The house next door is about to come on the market, but we are almost finished with plans for an expansion of our house.
- I’m 34, she is 38.
- CASHFLOW - Total HH income ranges from $700-$800k. We currently operate at about $2600 positive cash flow per month after all bills paid and investment accounts contributed to.
- CASH ON HAND - $650K in a Marcus MM account. Recently boosted by some heavy bonuses.
- DEBT - We have two car loans outstanding, need approx $40k to pay them off, but in my eyes it's a low priority as the car loans are at 1.5%. We have $775k mortgage outstanding. A 7/1 ARM, 3.75% now, rate starts increasing in Jan 2022.
- INVESTMENTS - We have about $500K across retirement and brokerage accounts.
- KIDS - We have two kids (1 and 3). They both have Custodial UTMA accounts with about $15k each. They both have 529 accounts with about $25k each with modest monthly contributions.
- RISK - We have a tolerance for risk.
We see that we have a few options:
Pay off our house in 12 months
- We bought two years ago have a $775k mortgage, a 7/1ARM at 3.75%. The adjustable rate starts increasing in Jan 2022.
- I was planning on putting $50-100k a year into this mortgage to get it down to a less crazy size when the adjustable rate starts going….or I could just pay it down heavily now and then finish paying it off in Feb 2020 with the next round of bonuses.
- As much as I hate paying so much interest I feel we could wait to pay this off until 2022. People tell this is the sensible approach to get to debt free but I don’t feel the financial urgency to do this.
Buy house next door as guest house and develop it in 5 years
- We live in the very strong (but potentially overheated) market of Austin TX so are wary of current valuations, however there aren’t many opportunities to buy your neighbor and basically double your lot size. The owner next door has approached me as he is thinking about selling now or developing the property himself.
- The house comes with plans and builder estimates for a very modern 3/3 house. The house is a 3/2 mid century modern house but needs probably $30k to get it ready for short term renting. Our neighborhood has a booming STR market due to it being walking distance to downtown. Property taxes would be about $17k a year and we estimate it could make $25k - 35k a year from STR (for the week of SXSW festival the house could rent for $900/night easily).
- Our thought is to buy this property, short term rent it and use it as a guest house for visiting family from abroad...and then in 5-10 years when we make a planned move to the UK we use the proceeds from selling our existing house (likely $1.4M or so) to finance the new build.
- Our cost basis for the house would be approx $2.3M (Current Land cost is $800k. Builder estimate is $1.5M.) Owner projects a sales value of $3M post development. There are comps nearby going for $2.5M. So in 5-10 years we hope we can sell for $3M+ and net a nice little windfall. This would mean we couldn’t do much work to our existing house, which is a little cramped with 2 kids and family visiting from abroad.
Develop our own home, expanding it
- We could spend $600k in cash on a conversion/expansion of our garage to two kids rooms + bathroom, as well as adding a large pool and an 1bed/1bath ADU perched on the back of our property would take our property from a 2bed/2bath up to a 5 bed 4 bath (including ADU). This would give our kids their own spaces and make the house a space visiting family actually enjoy coming to for extended periods, cementing the grandparent-grandchild bond.
- I believe this expansion would would likely add about 600k in current value (taking us from $1.1M to $1.7M) although could be more as Austin’s real estate market has bene increasing 5-10% in recent years... and there are some recent precedents near us over $2M.
- We could simply pay cash for this work, or pay some cash and some in loan, freeing up cash for other things. We have been quoted for a construction loan at 5.25% for $400k, interest rate starts rising after 3 years.
- If the real estate market tumbles then the project is a wash or worse and home improvements mean my TX property taxes will increase from $22k to probably $28k+. This would add a lot of joy to the family but also heavily disrupt us with ongoing construction.
Thoughts on approach here? As we are already down the path of expanding our home we are leaning towards this path.
Submitted March 12, 2019 at 10:56AM by amoult20 https://ift.tt/2HseOVz
