Selling Our Only Home for $170k Net... What Now?

Question

Hi! I'm 30 years old, married with no kids, and live in Sacramento California. I have a stable 9-5 and she is a new nurse. We gross about 100-110k/yr and we have roughly 40-60k in retirement accounts and other assets. We do not have debt outside our mortgage. Our goal is to build wealth through real estate buy and hold (rental properties), and maybe handle a couple flips each year so that I can have the choice to quit my day job (I actually like my job), so that we can travel the world, and so we can also be better prepared to have a baby and spend as much time with the kid as we like. We have no REI experience, but we're handy and have brains, so...

My wife and I bought our home as first-timers in 2013 and are listing next week for a couple reasons: a) we originally bought for 131k and are selling for around 310-320k and we feel it's the right time

b) we would like to live closer to my work, which is about 45 minutes to 1.5 hours away currently, depending on traffic and time of day

c) we want to sell our home high (we've done some remodels) and start over with another fixer-type property and just get into real estate investing with more cash to begin with in the coffers

We are projected to net $170,000 from the sale.  Here are median home prices in Sacramento (and actually we would be looking at moving north into the Roseville area so I'm closer to work). The market seems to be pretty hot with few multi-family staying on market for very long (like maybe a week or less until a listing goes to pending). There still seem to be some fixer SFH opportunities at lower prices in rougher areas though. I have yet to analyze a property.

We will no longer own property after this, so my question to you is... what would you do with the money? We need to live somewhere (renting is fine for us if we must for a little) and we want to start investing in real estate.

Thanks for your input!

Dave Foster · Answer

@Jesse Kailahi, I'll be a lone voice crying in the wilderness here but I love your start and your wife's career and your commitment to sound financial steps  so I'll chip in some advice (that I follow myself) that's worth every penny you're paying for it...

What I read in your post is that all of your goals are lifestyle not balance sheet oriented - travel, baby, time, job enjoyment, freedom etc...  Yes, theres a certain  thresh hold of income needed to support those but your goal is to maximize those things not your gross revenue.  To do that you need flexibility and security first and foremost.

First make sure you never take on any personal debt other than secured investment real estate.  You've made such a great start. Don't fall into the trap of becoming a servant to the bank.  Any personal debt puts your entire kingdom at risk.

Second, get a modest new residence for your self and own it for cash.  If you sit down with a financial planner I think you'll find that it is far easier to protect a personal residence with no debt in any sort of disastrous downturn (medical, financial, etc).  This is home base and aside from taxes and insurance (also optional if you're paid off and like to shoulder that kind of risk) you've not a base forever.  I had no idea how that was going to delight my wife and get her excited about risk in other areas!

Third, Go ahead and leverage the heck out of anything else you want real estate wise for investment purposes.  If the worst happens then you may lose that if you're  leveraged too high when the market corrects or whatever.  But that's all you'll lose.  Yes, you'll have to put a little  more down than you would on a primary.  Yes the interest will be a little higher.  But you can't lose a paid off primary.  Your tenants will be paying the PITI so it slows you down a little - is security and freedom worth that?

Once you've got a couple leveraged cash flowing properties and a paid off primary the world's  your oyster.  Wanna take a job transfer or travel for a while - rent your house off and take off.  Wanna have a baby and take a few months off work or go down to one job so you can home school?  Go for it.  Your expense base will be able to support that.

Ahhhh Freedom.

Michael Evans · Answer

Once you get the equity out of your house, I wouldn't put it back into another primary house.  The only way you can get access to your home's equity is either by borrowing against it (and paying interest) or selling the house (which also comes with selling costs).  If you're going to buy a home to live in, don't look at it as an investment.  Everyone needs somewhere to live and their is an ongoing cost for that.  When anyone determines where they are going to live, it boils down to two things: how much to get in, and how much to stay in.  How much to get in either means down payment and closing costs if you're buying, or deposit if you're renting.  How much to stay in either means PITI and maintenance if you're buying, or monthly rent if you're renting.

I would actual do a cost analysis between the two.  For example, if you were buying a house for $400,000 (median price in Roseville) and you had to put 20% + closing costs, you'd wind up needing about $99,000 total to get in.  Assuming an interest rate of 4%, your PITI would be around $2,200/month.

If you were to rent a median priced home in Roseville, the monthly rent is about $1,900/month and you need about $4,000 to get in.

So by renting you would $95,000 in cash available to invest plus an extra $300/month to invest.  You should be able to have a Return on Investment (ROI) of 10% per year on your cash, whether through real estate investing or other types of investing.  Houses in Roseville are projected to increase in value by 4% for the next year.  Based on this simple analysis, you would be better off renting and putting your cash to work as an investor (preferably as a Private Bank lending money anywhere from 6% - 12% per year).

When it comes to where to invest your money, my philosophy is simple: Grow your money until it matures, then have it produce cash flow.  it's like people.  As children we grow at a fast pace for a certain period of time (say the first 20 years of our lives), then once we mature, we stop growing and we produce children (in this case cash flow).  So I recommend that you invest aggressively (based on your risk tolerance) to grow your money via appreciation investments (in real estate, these would be double digit annual returns such as flips or being a hard money lender) and once you attain the level of cash you need to be financially independent, then you invest into income producing assets (in real estate this would be buy and hold properties and long term Private Money lending).

I hope this gives you some food for thought.  Feel free to reach out to me if I can be of any assistance.

Stay Blessed!

Derek Daun · Answer

I said 5-10% on the primary as a way to stretch out your dollars, and have more cash left over for improvements and investing. It's the cheapest money you'll get anywhere. Yes, you'll have to pay PMI, but if you buy right with a good renovation plan, you'll be able to refi out of the PMI in a couple years.

Overall, you have to balance out where the best place to have your debt and cash at any given time.

Jesse Kailahi · Answer

@Michael Evans Thank you for the advice! You mentioned that I should be able to earn 10% ROI on cash. I'd love to hear your thoughts on what types of investment vehicles (aside from stocks) you would put money. Private money lending sounds interesting too.. I'll have to look into how to do this and the risks involved.

@Isis Franco  This is sound advice, and I have been looking for about a month in the Sacramento market for this kind of opportunity (just through MLS listings), but I'm hardly seeing any properties that are cash flowing properly with FHA or conventional unless I slash 20% or so off the list price, whether I live in a unit or not. Still my focus at the moment, but it seems like alot of the deals are in the forclosure/auction market, which I don't have the cash to touch and not enough experience with hard money lenders to pursue.

@Dave Foster  All advice is welcome! And yeah, we both have been pretty averse to taking on any kind of debt other than zero balance credit cards. And the idea of owning a primary outright is tantalizing, and I can see how this would really allow us to take off whenever, to wherever!. But if we tried to do that right now, in Sacramento, we would have almost no cash leftover and safety would probably be a concern for the types of neighborhoods we could live in, lol.

@Gordon Cuffe  Thanks Gordon, and sound advice. We are currently looking in the roseville area for multi-family fixers/turnkeys (though few of these make cashflow sense) and single-family fixers.

Account Closed  Favorite strategy so far, and something others have echoed... Just running numbers and looking for the right deal at the moment, but coming up short in most scenarios!

Account Closed · Answer

I'd buy a duplex in my target area. Not sure how likely that is in Roseville. Otherwise, if I just wanted to set myself up lifestyle wise, I'd buy a house and pay it off like others have mentioned. The last option, which seems like your best bet, is to rent in your target area and use your $170k to buy 4-5 properties in the Midwest. You can find awesome deals from $80k-125k in KC, for example. Simply selling your home and buying another primary in a more expensive area/market doesn't get you anywhere.

Arpan Patel · Answer

Depends on your risk tolerance and available time. I'll give you three scenarios that might help illuminate the point:

1) Sell the house and take the proceeds to another primary residence and fix it up to sell after 3 but within the next 5 years

2) Keep the house, take out a HELOC on it and rent it and use some of the HELOC to purchase a new primary residence

3) Keep the house, take out a HELOC and rent the first house, and use a lesser amount of the HELOC to get a more modest place primary and use the remaining funds to start and arbitrage by becoming a private lender or investing in a crowdfunding (Fund that Flip or RealtyShare for example)

1) Pros: Not a lot of time other than fixing up the new house. You will get a tax free sale at the end of both properties as you are selling your primary residence after living it in the past 3 of 5 years and there is no need to learn anything new as you already have experience in fixing up your current place. Cons: At the age of 30 (I'll be turning that myself this year) you are young and there aren't many dependents you need to take care of so I think a higher risk/ higher reward model suits your investment time horizons better. There are still 30-35 years of raw earning potential so you can take a bit more risk to take and manage it for the long haul to earn a better reward.

2) Pros: With that much equity it seems you will cash flow if you rent it out (using @Michael Evans analysis) and the HELOC will be a good down payment on the next home you plan to buy but the difference is you will have two homes now instead of one. Plus renter pays down you debt and (again using @Michael Evans's analysis) you are still able to earn appreciate on now two properties instead of one. Cons: This will take a big of time to manage and find either the tenant or property manager and it is increasing your debt (which I could argue is a good thing).

3) Pros: You will still have two houses at the end and you will start making the home equity line work to make you money as well. If you get a HELOC at around 4% and you are getting 9% private lending or working with a crowd funder then you are in effect making 5% spread on that money. The other part of the HELOC you can get the second more modest home. Cons: The more modest home can feel like a step down. You will need to learn a bit about how to be a good private money lender (regardless of if you go through a portal or not, you should have an idea if the underlying investment is a good one or not). Lastly is time where you will need a bit of time to learn but I feel that is well worth it. Also risk is a bit higher in that some of your money will be exposed where you don't have direct control of the underlying asset, the operator who you are lending to does. Good and Bad.

I hope that helps you and PM if you'd like to discuss further. I'll give you the most informed opinion I can. Good luck!!

Wes Blackwell · Answer

Hi @Jesse Kailahi! Great question!

The tough part of this equation is that you still have to provide housing for yourself after selling. Therefore, one thing I would add to this conversation is to consider looking at 2-4 unit multifamily properties here in the Sacramento/Roseville Metro Area. This is an area I work in daily with multiple investors who have the exact same goals, so I can tell you there is plenty of opportunity.

The financing is just the same as SFR, and you can live in one of the units and rent out the rest. Either your obligation to the mortgage payment will be significantly reduced, or you might even come out ahead a couple thousand per year.

That allows you to enjoy extra savings and live there essentially mortgage/rent free. Stack away those savings to use as a down payment on your next property, and you can move out and rent your unit one day and experience a massive surge in cash flow.

Plus, since it will be your primary residence you will be capital gains exempt when you sell if you live in the property for at least 2 years! #winning!

This investing strategy is known as "House Hacking" and I know many other investors currently experiencing success with it. Here's a few Bigger Pockets articles on the subject to help get you started if this strategy sounds like a good fit for you:

• https://www.biggerpockets.com/renewsblog/2013/11/02/hack-housing-get-paid-live-free/
• https://www.biggerpockets.com/renewsblog/2014/11/20/a-new-way-to-look-at-the-concept-of-house-hacking/

Best of luck!

Gordon Cuffe · Answer

@Jesse KailahiYou could look into buying a older home in old town Roseville with only 3.5% down using a FHA loan. You could look for a home that is just outdated and liveable. You can then update it over the next 2 years and if you decide to sell and make money at least you do not have to pay capital gains taxes since it is your primary residence. You will still have your other money to try to do a fix n flip or buy a rental. Your mortgage payments will be higher than they are with your 130k mortgage but your new payment will be higher anyway since prices are higher and renting in Roseville is higher than many parts of Sacramento. I live here so if you have questions about the area, send me a email.

Jesse Kailahi · Answer

Why 5-10% on the primary? Just to have extra money for improvements? 5-10 means I'm paying PMI, right? Or is the idea to refi after the improvements with greater LTV?

And thanks for your input :)

Selling Our Only Home for $170k Net... What Now?

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