Stretch for new build or walk away?

[universalistanthony]

Hi! 28(f)/35(m) married couple with 300K HHI (pre bonus, 340-350K with bonus) - smaller Florida city, not Miami. MCOL/HCOL. We have a good "problem" that we're trying to work through.

The background:

• Wife has premarital home (current primary residence) with a great 3% rate and about 300K left on the mortgage. Monthly payment is $2400 (w/ taxes & ins.). Location is ok, not great, but not terrible either. It's pretty dated, so we do need some renovations soon, including a new floor throughout due to a water leak (now replaced) that damaged the flooring in several rooms.
• I have an old 80-year old small home (850 sq ft). A couple years ago (before we were married), I entered into a lease to own arrangement with a family member. My current payment is about $2500 (w/ taxes & ins.). Under the agreement, I need to take a traditional mortgage in the next year or so (when rates drop a bit). It needs a lot of upcoming renovations (roof, plumbing, A/C, windows) I am financially responsible for all work while in possession. My goal has always been to eventually tear it down and build new or do a significant remodel to fit a family. The value is 100% in the location. The old house cannot fit our current family.
• The old home is in an excellent, very desirable location. Lots alone on my street are going for 600-700k. The new builds in the neighborhood are selling for 1.8M to 3.5M (depending on size).
• Due to some life changes for us both during COVID and house downpayment, we don't have as much as we would like in savings. We have about 160K in a mix of retirement accounts, brokerage accounts, and HYSA.
• We have about 250K (maybe more) in equity in our primary residence (could sell for 550K-650K) . As part of the lease to own arrangement with the old house, we have about 250-300K equity as well. My price lock is 315K. If I were to try and buy that now on the marketplace, I would pay 600K plus.
• Only debt is student loan debt, wife's 60K will be forgiven in 4 years. Mine (75k remaining) will be paid off in the next 5 years or so.

The "problem":

• As renovations are coming due with the old house and the primary residence, we're starting to consider what to do with our housing situation. Ideally, long term we would like to tear down the old house and sell the primary residence and use about 200K from the sale as a downpayment for a new build on the lot. We've received some quotes for a build with our (basic, non luxury) specs for about 700K. The total mortgage would be about 1 million, less the 200K downpayment, so right around 800K mortgage out the door. I calculated about 6k-6500 per month in monthly payments (w/taxes & interest). I expect the value of our new home once complete will be about 1.7M (probably a bit conservative), so our equity would increase at the end.
• If we were to take the traditional mortgage and rent out the old house, my main concern is that likely rental rate for the old house would result in neutral or negative cash flow (definitely negative once repairs are considered)
• Pros with the new build: less complicated with one beautiful home in an amazing location (5 min commute for work and 10 mins from some of the best beaches in the world). Both homes will need a lot of renovations ($) in the coming years, so this scenario avoids that.
• Cons: higher monthly payment, losing the 3% mortgage, headache of a new build.Of course, if we went with the new build, we would love to keep the primary residence as a rental with the low rate, but I don't think it's feasible.
• One option is to keep the primary residence (low payment, low rate, house is ok), and not exercise my purchase option in the lease to own agreement. We could essentially walk away from the old house. However, we worry we'll seriously regret this in the next 5-10 years when we're permanently locked out of that location and values are likely even higher than they are now. Truth is, we're locked out of that location right now but for the lease to own arrangement.
• One thing to consider - we have two school age children and a baby on the way. Thankfully, childcare is minimal because we have a lot of family support in our town (yay grandma!) and wife works 100% remotely.

Would love to hear your thoughts and comments! Thanks for reading!

 

[judah1315]

@universalistanthony You're seeking advice from people that make less than half what you do. someone in the middle class makes between 50-150k in most areas, will buy a house valued between 200k-400k. That's middle class. Not 350k income and a house valued at 1.7 million. These mods need to do a better job of maintaining the intent behind this sub or its just another finance sub.

 

[lightbringer72]

@judah1315 Honestly, I'd say 3/4 of the posts in his sub are from upper class people who think they're poor. It's really frustrating.

 

[zhuru523]

@universalistanthony You guys make a lot of money.

 

[joettastaysblessed]

@zhuru523 That's it? That's the entirety of your comment?

Yes, they make a lot of money but we know nothing about their expenses and lifestyle.

I'd want to know if their costs to build include a 20-40% overage in both time and materials.

They've got kids and 2 homes but who's living in the small house of not OP's family?

It's Florida and school districts can be like night and day just moving one block in any direction. With 3 young kids, I'd be looking at which has better schooling options.

 

[tracieplaxton]

@universalistanthony The problem with this income in Florida is lifestyle creep.

Too many are living paycheck to paycheck

It’s extremely easy to build wealth with this income in Florida; you just have to live as if you only make 75k.

I think the details in this post prove that you can do it “wrong” when it’s so easy to win.

 

[universalistanthony]

@tracieplaxton I agree with lifestyle creep being a real thing, but that’s not a Florida-specific thing.

Care to elaborate how this may be doing it “wrong?”

 

[tracieplaxton]

@universalistanthony I lived in Florida for 2 decades.

If you are making anything over $130,000 you should be prospering.

Having a needs-based budget and then making a hardline fun expenditure is the best way to prevent lifestyle creep.

Another easy way to not do it wrong in Florida is avoiding being house poor.

So many times I see folks buy more than they need in places like Cooper City, or buy in the more expensive areas of Melbourne instead of getting a decent house just outside of it, or they just “have to” get that beachfront house in Clearwater instead of a nice home in Largo, or they WFH and still need to overspend in a high rise condo

Like, why?!! You can retire a millionaire! Stop giving your money away to lenders right now. Stop buying that boat you will never use. Stop shopping at the Aventura Mall… literally no one cares about what brand you are wearing.

There’s a strong culture of keeping up with the Joneses in Florida and it doesn’t need to be you that falls into that trap.

You in fact don’t need that Maserati. (or the BMW)

 

[theredraven]

@universalistanthony You make between $300-340K a year and only have cash assets of about $160K.

When you subtract your student loan debt of $135K you have a positive cash net worth of $25K.*

You are doing something very very wrong.

*Assuming this is your only debt apart from the mortgage and land contract. Did you do the land contract because you couldn't qualify for a mortgage?

 

[universalistanthony]

@theredraven The significantly increased HHI is recent. The depletion of liquid cash was to support an unexpected lifestyle change a few years ago as well as the down payment on the primary residence. The reason for the lease to own was a personal favor a couple years ago from a family member because I didn’t want to buy at that moment when she was planning on selling largely because I wanted to wait for a rates to cool down and make sure everything was good with the new job before committing. No problem qualifying. Both of us have solid 800+ credit scores and doctorate degrees in solid careers. Correct, no other debt.

 

[penpoint5309]

@universalistanthony Rent the old house, live in your wife’s house. Pay cash for renovations as needed and when you have 20% plus closing costs for the new house make the move. We make a little more than y’all and it’s easy to fall into the trap of cash flowing everything. Sure you can afford the monthly payments but at a certain point you will be maxed out and not have the savings to back up your payments. Building wealth takes time and maxing out your home purchase at 30 is not a good way to do it. We drive a car with 200k miles on it and live in house we bought for 300k but make about 400k/year. We will be able to buy whatever house we want and what ever cars we want in a few years but if we bought our “dream house” now we would really hurt our cash flow and you will be in the same situation if you just hold off a bit

 

[cbaker06021984]

@universalistanthony I didn't see any accounting of homeowner's insurance in your numbers. How bad is it in your area of Florida, and does that change the numbers significantly?

 

[universalistanthony]

@cbaker06021984 Good point! Yes I have calculated on the higher end of homeowners insurance in that figure.