Own two paid for homes, selling one when I retire, how to invest?

Question

My wife and I own two paid for homes. Our primary residence in Texas and our vacation/retirement home in Utah. When I retire, we are trying to decide if we should sell our Texas home or rent it. I have used the Bigger Pockets calculator and we would get a decent return. If we sell it, we would have about $400k to use for other investment properties. We are not fans of debt. We like the idea of small multifamily properties for maintenance, insurance, etc reasons. We want or first deal to be solid, but just not sure what to do. I should point out that our goal is to build up a passive income stream in real estate beyond the return of our other stock market investments.

Chase Leavitt · Answer

My wife and I bought a home in Pleasant Grove in 2012 for 150k on .67 of an acre. We ended up subdividing that extra land into to lots and made 100k profit just from the extra land. After living in the home for two years we had the home paid off. We came across a new construction mulit-unit opportunity, ended up selling our home and extra land for a profit of (275k) and rolled that into one 4-plex and a duplex in Vineyard Utah. Taking that money and buying a solid mulit-unit with solid returns was the best move we've made in our early investment careers. We've had that 4-plex for two years now, bought it new for 600k and now it's worth 860k and cash flows $2,000 a month after ALL expenses, (including property management, taxes, insurance, etc.) We sold that duplex for 100k higher than what we bought that for and rolled that into another 4-plex in Eagle Mountain, UT. Bought that 4-plex for 650k in which it's worth 850k and we cash flow $1,500 a month on that property.

I don't want this to come off as bragging but my point is I agree 100% with @Greg H.. Selling your personal residence tax free and roll that into something else with better cash flow. I would highly recommend a multifamily. I'm not seeing the same deals on the properties I mentioned above but I am still seeing great options that cash flow ($700-$1,000) and have very good equity play. We just closed on a duplex in Herriman and are closing on another duplex in Magna, UT in August. All new construction.

Just think if we would have kept that Pleasant Grove home we bought for $150k it would be worth 200-210k but instead we have two 4-plexes that cash flow awesome and we are sitting on 350-400k of equity for EACH property. (750k of equity instead of 60k is huge for us, especially when starting out).

Steve Vaughan · Answer

In general,  primaries are too nice to make good rentals.  It's also emotional. How will you feel when the lawn dies and the window and door screens and carpet get all torn up?  Usually hardest on our spouses. I can't believe what they did to OUR house!

Plus, the tax benefit of selling cap gains-free is too big of a bonus to pass up.  Make sure you sell prior to 36 months of renting out to take advantage of (most of) this.

Then there's the absentee factor.  Having a rental 2 states away is just rougher, even with a PM. Not optimal for 'retirement' IMO.

So, I would sell my primary, especially if a lot of gain.  I would buy a low-headache investment property (like NNN commercial) in my new backyard.  Good luck to you! Exciting times!

Susie Lowe · Answer

@Chase Leavitt I would love to hear of areas where new builds are for duplexes or 4 plexes.  We are listing our primary home this spring and looking to buy a multi family property but prices are just high right now for brand new in the MLS.  What builders are you going through to get the duplexes your buying soon.  We currently flip homes and were thinking of renovating existing duplexes or 4 plexes? What's your thoughts on that opposed to buying new?

Chase Leavitt · Answer

@Susie Lowe Great questions. My situation may be a bit different than most. I represent a builder, Volcommon, that builds off market brand new multi-units. Basically, we target high employment with low vacancy areas, and find pieces of ground in those locations that make sense from a numbers perspective (cap rate and cash flow). We tie up that piece of ground and then we will pre-sell that entire project to our investors. So I'm a little bit bias with your question and would say new construction all day long. I'm sure there are great existing duplex/investment options as well but I've found them in new construction. Personally, I don't like the idea renovating an existing duplex or 4-plex. A lot of times when you rehab or put money into a unit your numbers (cap rate) will change drastically. I've love my new units in the fact they are low maintenance with very few (if any) problems. I enjoy what I do, family, life, therefore, my time is too valuable to be doing a renovation and quite honest I just don't have the passion to do that like some do. Also, the newer multi-units I have are usually worth much more than what I'm buying them for because I'm coming in at an early stage in the game. It's not uncommon for our investors to purchase a multiunit with 50-100k of instant equity. That's why renovating something existing just isn't that exciting to me. Now the disadvantages of new construction;

1. You may be required to take on a construction loan depending on the builder and what their set up is.

2. You are having to wait 9-12 months for it to be completed, therefore, you won't have any rental income during the build period.

3. The numbers you purchase from are a proforma and they aren't actually numbers, they are projections. (With the right due diligence and know how you can help to eliminate this concern.)

I think there's opportunities in both but I've found mine in new construction. Here are a couple of key indicators I would look for; location, low vacancy, low maintenance, solid cap rate (A true cap rate with ALL expenses and true rents), cash flow. With the right due diligence the numbers will help you sift through which investment properties are better than other ones. Feel free to reach out to me directly with any further questions! Happy hunting :)

Chase Leavitt · Answer

Thanks @Craig Libby!! Besides Utah I'm really liking the Houston and Dallas, TX area, Meridian ID. and Phoenix locations. I'm sure there are many other great locations but the ones I've mentioned are actually ones where I've researched and seen deals that still make sense. Yes, I would love to keep int touch. Best of luck in your efforts! It's fun and exciting

Chase Leavitt · Answer

Thanks @Craig Libby!! Besides Utah I'm really liking the Houston and Dallas, TX area, Meridian ID. and Phoenix locations. I'm sure there are many other great locations but the ones I've mentioned are actually ones where I've researched and seen deals that still make sense. Yes, I would love to keep int touch. Best of luck in your efforts! It's fun and exciting

Craig Libby · Answer

Chase- Very helpful information and way to go on your investments! Love to hear experiences like these. We do not know the Utah market at all, but know there is value here. Goal would be to start with one or two multiplex units. Timing is the key as I still have a few years of day job work, but would like to have the units in place. I will check out Magna. If there are other areas you think would be worth a look I am all ears. If you don't mind I would like to stay in touch. Many thanks again for the great advice!

Craig Libby · Answer

@Greg H. thanks. Makes sense. Really appreciate the advice from folks.

Greg H. · Answer

To me it is a no brainer.  Selling your personal residence nets you 400K free of any capital gains tax.  You can easily invest $400k to increase your cash flow to far more than $400 per month

Mike Krieg · Answer

@Craig Libby I sold and am still selling my TX residential properties. I concur with your wife. I got to the point where I had no more patience with my rentals/tenants etc. I literally heard and saw everything from tenants and was sitting on a lot of equity. I started selling and jumped into larger deals and it's been great! I get my time back and my portfolio is growing faster. Also I have less legal risk. Honestly, I'm having such a great experience that I don't know if I'll ever return to residential. And yes, there are days when I don't even want to put up with the tenant who lives in my own house - "me". Yes, this guy doesn't repair the microwave when it breaks, holes in the wall. I have become my tenant. When the kids hit college, I'm cashing out. I might become someone elses tenant-ha ha- and roll my home equity into some of my larger projects.

Own two paid for homes, selling one when I retire, how to invest?

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