2 houses 450k each or one 800k?
Having someone else paying you rent is always going to be the better deal financially. The question is, what does $450k buy in the neighborhood in which you want to live, vs $800k? I'm going to assume you can afford either option (buying a $450k home and not selling, or an $800k home and selling your current one) whether someone's paying you rent or not. Let's make up some numbers here; a $450k home, financed 80/20 (360k principal) at 4% for 30 years will cost you about $1720 in P&I payments per year (plus escrows such as RE taxes, PMI, and homeowners insurance where applicable). An $800k home financed 80/20 (640k principal) at 4% for 30yr will give you payments of about $3,055/mo before taxes and insurance. So, the worst case overall is that you buy a 450k home in the new neighborhood and are not, at any given time, collecting rent on the old property. That would (assuming the mortgage terms on both home loans were comparable) cost you $3440/mo and you'd be living in a $450k home in a neighborhood where 450k may not buy a home as nice as the one you moved out of. The question as I stated above is this; assuming you had a reliable tenant in your home for the entire remaining life of the loan on your current home, which is more acceptable to you: buying $450k of home (which might be a downgrade in sqft or amenities) and paying $2020 in P&I, or paying about a grand more ($3055/mo) for a much nicer home in the new location? Strictly from a money perspective, the renter is going to be the best option, IF you get reliable tenancy for the entire life of the mortgage on that house; you'll be paying $2020/mo for 30 years, which is $727,200, to end up with $950k of total home value (plus adjustments for actual home value appreciation/depreciation). That's the only way you'll come out ahead on any mortgage; have someone else pay most of it for you. If you don't rent, the $800k home will cost you $1,099,800, while two $450k homes will cost you $1,454,400. The percentage of home value over total payments for the 800k home would be 72% (you will have paid 137% of the value of the home), while you will have paid 153% of the value of two 450k homes. "Forget the math's specifics for a moment: here's some principles. Additional housing for a renter gives you returns in the form of money. Additional housing for yourself pays its returns in the form of ""here is a nice house, live in it"". Which do you need more of?  If you don't need the money, get a nicer house for yourself. If you need (or want) the money, get a modest house for yourself and either use the other house as a rental property, or invest the proceeds of its sale in the stock market. But under normal circumstances (++) don't expect that buying more house for yourself is a good way to increase how much money you have. It's not. (++ the exception being during situations where land/housing value rises quickly, and when that rise is not part of a housing bubble which later collapses. Generally long-term housing values tend to be relatively stable; the real returns are from the rent, or what economists call imputed rent when you're occupying it yourself.)" Because it appears you have in the neighborhood of 30 years remianing on your mortgage for the first house, If you can sell it you will likely be better off in the end.  While renting has the potential for greater income it is a business.  And like any business there are risks, expenses, and work required to make it successful.  There will be times where you can not find a renter immediately and will be responsible for making both payments, maintaining both houses, the insurance(which for an owner is higher for a rental property than a domicile), and paying the applicable taxes.   You need to look at your best and worst case numbers.  If your best case numbers leave you in the hole 300/month then that is not the sort of business you want to run.  Your investment should build your savings and retirement funds not deplete them.  Further you are more likely to fall between your best and worst case scenerios.  So you need to be able to thrive at that level.  If something in the middle is going to take you into bankruptcy then sell the property.  If you are not willing to put the time into your business that it will need (My rental home took about 10-30 hours a month despite renters being responsible for basic upkeep and maintenance.   Finally your plan B:  A home with 800k value will have higher costs and higer expenses and maintenance.  If the 800k home is the home you and your family needs then by all means go for it.  But if it can do just as well in the 450k Home then go there.  Pay the home off early by making the payments you would be making for the 800k home.  In this way you pay less in total cost of the home and set your self up for the greatest chance of success.  Once that home is paid off the break even point for renting goes way down as well.  So the rental option could be in the future.  I would just aviod it now if possible.
I live in suburban Washington DC.  The houses in my old neighborhood that  used to sell for $500K to $600K were renting for about $2,500 because that's all the market could bear.  My mortgage was about $3,100 but I could never have rented it out for that.  Owners were taking a loss every month just to keep the house.  Like I said earlier though, that same house is now only worth $328K.  They're still renting for the same $2,500 per month that they did before the value plummeted.   I did downsize a bit when I moved to my new house.  Went from 4 very large bedrooms to 4 moderate bedrooms (1 is kinda small) and went from 3 bathrooms to 2.  But the plot is much larger now than my previous house.  Before felt like a McMansion and now it feels like a cozy cottage but I'm sure a lot of that is my perception of the whole situation. "This is the best tl;dr I could make, [original](https://www.project-syndicate.org/commentary/real-estate-prices-housing-inequality-by-robert-j--shiller-2017-07) reduced by 92%. (I'm a bot) ***** &gt; In some cities, higher-priced homes may tend to turn over more rapidly than in others.  &gt; Some cities may be inhabited by larger families, implying bigger houses than in other cities.  &gt; Using satellite data for major US cities, the economist Albert Saiz of MIT confirmed that tighter physical constraints - such as surrounding bodies of water or land gradients that make properties unsuitable for extensive building - tend to correlate with higher home prices.   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/6os52x/shiller_on_housing_prices/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~172691 tl;drs so far."") | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **city**^#1 **home**^#2 **price**^#3 **housing**^#4 **income**^#5" You can hire a builder to build for you on a lot that you would be happy to live on with utilities already connected. Subdividing a large piece of land gets a little more complicated. What easements exist, and what new easements would need to be created when connecting utilities? Would all of the lots already have street access, or do you need to dedicate some of the land to building a new road in the subdivision? Also, I edited your post because 83,000sqft is 1.9 acres. Building homes on .19 acre parcels (assuming no need for a road to take another 15% of the lot) reduces the value of the homes that you are building. You should run the numbers with 6 houses and see how attractive the math looks. Also, you should look for updated numbers on cost to build. Custom homes are likely closer to $275-$350 (where an architect is involved with drawing the plans). You should very much nail down your planned expenses and profit. However beyond that you may have some better options to avoid taxation assuming all your plans go well. You should take into account the ability to avoid taxes on the sale of a primary residence. You could build the spec house, then move into the spec house. You could then sell the primary (avoiding any profit less than $500k filing jointly, assuming you meet the Home Sale Tax Exclusion requirements).  You can then in another two years or so sell the spec house if you want and again avoid up to $500k in profit. http://www.nolo.com/legal-encyclopedia/the-250000500000-home-sale-tax-exclusion.html The breakeven amount isn't at 8 years. You calculated how many years of paying $500 it would take to break even with one year of paying $4000. 8 x 10 years = 80 years. So by paying $500/year it will take you 80 years to have spent the same amount ($40000 total) as you did in 10 years. At this point it may seem obvious what the better choice is. Consider where you'll be after 10 years: In scenario #1 you've spent $5000 ($500*10) and have to continue spending $500/year indefinitely. In scenario #2 you've spent $40000 ($4000*10) and don't have to pay any more, but you currently have $35000 ($40000 - $5000) less than you did in scenario #1. If you had stayed with scenario #1 you could invest that $35000 at a measly 1.43% annual return and cover the $500 payments indefinitely without ever dipping into your remaining $35000. Most likely over the long term you'll do better than 1.43% per year and come out far ahead. A $250K earner might have $4M in retirement savings and $500K in available funds, but doesn't wish to spend all his liquidity on the house. In general, a house might cost 2-3 times one's annual income. It would take many years to get that saved up. They might want to have the house sooner.  It all goes back to choice, priorities, personal preference. "Say you're buying a 400K house. Your relative finances 120K (30%). Say I'm optimistic, but the real-estate market recovers, and your house is worth 600K in 5-6 years (can happen, with the inflation and all). The gain is 200K. Your relative gets 100K. You repay him 220K on 120K loan for 5 years. Roughly, 16% APR. Quite an expensive loan. I'm of course optimistic, it seems to me that so is your relative. The question is: if the house loses value in that term, does your relative take 50% of the losses? Make calculations based on several expected returns (optimistic, ""realistic"", loss case, etc), and for each calculate how much in fact will that loan cost. It will help you to decide if you want it. Otherwise your relationships with your relative might go very bad in a few years. BTW: Suggestion: it's a bad idea to mix business and friend/family you don't want to lose." I was down in San Diego recently and talking with a friend while at dinner. I was complaining that the housing in my area had gone up and a starter 3/2 was getting into the ~415k range.  I guess houses in not even good parts of SD are in the 600k range minimum. Another vote for a bigger downpayment, for the reasons Benjamin mentions. Also, from experience, I would save up at least a small pile as a separate house emergency fund because you will find things that are wrong and/or that got bodged by the previous owner and it's probably not going to last past the first few months of home ownership. In my case, the home inspector missed - amongst other things - that the shower on the 2nd floor was leaking both into the adjoining bedroom and the living room below. That added a little unexpected expenditure as you might guess. First the good news: based on the time involved, and the amount of potential profits; you will not owe any tax on the sale of the house no matter which option you pick. Now the details. When determining if there are any capital gains the IRS cares about the difference between the sale price and the purchase price. The amount of the loan, the final balance of the loan, or the lack of loan don't factor into the calculation. To complicate matters the government does factor into the equation any improvements you have made to the house (like a new deck) and the cost of buying and selling the house (real estate agents). If a single person has less than 250K in capital gains and has used the house as their main residence for 2 of the the previous 5 years their tax is zero. For a couple the tax free gain is $500K. For your situation since the sale price is less than $250K, the capital gains will also be less than $250K. You do have one potential area of concern. If the house is worth significantly more than $150K, the government could claim that the difference between what you charged your parents and what you could have charged was a gift. Assuming that there are no other factors that you didn't include in the original question it would appear that you will not face any taxes. Regarding your two options, neither will impact the taxes. Though draining your savings or investments could make it difficult to meet an emergency during the time between the sending of the $95K to the mortgage company and the closing on the deal with your parents. If the money came from retirement account it could have an even greater impact on your taxes and retirement situation. You are being ripped off on several counts. 1) 40k is 26% not 25%. 2) Why should you pay them $500 rent? they bought a share of the property, they should fund it if they intend to keep 75% 3) Why do you need to pay them for the 75%? why dont they need to pay you for the 25%? You are better off getting a loan for the 75% and going solo so you get to buy equity. If you buy a townhouse, you often are in a condominium arrangement in the US (when you're really in a rowhouse in particular).  So that's a downside right away: you have to have a HOA, or at least some sort of common agreement, though it might not have formal meetings.  Everyone who owns an interest in the entire group of townhouses gets some say in landscaping and such. Beyond that though, townhouses (and similarly, condominiums) are often easier to own (as they don't have as much maintenance that you have to do), but more expensive because you pay someone to do it (the landscaping, the external repairs, etc.).  You likely don't have as much control over what the external looks like (because you have to be in agreement with the other owners), but you also don't have to do the work, unless your agreement is to collectively do the mowing/landscaping, which you should know in advance.   I wouldn't underestimate the value of easier, by the way; it's very valuable to not have to deal with as many repairs and to be able to go a week without thinking about mowing or watering.  In that sense it can be a nice transition into ownership, getting some-but-not-all of the obligations.  But if that's something you really value, doing the landscaping and mowing and whatnot, that's relevant too.  You can always tell your realtor to look for townhouses where the owners do some/all of the landscaping, though that opens up a different can of worms (where you rely on others to do work that they may not do, or do well). They're also somewhat noisier; you may be sharing a wall (but not necessarily, air-gap townhouses do exist) and either way will be closer to your neighbors.  Does noise bother you?  Conversely, are you noisy?  In a college town this is probably something to pay attention to. Price wise, of course stay well within your means; if being close to the city center is important, that may lead you to buy a townhouse in that area.  If being further out isn't a problem, you'll probably have similar choices in terms of price as long as you look in cheaper areas for single family homes. I live in MA. Median price value here is $410K. Depending on location a $410K house here can be a ranch from 1950 needing a complete overhaul, a 1970's split level, a 4 bedroom Colonial in Central MA or a condo somewhere close to Boston. These homes are decidedly nothing special, and certainly not where the 1% live. There are plenty of houses that list in the $750s in my town that go on and off the market really quickly, generally purchased by a two-earner family making decent (but not 1%er) money. Think engineers, doctors, sales and marketing execs, managers.   Source : https://www.bostonglobe.com/business/2017/07/25/median-home-price-massachusetts-tops-for-first-time/rVsP7BwWZCtKwP9BqZQOKJ/story.html A lot depends on whether your mortgage payments are interest only or 'repayment' and what the remaining term is on each of the mortgages.  Either way I suspect that the best value for the money you put in will be had by making payments to the larger, newer mortgage.  This is because the quicker you reduce the capital owed the less interest you will pay over the whole term of the mortgage and you've already had the older mortgage for sometime (unless you remortgaged) so the benefit you can get from an arbitrary reduction in the capital is inevitably less than you will get from the same reduction in the capital of the newer mortgage.  Even if the two mortgages are the same age then the benefit of putting money into the one on the new house is greater due to the greater interest charged on it. "Another problem with this plan (assuming you get past Rocky's answer somehow) is that you assume that $50K in construction costs will translate to $50K in increased value. That's not always true; the ROI on home improvements is usually a lot less than 100%. You'd also owe more property taxes on your improvements, which would cut into your plan somewhat. But you also can't keep doing this forever. Soon enough, you'd run out of physical and/or legal space to keep adding additions to the house (zoning tends to limit how much you can build, unless you're in the middle of nowhere, and eventually you'd fill the lot), even if you did manage to keep obtaining more and more loans. And you'd quickly reach the point of diminishing returns on your expansions. Many homebuyers might be prepared to pay more for a third or fourth bedroom, but vanishingly few in most markets will pay substantially more for a second billiards room or a third home theater. At some point, your house isn't a mansion, it's ""that ridiculous castle"" only an eccentric would want, and the pool of potential buyers (and the price they'll pay for it) diminishes.  And the lender, not being stupid, isn't going to go on financing your creation of a monstrosity, because they are the ones who will be stuck with the place if you default."