Selling your primary residence to finance investments?

Question

Rob Hakes · Answer

@David Mazza

I was in a similar situation earlier this year (but probably smaller numbers).  I was refinancing my house to try and lower my payment amount in efforts to create a cashflowing rental out of my personal home.  My appraisal came back about $75k more than i thought it was so i changed my strategy.

I did a cash-out refinance and used the $75k to re-invest.  This raised my mortgage payment by $200/month but left me with an opportunity to cashflow about $1200/month with my new properties and investments.  This was alot better than selling the home because i got to stay in it, and rather than having to worry about paying taxes on any gains, now i have created additional interest to write off.

It was basically an arbitrage move, where i am borrowing the  75k @ 4% and investing it at around 10% (one of my investments turned out to be a huge return thus getting me to $1200/ mo extra.

I found some good providers in the south that have worked out really well.

I am brand new to this, so time will tell.  So far so good.

Courtney Fricke · Answer

Thanks for this thread @David Mazza - interesting information!

I'm finding myself in somewhat of a similar position. I have my primary residence which I bought from a bank through a short sale and rehabbed it before moving in and I have one rental that I've been rehabbing for the last two months which should be ready for February 1st. I'd like to flip my primary residence to upgrade into a larger primary residence. Something to grow into.

Looking at a foreclosure right now that has some redflags and has been sitting on the market for a while. Getting those checked out first by pros as I'm considering making an offer. My DTI is difficult too as I quit my W-2 in October to do REI full-time. My only debt is a Home Equity Line of Credit on my primary which I used to purchase and fund the rehab of the rental.

Right now, I'm looking at using the rest of that HELOC to purchase this home if I can get the bank to wiggle enough. I can then move into it and start the priority repairs first while leaving other things for later. Then I can put my current primary on the market FSBO and use the cash from that (it has been two years that I've lived there) to pay off the HELOC and the excess cash to fund some repairs at the new primary. Overall, if the numbers work and the bank is motivated enough, I would be trading up because of the sweat equity involved in this property as well as the zip code gives it much more value.

I'm not married so I only have my dog to adjust to the move and he doesn't necessarily get a say in the matter. So I don't have the complications others may have as far as making decisions goes, but I do find myself hesitating sometimes as far as my DTI. I want to be aggressive but not to my detriment.

Thanks again for the thread and best of luck!

David Mazza · Answer

@Jeshua Patrick ... thanks for the note! I don't think I'm quite going to convince my significant other to live in a multifamily, though that is where I'd like to start my investing in general :) I think I'm willing to play the game with the cards I have available and recognize that I still want to maintain the SFR living lifestyle. My goal would be to rehab something then move in to keep the taxes down quite a bit since they're a little ridiculous where we'd like to end up.

As for the 1031, I have been researching that quite a bit as well. It'll for sure save me a few bucks, but it also means I'll have to be ready to put those dollars to work, which I'm not at the moment.

Did you end up investing in the market you live in or going out of state?

David Mazza · Answer

@Rob Hakes Thanks for sharing your journey there! I took a little bit of cash out of my primary but put it back into the property. I bought the house for it's bones over beauty, and it was in pretty original condition from the 50's. Given pricing of the bay area market, I'm running into DTI issues that also make holding this particular property a little bit more difficult while trying to extend myself to other deals. Once again, selling the condo should help with some of that and kick start the process, but by goal is to try to figure out a method of deploying more capital at a faster rate!

David Mazza · Answer

@Jo-Ann Lapin thanks for the note! I definitely agree that I need to get my cards out on the table to see what's actually in front of me. I've run some proxy scenarios based on what I've been able to self educate on, but I'm very aware that "I don't know what I don't know". That's why every bit of help is appreciated!

David Mazza · Answer

@Cody Evans @Ana Garrido - My dad always taught me that "the lazy man works twice as hard."...that said, fully agree on needing the plan. I'm exploring options at the moment, so plans are still baking. My thought is that the more liquidity I can get my hands on, the better positioned I'll be to move when opportunities strike and leverage deals. My high level thought right now is to buy in cash, but with economics that would work had I taken out a mortgage. I want my cash flow to all go to new home purchases, until I'm out of money, then take the equity out of homes and start again. Location, property type, etc still has some factors that I'm exploring to see more of "when" I'd need to sell my primary. I can always dump my condo and get moving on some deals before then. As far as market pricing goes, I'm of the stance that I'd be selling at a bit of a premium right now, but who knows where the market will head. I have continuously been shocked by it, thought my primary should get hit pretty hard by the new tax bill for the next buyer.

@Raul R. - I'm from the Bay Area, she's from NYC. Part of this equation might mean moving to the East Coast, which might give me some negotiating power with her! So we'd technically be liquidating the house anyways. It'd be more about NOT buying a new house right out the gate while we figure out areas, rather than moving straight toward a rental in the same town. Outside of that, I convinced her it's taking a gamble on me overall, but that my track record professionally and personally justifies it. I have a family and I never would put them in jeopardy, and I have a career I wouldn't plan on altering unless something drastic changed. If we don't take a swing in the next year or two, I think the rest of our lives will be fairly predictable, and rolling the dice in an intelligent fashion to put a new trajectory on things sounds attractive to each of us.

Jo-Ann Lapin · Answer

you need to seek a profess opinion from cpa to see what the tax ramifications are. Feels like we are at the top the market and you will need to come with a well executed plan of attack.

Selling your primary residence to finance investments?

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