Bigger house for Tunaclan?

Full disclosure:

Out family is four kids big. Our house is 1800 sq ft. Three boys in one bedroom, lone girl in the other. Homeschooling means they are all there a lot, and we are, or perhaps have, outgrown it.

It was worth $165K three years ago. It's worth slightly more now. We have refinanced a few times, each time shortening the term, though we did get extra cash out last time. Mortgage is our only debt of any kind.

It's a ten year mortgage now. We owe $90K, seven years left.

If we're just talking end-game comparisons, our $1400 monthly payment is almost exactly the going market value for a rental house of this size in this area. We can safely be approved for a 30 year, $340K mortgage, and the $1400 remains the same, but a renter in the now-house makes both houses free, and we can live in a much bigger, homeschool-room-having-workshop-having, $150K house. In this area, we can live within 20 minutes of the now-house, and get 2500 sq ft with all which that entails (see above) for free.

I called the finance guy today.

Why is this an awful idea?

The rental market is huge right now. The downside i see is tunadad being already stretched thin, and having to maintain two houses instead of one. Other than that it seems like a brilliant plan to me.

You'll be a landlord. With all the responsibility that entails.

Renters are typically not us. They wreck the place, and bail on the last months rent.

Can you afford to eat that?

In reply to mndsm:

exactly this, If you can deal with being a landlord, its a great time to be one.

Being a landlord is not for the faint of heart. I've regaled you with some of my tales, I'm sure. At least now that the mortgage market is tighter the rental pool is comprised of people with actual somewhat-decent credit and jobs that don't involve selling drugs.

Since you have time on your hands, look for short sales in your area. We got our house on a short sale for about 2/3 of what it would have gone for on the open market. The downside is sifting through the paperwork and waiting, but a decent real estate agent should handle most of that for you.

One other thing: the 2500 sq foot house will almost assuredly be about 700 square feet more expensive to heat and cool, 700 square feet more expensive to repair, and 700 square feet more annoying to clean, than your current home.

Than again, I can imagine cramming 3 boys into one room is downright Pioneer.

volvoclearinghouse wrote: Than again, I can imagine cramming 3 boys into one room is downright Pioneer.

Negatives to increased size are noted, but yeah, it's crowded. We're going to need more school space to be really successful very soon. Or a while ago.

Also, we're really really close to Greenville seminary. Typically they are well behaved tenants. We'd rather leave it vacant then rent it to folks who will trash it.

Nothing is free. The real value is in a lateral move that gives you more space with a lower quality of finish that requires more work by you. I have friends (with four home schooled kids as well) that went through this process three times.
Buy semi crappy house.
Put a load of sweat into making house nice.
Spend a couple of years obsessively looking for your next project.
Repeat.
They ended up with a small mortgage on a pretty incredible house, but the work they've done makes me look like I sit around an watch soap operas all day.

Trust me, there is no substitute for having a house big enough to suit your needs. SWMBO and I downsized a bit once both of our kids were grown and on their own. The 1300 sq ft 2BR/1 bath seemed just right for a few years. Fast forward and both are married and we now have four grandkids, and everyone lives close enough that having everyone at our house is not uncommon, and let me tell you that four adults, four kids and two dogs got crowded. Throw in a few more family members or friends and it becomes seriously uncomfortable. Which is why SWMBO and I have under construction a new 2830 sq ft (NOT counting the garage) 4 br/3-1/2 bath house with an open/free-flowing central downstairs, plus the "pub" and fourth bedroom and third full bath upstairs. We will be able to host a dozen adults and a half-dozen kids without anyone having to go around anyone else to walk to a different area from where they are. It's going to be heaven!

And I'm in 1600 square feet with four. If they were home all day every day I'd be likely to go insane. I get that part of it, but you also have to ask yourself about the freedom that no mortgage will get you. What could you do for your family with that extra $1400 a month?

Park a trailer in the backyard and call it the boys room?

I have an acquaintance who grew up in a family with like 12 kids, and that is what they did.

From people I know who have done the rent thing, it goes from one extreme to the other:Amazing if you have the right tenant, and a nightmare if you have the wrong one. The ultimate horror is the number of grow houses that have been found in town pretty much have to tear the house down pay the electric company for the power your tenants stole and your insurance wants nothing to do with any of it.

mazdeuce wrote: And I'm in 1600 square feet with four. If they were home all day every day I'd be likely to go insane. I get that part of it, but you also have to ask yourself about the freedom that no mortgage will get you. What could you do for your family with that extra $1400 a month?

So, if I have two houses, and the combined monthly payment is exactly what it is now, and we have tenants paying that, we'll pay some ahead to principal, and then, I don't know, maybe we have some Unfinished projects that could use some extra cash

Let's ignore the possible new house, and just attack the current house as its own business venture if you want to be a landlord. We're missing a lot of information here, but I'll go with what I can:

The mortgage is $1,400 a month. You have 7 years left. The rent you could get is $1,400 a month. Let's call it $1,700, just to give you some more room. That is $300 profit a month, or $3,600 a year! But, wait... what about that pesky insurance? How much is that a year? Ok, so we're down to $3,000 a year. Oh, don't forget about taxes! We're down to $2,000 a year. Now, you're renting it hopefully to seminary students? How long do they stay there? Let's guess 2 years. Every 2 years you'll have a month of it being empty and you not earning anything. And you'll probably have to spend $500 on something in there--whether it is a new water heater, carpet, fridge, something is going to need attention. No renter is a good renter, we're all going to trash the place some how.

If all of that is true--a $1,400 mortgage payment, a $1,700 monthly income in rent, $600 a year in insurance, $1000 a year in taxes, and 1 month ever 2 years that it is empty, with $500 expenses every 2 years--you're at a profit of about $2,000. Total. Is that worth it? I don't know. You only have 7 years left on the payment before it becomes about a $15,000 a year profit--can you wait it out for 7 years knowing you're not going to be making much? Or it actually costs you money?

Is rental income taxed like ordinary income? A quick Google search says it is, with certain expenses being deducted, but that's something to consider.
I'm not saying don't do it, but I don't think it's quite as simple as having a renter pay your mortgage. If nothing else the house will still require the same upkeep as it does now, which means you pay someone to do it, or you STILL spend time working on it. So now you're raising kids while maintaining two houses.

Is it possible to put an addition on the existing tunahouse and stay put? Being a single family dwelling landlord puts a lot of eggs in one basket and doubles your exposure to repairs and maintenance.

You have 4 kids but they are a temporary situation, how long until some of them start to move out? (oh happy day!) If adding a bedroom and a decent den/classroom for 10 grand gives you the necessary breathing room I'd think that's where the smart money goes. Then, when the kids go off to college you aren't left with an overly large house.

KyAllroad wrote: Is it possible to put an addition on the existing tunahouse and stay put? Being a single family dwelling landlord puts a lot of eggs in one basket and doubles your exposure to repairs and maintenance. You have 4 kids but they are a temporary situation, how long until some of them start to move out? (oh happy day!) If adding a bedroom and a decent den/classroom for 10 grand gives you the necessary breathing room I'd think that's where the smart money goes. Then, when the kids go off to college you aren't left with an overly large house.

There is no room to grow in our neighborhood, so an addition would be a zero addition to the value of the house. Otherwise, it's potentially a solution.

Oldest leaves in roughly 11 years.

Taxes are something to factor in with being a LL. Rental income is taxable, however you have a lot of potential deductions, such as:

1) Your refinance costs 2) Your interest and insurance 3) All repairs made to the house 4) The cost-basis of the home plus Improvements to the rental home, depreciated over (IIRC) 25 years 5) Mileage incurred traveling to/from rental house and on rental related business 6) Any fees, taxes, etc incurred relative to the rental.

I'm assuming that the 1400 figure tuna threw out there is inclusive of the homeowner's insurance policy. And actually, the cost of the policy on our rental house went down when we switched its status from "primary dwelling" to "income property". Reason: if you don't live there, insurance doesn't cover the private property of the tenants. So if there's a break-in, they're not on the hook.

There's a lot of factors involved, and you'll likely find it beneficial (as I did) to hook up with a local accountant to do your taxes if you do get into the rental game. I can recommend a good one in your area. When I switched from doing them myself to the professional, she found another 2000-3000 per year in refund (so like 10k in deductions!) that I wasn't doing.

Bottom line: until you own the property outright, it's really hard to "make money" (for tax-income reporting purposes) on a rental.

We did the same thing Tuna55 is planning. We put most of the rent back into savings for maintenance. We have tenants pay for background and credit checks. We also charge low end of market for rent. This keeps our tenants there longer and they are more respectful of the property.

Do not plan on the rental income for paying your new mortgage. Once the old mortgage is retired in 7 years, you will have some income. 20 minutes away is certainly doable. Visit the property often and record your trips, mileage is deductible. You can pull up Schedule E and see what records you need to keep for taxes.

One thing that I did not add is that we'd be happy to just sell and move, but the house next door is vacant and has been for some time. I fear that would make selling more difficult.

There are also a lot of tools for small residential landlords available online. You can have your tenants pay rent online, they can fill out applications and do credit checks online, etc. Perhaps a bit much with one rental house but still you could offload some of your headaches that way.

I will say, we were in 1200sf and when our first baby was on the way we decided that just wasn't enough. We overdid the upgrade but have another family living with us now. 4 adults and two kids doesn't feel like much in 6000sf. But the price was right!

You'll have some teething issues but to me it sounds worth it. Just be careful in tenant selection.

Just curious as too how your current house is laid out. I have 1980sq ft plus basement and its 4 bedroom. 3 fairly large and one i use for a mancave.

Having four kids between 16 months and 9 years old, I wouldn't want the stress of being a landlord, and maintaining two houses. Not to mention two mortgages!

There are some challenges - homeowner's insurance may charge you different rates knowing it's not owner-occupied, and your bank on your existing mortgage will want to know that you're not living there (it increases the risk of default). These two factors will likely result in increased mortgage and insurance costs on your existing home that'll impact your profit.

In addition, you may have a hard time getting a loan for a house when you already have an existing home loan. If for some reason you can't rent your existing house, you're more likely to default on the loan there than on your new house where you'll be living. Banks look at that sort of thing when they're making their underwriting decisions.

Unless you have sufficient income to cover both mortgages, or a significant chunk of money in the bank, I think the financing will be difficult - they may deny the 2nd loan, or charge a higher interest rate that'll make it less attractive.

We moved a few years ago from a 2000 square foot house to 2800. It gives everyone a lot more of their own space, but it has downsides in initial cost, maintenance, taxes, etc. When we did it, we made sure our first house closed before we purchased our second house. We didn't want the stress of having two mortgages, even for a (hopefully) brief period of time.

tuna55 wrote: One thing that I did not add is that we'd be happy to just sell and move, but the house next door is vacant and has been for some time. I fear that would make selling more difficult.

Buy the house next door and dig a tunnel. Done.

dropstep wrote: Just curious as too how your current house is laid out. I have 1980sq ft plus basement and its 4 bedroom. 3 fairly large and one i use for a mancave.

We have no basement

We have very limited attic space

We have 3 bedroom, 2.5 bath.

Stairs are off to the side, downstairs bathroom is center. Kitchen is OK sized, dining room is OK, and right off main entrance. Living and family room is all combined with arch, and it's nice, but not enough for homeschool.

We really would like an office space type arrangement, with a doored room off of the main floor so the kids can have a quiet(er) place and Tunawife can store things. For those not familiar with homeschooling, imagine the offices of every teacher and the principal for a given grade and put them all in that same house.

Likewise, a bonus room or whatever extra room exists would be good to use as a playroom, thus leaving the rest of the house livable. As it is not, family and living rooms are dominated by their stuff.

So, imagine your house, with four kids. Three kids stuffed in one room, one kid in her own room. No basement to store stuff, and four kids worth of stuff, and the stuff all required for homeschooling stuffed into the kitchen and dining room.