Things have taken a very interesting turn in my world with regards to my home sale. However, prior to getting into all the numbers, I think it may be prudent to go over what has occurred in the past year or two with regard to my primary residence and then my search for the perfect rental home.
The Wife and I saw some very interesting things happening in our tiny real estate market on Long Island back in the beginning of 2018. Our first inclination was to put it on Zillow’s “Make me Move.” We didn’t get the traction or responses we thought. Side note: I don’t think the market is there yet, but realtors hear me now, this service and others like it are your future. Being a real estate agent in 2028 years is going to be the equivalent of a taxi driver in 2018, but I digress. The Wife and I decided at that point to put the hold on the sale side until we found something we loved.
It took a lot, and I mean a lot, of open houses and even a few failed negotiations to end up with a house we finally wanted to move forward with, and even after finding said house the negotiations thereof didn’t exactly go as planned (like they ever do).
Sometime between that first and second post we decided to move forward with the sale of our home. Despite having 3 different brokers tell me that the sale price of my home wasn’t going to be a problem, it was a problem. The Wife and I reduced it $20,000 before both partners at my firm said something to me, independent of each other, that really resonated with me:
- Partner No. 1 – “At some point your broker becomes worthless. If you believe you can sell your home for $X without her, then save the 4%.”
- Partner No. 2 – “Just put it out to the world that you’d rent the home, and make the rent a big enough cash flow positive gap versus cost that you are covering at least some of your new home’s increased cost.”
Both were absolutely correct.
To the first partner’s point, I was going to pay the broker 4% which would be somewhere in the neighborhood of $24,000 (4% of $600k). That is a shit ton of money anyway you slice it and after being on the market for 45+ days she honestly just did not do her job. Maybe it was a case of over-promising and under delivering, but it left me with very angry feelings. At some point I could sell my house for $585k instead of $600k and still net more without her ridiculous fee.
To the second partner’s point, I have talked about owning rental real estate, both on this blog and in real life conversations for a long, long, long, long time. Maybe this could be my chance if the numbers work (and they obviously do given the title of the post).
Finding a Tenant for my Long Island Home
Just to test the water I put the home on a few sites including apartment.com and Craig’s list, the emails started to flood in! Some were not a right fit at all including a mother/daughter duo that came to see the home and in broken English actually asked me, “how many people can fit in the home?” My response was “1 family, how many people are in your family?” The Wife immediately shut that down as she wasn’t comfortable doing that to our neighbors and community.
Our luck changed once we put it out to the community. We were immediately contacted by a woman that The Wife has had a few interactions with. She shared with us that she is getting divorced and needs out of her house. She has 3 kids and wants to keep them in the school district. I told her the price (numbers discussed below) and insisted on first month’s rent, last month’s rent and security thinking it may dissuade her. It did not. We gave our broker one more weekend to figure her shit out. She did not. I then had to “break up” with my broker and she was not happy, but it is what it is.
Running the Numbers on Renting my Old Primary Residence
Between mortgage, insurance, taxes and a HELOC payment I am looking at about $3,100/mo of operating costs. I am currently charging $3,500/mo providing me a little bit of a cushion which will help with the new home costs since I will still have a large part of my net worth still locked up in the walls so it can’t be put down.
In addition, and as important, I am 6.5 years into a 30 year fixed mortgage. This means every month more and more of my payment is going to principal rather than interest. Last month for example of the $2,800 I sent to my primary insurance mortgagee about $800 went to principal.
In addition, I came up with this plan that I have since offered a few of my buddies that I have talked about getting into real estate. I offered them an opportunity to buy into the equity of the home. There are a few major pros and cons with doing so that I explained in full as to avoid any confusion later. To date, I have not solidified any deals, so we’ll see if this goes anywhere. Whether it does or does not this plan has way too much steam behind it for anything to change at this point (nor do I really want it to).
Running the Numbers on the New Home
Originally, I shared my plan,
- $485,000 home with an original $385,000 mortgage at 3.375% for 30 years (fixed);
- Taxes of about $12,500
- HELOC has about $100 of interest owed monthly
All in I am looking at about $3,100 a month for housing. The way I figured it is if I found a home for about $700,000 and I sold my house for $600,000 (net of broker’s fees) my life wouldn’t change all that much!
- Current house, verbal accepted offer is at $685,000
- I currently have $240,000 of equity in my home ($600,000 minus $330,000 left on the mortgage and $30,000 for my HELOC).
- If I put $200,000 as a down payment and I get a 4% 30 yr fixed I am looking at a payment of $2,400/mo (assuming $40,000 went to waste, taxes, attorney’s fees, and some upgrades).
- My Taxes are about $15,000 (up from $12,500)
- So my monthly nut changes from $3,100 (P&I and Taxes + HELOC interest) a month to $3,650
Well, as the saying goes, man plans and God laughs. As I sit here today, I have put 5% down from my HELOC on the new home, and I can’t come up with anywhere near $200,000 down as the equity is still tied up in the rental. Right now I am getting approved for only 10% down which is obviously way less than the 30%+ I had planned. Notwithstanding, I think it may be premature to share the home numbers because I am not exactly sure what, if anything, I am going to liquidate to bring up my down payment beyond 10%. When I get my final numbers I’ll share them, but for purposes of an example:
- $685,000 house with 10% down gets us to about a $615,000 mortgage
- I have been approved at 3.875% which gives me a P&I cost of about $2,800
- Add in taxes of $15k/12 ($1,260) – and I am at about $4k!
- Now we add in PMI, Homeowner’s Insurance, and I am looking at about $4,400
- Minus the $400 or so I’ll receive on the other property and I am at $4,000 (vs $3,650 originally estimated).
Not terrible, since I’d be building equity paid by someone else. Again, this could all change by the end of the month depending if I plan on putting more down to get me closer to my original estimates.
Phew! To say it has been a stressful past 30 days or so would be an understatement!