Want to buy new house - keep first house or sell it

[cidley69]

There are lots of smart real estate savvy people on here.

The answer to this may be more of an opinion than clear cut, but here is my situation.

We want to buy a new house, our salaries have increased significantly since 5 years ago when we bought our first house, and we'd now qualify for a bigger mortgage.

Do we keep the house we're in now and rent it out, hoping the market will come back up to reach the value we paid for it (paid $399K in 2007 for a bungalo that's now appraised at $350K).

Or do we cut our losses because our current house may never reach its peak value again?

Anyone have thoughts on this situation?

All input appreciated.

Thanks!

[tictactoe2004]

There are two seperate issues you need to consider:

1) Unless you sell your house and choose to not buy another, you're not really losing anything. Look at it more like transfering your debt from one mortgage to another.

2) Do you want to become a landlord? There are risks and costs associated with it. Make sure you can afford to pay both mortgages if you have to for what ever reason.

Obviously both of those points could be expanded to go into way more detail, but it's should be enough to give you something to think about.

[cidley69]

hey tictoc, thanks for that. very good points.

It's hard to take a $50K negative hit, its probably more an emotional than logical thought to want to keep this place to hope market comes up to decrease that loss....

although that might not be the smartest thing to do financially.

Say I decide selling is the way to go, is there any way around this: best time to buy is in winter as prices are lowest then, best time to sell is spring summer because prices are highest then (is this even true?)?

[Swank]

I'm in a similar boat and not sure what to do. I'd want to buy a new house and then be able to spend a few months renovating the old one at my leisure and then sell it, thus not having to live through a reno (which I hear and believe would kinda suck). The concern I had was any increase in value on a property that is not your primary residence would be considered income when you sell and thus have tax implications. The house I'd be moving out of I've had for ~12 years, so it has def gone up in value.

In your case, you should get a tax break due to the decrease in value, but you'd still take a loss overall. The tax break might help with your decision though.

[Feruk]

I think the one question you haven't really answered is... do you WANT to keep the house? The 50K's a sunk cost.

Also think about it this way: If your house is down in value $50K and you're upgrading, chances are your future house will be more expensive and will have depreciated by more than $50K since 2005 highs. If you think the market's going back up (which I do not short term), it'd make more sense to take the $50K loss, buy the more expensive place, and watch it appreciate more than $50K in the same time period as your current place.

[JordanLotoski]

I personally would rent it out, even if you took a 200 a month loss on it it would take years to make up that 50k loss. I have a great property manager if your looking for one.

Let me know if you have any questions. (Call me if youd like)

[lint]

Originally posted by Swank
I'm in a similar boat and not sure what to do. I'd want to buy a new house and then be able to spend a few months renovating the old one at my leisure and then sell it, thus not having to live through a reno (which I hear and believe would kinda suck). The concern I had was any increase in value on a property that is not your primary residence would be considered income when you sell and thus have tax implications. The house I'd be moving out of I've had for ~12 years, so it has def gone up in value.

In your case, you should get a tax break due to the decrease in value, but you'd still take a loss overall. The tax break might help with your decision though.

your 12 years of appreciation will be exempt since this happened while it was your primary residence. when you convert your primary residence to a revenue property, there should be a deemed disposition at market value. it's as if you bought your property at the time you turned it into a rental. that's your starting value for cap gains on the rental.

[ercchry]

we just went through this same thing last week, i made a pretty sweet spreadsheet and we decided to keep the first house. not only will we be better off down the road. but we qualified for more by keeping it (then again we are not backwards on the mortgage)

[JudasJimmy]

I'm surprised how many people have two houses. and actually can get a second mortgage...and have the ability to put 20% down on a second house. You need 20% to buy a second house, right?

As mentioned earlier, 50K loss is relative. Your new house is also 50K less than the market 4 yrs ago. Don't think of it as losing money, sell high, buy high. sell low, buy low.

Unless your house is paid for, you'll lose money on rent. The only way I see you getting your 50k back is if you keep the house for 20+ yrs.

[Swank]

Originally posted by lint


your 12 years of appreciation will be exempt since this happened while it was your primary residence. when you convert your primary residence to a revenue property, there should be a deemed disposition at market value. it's as if you bought your property at the time you turned it into a rental. that's your starting value for cap gains on the rental.

That's what I suspected, so if I only take 3 months to fix it up then the appreciation should be negligible assuming I don't do any massive renos.

Originally posted by JudasJimmy
You need 20% to buy a second house, right?

Some guidelines are found here, anywhere between 5%-20% is required depending on a few factors.

http://www.mortgagescanada.ca/info/m...e-down-payment

[Swank]

Oops, double post

[cidley69]

Hey Judas,

We were just at the bank yesterday, and they said that if you are moving into the second house, so it will become the primary residence, then CMHC only requires 5% down.

Any mortgage specialists that can confirm or deny if this is accurate?

Anyone have any thougths on when the market in Calgary will again reach the peak levels from a few years ago? 5, 10, 20, never?

[benyl]

Your doing it back asswards.

You should have the house you are going to rent maxed out so that the interest is written off.

Your primary residence should be paid down more.

Pull any equity you have in the rental house to put a bigger down payment on the new house.

You pay interest either way, but you may as well put some of it against the income you are getting from the renters.

[Feruk]

I don't think anyone can predict that. Certainly won't be the next 2 years though. I'm even skeptical on a 5 year horizon, but you never know what might happen.

[bitteeinbit]

How is the 50k a sunk cost? Unless he paid for the house cash, he most likely didn't "lose" 50k, not in 5 years of payments. To figure out what you "really" lost you would have to see the monthly payment difference between a 400k mortgage and a 350k one. Mot likely it's not that significant, especially over a 5 year span. A few grand at most, but not 50k as you would imagine.

Or am I doing this wrong?

[cidley69]

I wish that logic was true....but, if I assumed $400K worth of debt to get the house, but can only sell the house for $350K, haven;t I lost $50K?

Not sure how I can figure any other way to look at it (but would love a way to do that so its not so depressing).

[ercchry]

Originally posted by cidley69
I wish that logic was true....but, if I assumed $400K worth of debt to get the house, but can only sell the house for $350K, haven;t I lost $50K?

Not sure how I can figure any other way to look at it (but would love a way to do that so its not so depressing).

you dont lose till you sell... so dont sell, rent it out and buy the second place

[max_boost]

Rent it out and have someone pay the bulk of the mortgage. Ride it out and over time, it'll be worth more than $400K.

[BrknFngrs]

Are you upside down on your mortgage too or just concerned that you paid $400k and it can only be sold for $350k now?

[bspot]

What's your mortgage payment/property taxes?

What would it rent for?

If you are taking a loss month to month, it's probably not worth it.

On top of this month to month cost, there is maintenance, no matter how old the house is. Remember, buildings depreciate, only land can appreciate. Where is it? Will the land appreciate?

I personally can't see any huge gains in housing for 10 years, I hope I'm wrong, I've got a 2nd house I want to make some money off one day.

If you have to hold this thing for 10 years, how good of shape will it be in?

Will rents have gone up to the point you are profiting every month? What if mortgage rates go way up, will your month to month balance sheet suddenly scare the crap out of you?