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Buying a second home, renting the first

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Buying a second home, renting the first

Old 05-06-08, 03:54 PM
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Buying a second home, renting the first

For our move to CA this summer, I'm now thinking about buying something. The market there has tanked, it seems like a good time to buy as long as I can wait out a recovery.

We only plan on being there 3 years, but could also rent out the home there if the market hasn't begun to recover.

Rent is looking around 1800-2200 and for that price, I figure I might as well pay 2200-2600 on a mortgage (small home, obviously) so I get the tax breaks.

We'll be renting out our current home in CO.

Assuming I can obtain the financing, anything I need to consider in this plan?
Old 05-06-08, 04:24 PM
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The current home will count against you, but assuming you can swing the financing, it is an okay plan. I would want to be a landlord from 2,000 miles away, but if you can live with that...bully, sir. Bully!
Old 05-06-08, 04:37 PM
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Where in CA are you moving?
Old 05-06-08, 06:27 PM
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Originally Posted by X
Where in CA are you moving?
Ventura.
Old 05-06-08, 06:31 PM
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Originally Posted by Thor Simpson
Rent is looking around 1800-2200 and for that price, I figure I might as well pay 2200-2600 on a mortgage (small home, obviously) so I get the tax breaks.
Is the $2200-2600 including taxes? That'll likely set you back nearly another $500 (I made this number up, but it seems likely the ballpark) per month, no?

I don't know that I would buy if you are selling in 3 years. I don't think the market will be rebounded by then. And most of CA could still have a long way to fall before things settle down.

Last edited by mbs; 05-06-08 at 06:40 PM.
Old 05-06-08, 07:35 PM
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Originally Posted by mbs
I don't know that I would buy if you are selling in 3 years. I don't think the market will be rebounded by then. And most of CA could still have a long way to fall before things settle down.
While I probably wouldn't buy if I knew I would be leaving in 3 years, it is a very rare market that doesn't rebound in that time frame. Most don't take more than 18 months. And I don't know about CA having a ways to fall still either. Their property use regulations do a nice job of keeping a premium of existing lots and homes. Unless they decide to reduce regulations (HA!), I wouldn't be so sure.

Banks are doing stupid things in lending right now, but that will shake out in 4-6 months. Underwriters are doing stupid things to show their bosses how tough they are on loans now, and their bosses have told them to be tough. But they still need to make loans to make money, and rates are stuid cheap still.

I don't see it as all roses, but it isn't the doom and gloom that most report.
Old 05-06-08, 07:40 PM
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I've been considering this with the wife. We have a small home and would like to move closer into town and buy something while the AZ market sucks. Problem is there are a ton of rentals out in my area, so we might not even be able to rent it out.
Old 05-06-08, 07:46 PM
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And a $2500 payment at 6% for 30 years, not including taxes and insurance, would be just short of $420k
Old 05-06-08, 07:50 PM
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Originally Posted by Deftones
I've been considering this with the wife.
How much per month? I may be interested.
Old 05-06-08, 08:15 PM
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if you can get a deal on a foreclosure it might be worth it to buy considering you will be looking to sell again in 3 years. Most likely the market isnt going to be full throttle again in 3 years, but it has to be better than it is now, at least in terms of activity. If its anything like it is now, put it on the market after 2 years and hope to sell it by the 3rd year.
Old 05-06-08, 08:36 PM
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Originally Posted by kvrdave
While I probably wouldn't buy if I knew I would be leaving in 3 years, it is a very rare market that doesn't rebound in that time frame. Most don't take more than 18 months.
You are the expert here, so I believe you over my thoughts. My speculation was that it'll take another year to hit 2002-2003 prices (which I think will represent the bottom) in CA and then the market will start to gradually increase.

Last edited by mbs; 05-06-08 at 08:39 PM.
Old 05-07-08, 12:52 AM
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Property taxes are fully deductable as well, right?

I think the $500 figure is pretty close. So after deduction, maybe $400 or so... but well worth taking into consideration. Thanks for pointing that out.

It might not be feasible, but I need to run a lot of numbers and see what we can get approved for as well. It's a little scary thinking about being vested in 2 homes in this economy, but at the same time, I'm not sure there's a better place to be vested if we can pull it off.

We don't have to sell in 3 years... we may choose to sell our Colorado home at that time and rent the Ventura home out... we'd have some options. It's a lot to think about, to be sure. I just hate the idea of spending $2100 in rent right now and still not ending up with anything we're really excited about. At least with a home we have flexibility to fix things up and do as we please, with a shot at some equity a few years down the road. If we broke even (or even lost all the fees), it would still likely be better than renting where we stand to gain nothing, except the freedom to move on.

It could turn into a long-term investment if the circumstances dictated.
Old 05-07-08, 01:14 AM
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Originally Posted by Jacoby Ellsbury
if you can get a deal on a foreclosure it might be worth it to buy considering you will be looking to sell again in 3 years. Most likely the market isnt going to be full throttle again in 3 years, but it has to be better than it is now, at least in terms of activity. If its anything like it is now, put it on the market after 2 years and hope to sell it by the 3rd year.
Foreclosures are not (generally) the great thing people think they are. First consider that if they were worth more than what people owed, they would have sold it rather than let it go. In the rare case that this happens, it is generally bought at the courthouse steps. But if the bank does end up with it, they will have it appraised and sell it for market price (despite what is owed). So you generally end up with an eager seller, as they will drop the price every few months until it does sell, but they will start out with a price from an appraiser that gives a 90 day sale price, then bump it up figuring people will want to negotiate. And what you end up with is often a house that was abused by people who were angry about the situation.

Don't hear me as saying there are no good repo deals, but they are not as common as most would believe. And when one is listed, they often sell for more than I expect because people know it's a repo and believe they are getting a deal as a result.

But once in awhile they price it too low. And right now they are selling them quickly to get them out of the asset manager's hair because they have a lot to deal with.

The real deals are found at the courthouse steps when there is a second mortgage and the second mortgage holder doesn't show up, which is typical. Or when there is a medical lien, etc. on the property where the owner owes twice what a property is worth and lets it go for taxes, since they can't sell it because of the liens. But in those situations, you generally have to have a cashier's check or cash at the courthouse steps, and that isn't realistic for most people.

Freaking repos are driving me mad right now.
Old 05-07-08, 09:25 AM
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Originally Posted by kvrdave
How much per month? I may be interested.
Really, really cheap. Like pennies on the dollar.
Old 05-07-08, 11:17 AM
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Originally Posted by Deftones
Really, really cheap. Like pennies on the dollar.
Old 05-07-08, 01:12 PM
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Originally Posted by Deftones
I've been considering this with the wife.


awwww dave beat me to it
Old 05-07-08, 03:09 PM
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Aren't property taxes deductible only on the house you dwell in? (not sure if you already fully own the CO house).

I'm a renter in SoCal, so my views are skewed by wishful thinking, but I'm not sure the market will turn back in 3 years. We're still way, way above the point where most people can afford to buy a house even by saving the traditional 20% without the lax lending practices that we've seen in past years. Not that everyone deserves to own a house, and certainly things like foreign investments could keep prices high, but the housing market just seems so far off from relative income here in SoCal.
Old 05-07-08, 03:35 PM
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Originally Posted by fujishig
Aren't property taxes deductible only on the house you dwell in? (not sure if you already fully own the CO house).
A rental is an income investment, so you are only talking about net income after expenses, and property taxes are an expense. Very deductible.

But that makes for a good point for Thor to consider.....if he sells his CO house within 2 years, he will get the money without paying taxes on any gain. However, if he goes over 2 years he will pay capital gains on the difference of what he realizes and his basis in the property. Also consider that capital gains are currently 10-15% which is set to expire in 2010 (IIRC). But more likely is the potential for a president Obama to raise capital gains taxes (I know....shocker), which would make the realization even less.

So for fun......Thor bought a house in CO for $100,000 and sells it in 20 months for $125,000. He gets $25,000 tax free.

Thor bought a house in CO for $100,000 and sells it 25 months later for $128,000. President Obama gets $8,400 with the new 30% capital gains rate and Thor ends up with $5,400 less in his pocket, even though he sold it for $3,000 more. Stupid Thor.

Last edited by kvrdave; 05-07-08 at 03:38 PM.
Old 05-07-08, 03:44 PM
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My wife and I are on our way to doing this same thing. The rental market here in Denver is doing rather well, so we're renting out condo and moving into our new home in June. It's a little scary owning two places, but I'm hoping things will work out financially for us.

The only thing that really bothers us right now is that the rental fee won't pay for the mortgage and the HOA fees, so we'll be taking a small hit ($50 to $100) each month.
Old 05-07-08, 03:47 PM
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Originally Posted by bishop2knight
My wife and I are on our way to doing this same thing. The rental market here in Denver is doing rather well, so we're renting out condo and moving into our new home in June. It's a little scary owning two places, but I'm hoping things will work out financially for us.

The only thing that really bothers us right now is that the rental fee won't pay for the mortgage and the HOA fees, so we'll be taking a small hit ($50 to $100) each month.
Once you figure out depreciation, and all the things you can right off for your rental (that you may store at your new home), being down that much per month is being ahead a hell of a lot.
Old 05-07-08, 03:59 PM
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Originally Posted by fujishig
We're still way, way above the point where most people can afford to buy a house even by saving the traditional 20% without the lax lending practices that we've seen in past years. Not that everyone deserves to own a house, and certainly things like foreign investments could keep prices high, but the housing market just seems so far off from relative income here in SoCal.
I think this is true in a lot of CA. In other areascof the country, real estate prices seem to have retreated to 2002-2003 levels and then stabilized somewhat. This has not happened in CA and prices in most CA markets would need to drop another 20% or so to hit 02-03 prices. Maybe CA will buck the trend, but I would be nervous buying an "investment" property in CA right now with a plan to sell within 5 years.

That said, if you can hang onto it long term >5 years, there is probably never a bad time to buy real estate.
Old 05-07-08, 04:13 PM
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Some of the houses we're looking at are listed for their '02, '03 prices, which is a good thing.

I need to read up more on deductions for the rental. I didn't realize our CO property taxes would still be deductable, just the taxes on the new home. Thanks, Dave. I'm still trying to figure out if we can make this work. I'll call a lender later today.

I thought someone previously told me I couldn't deduct my mortgage interest on the rental, but I'm finding things that say I can?

Can someone explain this to me: "If you do not rent your property for profit, you can deduct your rental expenses only up to the amount of your rental income."

Say we're renting for $1,600. Does that mean we can only take up to $1,600 in deductions, or if we claim the $1,600 as income, then we can deduct more?

Last edited by Th0r S1mpson; 05-07-08 at 04:17 PM.
Old 05-07-08, 04:18 PM
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Originally Posted by Thor Simpson
I thought someone previously told me I couldn't deduct my mortgage interest on the rental, but I'm finding things that say I can?
It is not the same as with your primary home which is like a government welfare handout for home owners. The rental works more like a business where you deduct expenses from the income.

Rent = income
taxes/interest/principal/tons of other things = expenses

You can deduct just about anything that is an expense on a rental
Old 05-07-08, 04:23 PM
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Originally Posted by Thor Simpson
Some of the houses we're looking at are listed for their '02, '03 prices, which is a good thing.

I need to read up more on deductions for the rental. I didn't realize our CO property taxes would still be deductable, just the taxes on the new home. Thanks, Dave. I'm still trying to figure out if we can make this work. I'll call a lender later today.

I thought someone previously told me I couldn't deduct my mortgage interest on the rental, but I'm finding things that say I can?

Can someone explain this to me: "If you do not rent your property for profit, you can deduct your rental expenses only up to the amount of your rental income."

Say we're renting for $1,600. Does that mean we can only take up to $1,600 in deductions, or if we claim the $1,600 as income, then we can deduct more?
Rentals are the greatest thing in the world. It wasn't until the last two years that I actually started showing a paper profit on them. There were years where I showed a $20,000 paper loss on them, which meant that it lowered my overall taxable income by $20,000/

And mortgage interest is absolutely deductible. As are utilities, insurance, etc. Advertising. Travel to check on the rental. Almost everything.
Old 05-07-08, 08:51 PM
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So if I am renting the home out for $1,600 and my expenses are $1,900 I can deduct the full $1,900?

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