015 8:48 pm
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Wino
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quote:
Originally posted by littleroc02us
Remember, there's always another home you can buy.

But there's only two that are "right next door."

It's looking like selling the present place might be the only option that littleroc and oldguy will sanction.

"Not buying" is not an option. DW is already picking out paint colors in her mind. Truth be told, we've been talking about buying a tear down and rebuilding for a few years. The plan has been "pay off existing, then sock away money like demons," but DW's new car slowed down that plan considerably. We still managed to pay down the house nearly to pay-off, but buying and paying off a Tahoe is going to impact anyone's finances if they actually work for a living.

We are not going to be changing neighborhoods, though. If we sell the present place, we could conceivably pay off the new place within two years, and have exactly the home we want, in the neighborhood we want.

The only sticking point is that the neighbor has made his decision, and he's going to move. I really should sell my present place to do this, as it is too expensive to be a rental. I am just going to miss all of the improvements we've made. It's also a cash cow. The new place, probably not so much, as I'll be buying at a probable peak - but then again, if that's the case, I'm also selling at a probable peak.
Post Fri Jun 05, 2015 4:53 am
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littleroc02us
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You mention the peak of the housing market. What's interesting is that we just sold our home for full list, which compared to the other comps was an excellent price. The funny or shall I say not so funny part is we bought the home at the peak of the market in 2006, so technically we didn't make a dime, but like you Wino we paid down the mortgage extensively.
The good part of the story is we bought a different house in a better school district for a great price ($280). In fact in 2005 our neighbors bought their home that is smaller and has less rooms for 309k. So both examples show how the market hasn't recovered or excelled very well in Minneapolis. But luckily I was able to sell for full list and get a deal on the new home, so there are deals to be had is what I'm trying to say.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Fri Jun 05, 2015 3:30 pm
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Wino
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quote:
Originally posted by littleroc02us
You mention the peak of the housing market. What's interesting is that we just sold our home for full list, which compared to the other comps was an excellent price. The funny or shall I say not so funny part is we bought the home at the peak of the market in 2006, so technically we didn't make a dime, but like you Wino we paid down the mortgage extensively.
The good part of the story is we bought a different house in a better school district for a great price ($280). In fact in 2005 our neighbors bought their home that is smaller and has less rooms for 309k. So both examples show how the market hasn't recovered or excelled very well in Minneapolis. But luckily I was able to sell for full list and get a deal on the new home, so there are deals to be had is what I'm trying to say.

"I am a great believer in luck, and I find the harder I work, the more I have of it."

I'm guessing your luck was more research and work than luck.

I got lucky, as well, but it was more search and find and buy, and less "fall into it" kind of luck. The market in Houston is at a peak. There's no doubt about that. The oil patch fallout will have to go on at least another 6 months before it affects housing prices. There are no deals in my neighborhood right now. Well, there are. My neighbor is selling about 3% below market, but probably 5 to 8 times what he paid for it. He's been there 30 years, though. I'd say his house value has doubled every 10 years, on average.

Anyway, the decision is made. We're going to borrow the whole amount and build. After the new place is ready, we'll sell my old place Crying or Very sad Oh, well, I guess I'll just take the money and spend.

I should be able to pay off the new place in about 2 years or maybe 3. That mostly depends on how much I keep putting away for savings, and how big my bonuses are. This year's bonus isn't going to be very good, as the oil patch hasn't been good to me for at least half the year. It still beats living in a tent.

Once it is paid off, I'll start the rental property purchases. This year is already looking very good. If it keeps up, my plans could easily be accelerated by years. That would be a good thing.
Post Sun Jun 07, 2015 2:15 pm
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littleroc02us
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quote:
="Wino"

I'm guessing your luck was more research and work than luck.






I guess the word I would use is fortunate vs. luck. We did extensive research and used timing to our advantage.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Mon Jun 08, 2015 6:31 pm
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