A Big Decision for Our Family
Those of you who subscribe to my weekly newsletter know that I have been all over the place lately! First there was our Family Gap Year. We were striving to leave in June! Then coronavirus. Then I applied for a fellowship in New Zealand (to continue the work of Montessori For All). And I’m not if I mentioned that I was brainstorming how to build a container house in rural New York (to live there just for a year). Oh, and then there was the house I found that I wanted to renovate. Yeah, my brain is all over the place! The dust has settled and our immediate next step has emerged, which is a big decision for our family. Can you tell I’m craving “progress and novelty”?
We have decided to rent out our current house, build a new house, and move into the new house when it’s ready.
Phew!
There’s so much that has been happening behind the scenes, including reading this book and building financial models with my friend, Noah. He helped me learn about “cash out refinancing.” That’s where you refinance your house for a bigger amount (I know, it’s counterintuitive) and then take out the cash. Real estate continues to appreciate in Austin, and we have lived in our house for 7 years. Plus, interest rates are so low that it makes sense to take money out and invest it.
So here’s the plan:
Step One
Rent out the house we currently live in. This step is done! I put it on Zillow and had it rented a week later. I love the tenant I found! She’s moving to Austin from Brooklyn.
Step Two
Close on the new house. We will close in mid-November and be completely settled by December 1. We are downsizing from 1,800 square feet to 1,500. We are bringing nearly all of our furniture with us.
Step Three
Do a “cash out refinance” on the original house. After the dust settles following the first closing, we will do a cash out refinancing to get a large chunk of money out of our current house’s equity.
Step Four
Use a chunk of the money to build a pool and put in landscaping. I had to be really honest with myself about how much I LOVE having a pool in a city that is hot most of the year. And the landscaping is critical because our new house is on significantly less land and will be very close to our neighbors.
Step Five
Invest the remaining money in the stock market. We don’t need money fast, so we can play the long game with the stock market and start investing now. Even if there’s a crash around the corner, we can ride it out and start saving for our future.
It’s a lot! But I’m honestly feeling so energized. My brain has been craving an intellectual challenge and some excitement. Plus, I’ve been really trying to figure out how to help my children get through college debt-free. Finally, having some exciting to think about helps me cope with the crippling anxiety I feel about the state of our country!
16 Comments
Mamaschlick
Hi, first of all congrats on your plans! Second of all, please reconsider or be very careful with a cash out refi to invest. This is what I do for a living (or rather help people out of these) and there are a lot of pitfalls and hidden fees and closing costs that are overlooked but lead to an overall loss of anticipated gains. Knowing you, you have done your research and I assume you have plenty of liquid assets to pull from in case of unexpected costs and emergencies… We are in very unstable times where construction could inexpectedly halt or the election could cause serious instability. Please just be careful. Do you guys have 529s or mutual fund investments? These are stable-albeit unsexy-alternatives. There is a movement to “declutter finances” where one tried to pay off and be free and clear of debt now in order to save outright for future. Ok, let us know how you’re doing! Sending much luck and well wishes your way.
Sara Cotner
Thanks, Mamaschlick! I post the intimate details of our financial life precisely so I can get feedback from smart people like you! I really appreciate it. I will definitely look into the refi part very carefully (that’s not happening for a couple months). We have a 529 and a Roth IRA with Vanguard. The tenant we are leasing to seems really stable and hopes to stay in the house for several years (if possible), so that’s good news. And Austin is generally a strong real estate market. But I appreciate your caution! My friend and I are definitely modeling conservative numbers.
Olivia
Whoa! This is so exciting, and such a creative approach. Love that you’re working with someone on detailed financial modeling to come up with what makes sense for your family. And totally agree that with current interest rates and housing markets, if you’re able to expand real estate assets, it seems like a really savvy move. We fast-tracked a long-term goal for just that reason this year, and am SO glad we did.
Sara Cotner
I would love to hear what your long-term goal was that you fast-tracked, Olivia! And I’m glad you are happy you made that decision!
Justine
I’d love to hear from you on your reasons for moving and buying a new house. I’ve followed you since the $2k wedding days : ) and as I recall this house was a dream of yours and you designed it how you wanted. Was it never supposed to be a “forever” home? Or do you not believe in that kind of concept? My husband and I are hoping to build a forever home in the next 10 years and I’m afraid he will get bored of the house, so maybe I’m just projecting here.
Sara Cotner
Hi, Justine! We thought it was going to be our “forever-until-the-boys-go-to-college” house. We truly love it. That’s why we are renting it and not selling it. The second house idea came up randomly when my mom was in town before the pandemic happened. There was a new housing development going in near us and we decided to check it out for fun. I fell in love with a 1,500-square foot floor plan. It’s really simple but really effectively laid out. They boys’ bedrooms will be at the front of the house and are much smaller than their current rooms. They have a bathroom between their two rooms. Then there’s a hallway that leads into an open-concept living/dining/kitchen (similar to what we have now but a little smaller and definitely not as much natural light). There’s a laundry room off the kitchen and a master bedroom off the other side of the kitchen. And we waited until we could get one of the last lots to be built, which is a lot that backs up to protected land (so it’s a forest-view). When our Family Gap Year got canceled and we got the huge refund from all the AirBnBs we had been paying for while Matt had a job, it seemed like a good next step for us in terms of generating more income. Matt is still staying home full-time, and I’m panicked about us not having enough money to send the boys to college in 9 years. Simultaneously, the coronavirus situation has left me really craving “novelty and progress.” So this seemed like a good way to help our family generate more income and give me something interesting and challenging to work on in my free time. Work is so consuming right now; it’s helpful when I have something really engaging to focus on in the evenings. It’s only 2 miles away, so nothing will really change about our lives. We will still be close to school/work and all of our friends will still be nearby. Renting out our house feels like the best of both worlds. We get a new adventure and a new project, but we aren’t permanently giving up what we have worked so hard to build. Definitely let me know if you have more questions!
Mamaschlick
Sara,
I know this is super “boring” but what about investing the gap year refunds directly into aggressive mutual funds? I know it doesn’t hit the progress and novelty but I started saving early and found that even investing one year sooner made a huge difference. Even though the market fluctuates, it does make a difference. And maybe setting aside some $ for adventures along the way?
Your idea is much more fun, i’m just nervous about it. But that does NOT mean I’m not excited. I am definitely worried about the variables at play here (pandemic-esp in texas, election, etc) that could change this good plan. Anyway, it sounds like you are investigating all angles and it is inspiring nonetheless to see you follow through and take risks! You are brave! (:
Sara Cotner
I know it’s scary! I’m feeling pretty good about the plan because we have already secured a tenant and she has signed a lease. It seems like the most unsure part of this all is whether we can get a cash out refi and what the rates would be, given it will be an investment property and not our primary residence.
Mamaschlick
P.S. both you and Matt could do phenomenally well earning side income on outschool! Matt could teach basic photography (or even show his photographs and describe what and how he took it!) And you are a teacher with many talents to share. You could even teach a planning 101 class to kids! Have you checked that out?
Stephanie Brown
This is a very interesting plan and not far from one that I considered doing. Hopefully you’ve considered how your refinance rate for a rental will be much worse than a property you live in. We ended up moving back into our investment property in November just so we could refinance at a much lower rate. The refinance rates for investment properties are much higher so the market may not always beat them. Anyway, good luck!
Sara Cotner
Thanks for chiming in, Stephanie! I’ve been estimating about 0.5% higher. Is that way different than what you have seen?
Concerned Friend
Hi Sara,
Another long time reader (from the $2k wedding days). As a CPA who owns a few rental properties and works in financial planning, I have a lot of thoughts when reading this and will share a few, which of course come with the general “I’m an Internet stranger and you don’t have to consider them whatsoever” caveat. Your spending and income are, of course, completely personal decisions and only you and Matt can make the choices that you believe are the right course for your family.
1. I think you’ve mentioned Mr. Money Mustache’s blog (or linked to it in passing) in the past. His passion for simplifying life and enjoying frugal living has its roots in Vicki’s book, which you’ve referenced lately. I’d really encourage you to consider reading his blog if you haven’t in a while, and further encourage you to post a case study to the MMM forum. There are really amazing people who will give you a lot of great input on the forum, and probably help you think about aspects of this that might not be readily apparent.
2. You’ve already signed a lease, but a few notes of caution on property rentals – it can be a fantastic experience, as long as your lease agreement is very clear and you take the vetting process very, very seriously. I don’t know if you and Matt are the handy type, but that is a much more profitable way to manage a local rental (being able to go over and fix a toilet leak yourselves, vs. paying someone else to do it). It may be a while before things like that pop up, but it’s really important to consider those unexpected costs in projecting rental income. I also always have a multi-page addendum to our leases, spelling out things like exactly what non-smoking means, what leaving the property in clean condition means, and so on. I find this protects not only us but also our tenants, because we all have clear expectations established in advance. No matter how glowing the tenant seems at first, it is also really good to do periodic check-ins (you have beautiful landscaping and a pool that will require a lot of upkeep, and often those things simply aren’t cared for as much by someone who doesn’t own them).
3. Investment refi rates – as noted by several commenters already, this plan is quite risky and is going to cost a lot more if you do it while it’s an investment than if it were your primary residence. I typically find investment rates are 1% or more above primary residence quotes. I don’t know if you already have quotes to support the .5% spread estimate, but I’d think really carefully about all of this and get as many quotes as you can now, because that variation could change the outcomes significantly.
4. Overall, it’s an extremely volatile time to drop a significant part of your accumulated wealth into the market. I would be fairly concerned about that, given all the rest of the factors at play here. Do you have an investment plan for how much you will invest in specific securities? And are you carefully considering your risk appetite in all of this (you want to have more money over the long term, but will you be able to sleep at night if you were to invest this lump sum and then see a drop similar to the one that happened this past year)?
5. There are a lot of tax factors at play here. I’d make sure you model those out (you may already have done this), to fully understand what interest is deductible and what will not be, how passive rental losses will be treated, etc.
Overall, I wish you success, and hope that your family is able to adjust and find ways to save and prosper in health!
Sara Cotner
I’m so grateful for all of this free consulting advice from smart women! I will definitely take all of this into account. Thank you for taking the time to share all of this!
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