Home Sale - Capital Gains for Investing or Living Debt Free?

Question

Hello BP Community. I am somewhat new to BP, this being my first discussion topic. The question I have been wrestling with for a few weeks now is a fairly simple question that provokes a difficult decision.To give you a little background I am a husband and father of 2 in my upper 20's. I have been involved with real estate for 5+ years now as an architect and a design consultant for other property investors. We purchased our first home (primary residence) 3 years ago and have almost completely renovated (mostly on my own) during that time. A career move is prompting the sale of this house and we will be relocating out of state. With that sale will come a somewhat sizable amount of capital gains that could allow us to begin our journey as R.E. Investors or it could be used to lessen our monthly expenses.

So my question is, what do you all suggest we do with the capital gains we earn from the sale of this house? Do we use the capital to purchase another primary residence for a reduced or zero mortgage living and begin saving for future investment deals? Or do we invest the money into an LLC and put a down payment onto a multi family property to begin our REI venture?

Buildings, houses, property, renovation, construction, this is what I know--it's my career. Because of this we know we want to get into REI we just aren't sure that this is the best way to approach it. Having children to care for doesn't make the decisions any easier either. So we figured we would like to hear from some of you, hoping to get some expert guidance from the BP Community.

Can't wait to hear what you think.

P.s. To be candid, I have done minimal research on the topic here, so if a thread exists on a similar topic, please reply with a link to that thread. Much appreciated.

Scott Ellis · Answer

Hi Bradley, Welcome to BP. I'm in a similar situation to you but without kids, and I'd LOVE to have your background in architecture and design. I think it'd be worth paying a tax advisor for an hour or two of time to get their take on the implications of either road, but here's my take on it.Interest rates are still very low and will eventually go up (my parents' first mortgage was at 18%). Also, with a mortgage, you're paying it back with inflated dollars meaning you're really paying less. Jason Hartman talks about this a lot. Here's one of many articles/podcasts of his that discusses this.If you know you want to end up in REI, why not start now? As with investing in the stock market, I think most investors look back and always say they wished they would have started sooner. I think having the opportunity to get into it while still in your 20's awesome.My wife and I spent the last three years remodeling our house as well. We don't have kids, so we rented out two rooms and lived in a slightly separated basement. It wasn't always fun, but it was AWESOME living mortgage free. So I get that. When we do have kids, our plan is to look for a house that makes sense to build a detached accessory dwelling unit on the property. Then we could have the benefits of our own house plus some rental income. I think that would be something to consider with your background.I also like your plan on multifamily. You could purchase a modest home for you with an FHA, as well as a moderate fourplex and have 5 living spaces locked into 30 yr mortgages at attractive interest rates. (I'm biased here, though, because we put in an offer today on a triplex for this exact reason).Best of luck and keep us all up to speed on your thought process. There's lots of young families out there wrestling through these same decisions that will benefit from the discourse.

Bradley Huizenga · Answer

Thank you both for the quick replies. There is some excellent advice packed into both of your statements. Scott, I love the idea of the detached accessory dwelling on your primary residence, and you bring up a good point about current interest rates & inflation (which is something I hadn't yet considered). Justin, you have given me some new thoughts about direction and goals. You are suggesting we mortgage our primary residence and keep the capital liquid so when we find a deal too good to pass up the process is simpler and quicker? What are your thoughts on using the capital to purchase a house and then acquiring a HELOC when we're ready to finance an acquisition? Scott do you have any thoughts on that? One of my primary concerns is, as you stated Justin, psychological. I am a bit concerned about moving 2k miles, finding a house for my family, starting a new job and beginning this venture. I believe trying to tackle all of this might be too overwhelming in a short period of time. So maybe it would be best to tackle the career move first and then once settled, begin my plans of owning real estate. Because "when we're ready" is an undefined length of time, would it be more wise to go the purchase & HELOC route?Thanks again for your insight!

Justin R. · Answer

Bradley Huizenga Regardless of how soon you decide to buy a property, or what type of investment you end up making, the important thing is that you have access to capital so you can move quickly when you find something that's favorable. I would recommend you mortgage your new home and keep the capital accessible - you should be able to find a short term investment for it that at least matches your owner occupied interest rate. Keep looking for a very solid deal and, once you've found it, pounce. Capital coming from a primary mortgage is about the best capital source you can have - cheap, fixed rate, deductible interest, long term. Unless you are concerned about your ability to protect that capital in whatever you invest in, most of the arguments against it are psychological. Good luck!