Massive Appreciation-Hold, Sell, Refinance?

Question

Hello fantastic BP community! I've been lurking on the forums for a few months now but this is my first time actually posting. I have a 1/1 SF home that I bought 4.5 years ago-I originally bought it to live in but I ended up moving out and renting it. I'm in Austin TX, which-as you probably know-has been experiencing totally bananas growth and appreciation recently. In that short time my tiny little house house has more than doubled in value, and I'm trying to figure out if it would be best to hold it and keep renting or sell (maybe 1031?) and have the capital to invest in something else. Another option would be to keep it, refinance and pull out some cash, but I'm concerned about cutting too much into my cash flow and screwing myself in the long term. I'm driving myself crazy going back and forth on choices and could definitely use some insight from folks with more knowledge and experience.

Here are the numbers:

2012 Purchase Price: $106,750

2016 appraisal: $265,000

30 year mortgage, $94,627 @ 3.75% (PITI $785.80/month of which $84.50 is PMI that will be gone in May)

Remaining mortgage balance: $78,600

Rent: $1250/month

I'd be supremely grateful for any thoughts anyone could offer, and I'm looking forward to the discussion!

Here are the numbers:

2012 Purchase Price: $106,750

2016 appraisal: $265,000

30 year mortgage, $94,627 @ 3.75% (PITI $785.80/month of which $84.50 is PMI that will be gone in May)

Remaining mortgage balance: $78,600

Rent: $1250/month

I'd be supremely grateful for any thoughts anyone could offer, and I'm looking forward to the discussion!

Kris Wong · Answer

If you lived in the house for at least 2 of the last 5 years, do not 1031 exchange. If it wasn't quite 2 years, then it's something to consider. You should be able to substantiate it if it's been more than 2 years (with, say, settlement statements or something similar). I agree with everything Jacob said.

Jacob Pereira · Answer

Seeing your second comment that you've lived there for more than two years of the last five makes it a bit more complicated, but it gives you extra options. DO NOT sell as is in a 1031. You will be stuck doing 1031s until you die or break down and pay the taxes.

If you want zero hassle, sell it now so you don't have to pay capital gains and leverage that money to get a more valuable piece of property (preferably a multiplex if you're interested in increasing your cash flow). Make sure you've actually been there over two years and have some sort of corroborating evidence of it, though. Also, that means your window is quickly vanishing, so get it on the market soon.

If you're willing to do some extra work, you could stand to make quite a bit more money, though. I don't know where your house is, but the numbers you're quoting imply that it's somewhere very close to the center of town, or possibly near one of the desirable multi-use developments such as Mueller or The Domain. If that's the case, you should scrape your 1-1 and build something bigger, most likely a luxury duplex with each side converted to condos. This will take a lot of work and money, but you should easily be able to sell EACH side for more than a half million, considering your old (I say old because they don't really make 1-1s in Austin anymore) house is worth a quarter million.

Again, the info you gave is limited, so if any of my assumptions are off, feel free to disregard, but most likely you are in a good position to significantly increase your net worth.

Eddie Lehwald · Answer

Thanks for all the quality input, everybody-it's definitely helped me to get a better sense of my options and position. I don't think I have the bandwidth to get it on the market before May, but @Jared Watson I'd love to talk more in depth about building possibilities with you-either by phone or over lunch on me. @Jacob Pereira, thanks for the introduction and congrats on the retirement and beard!

David Forester · Answer

@Jacob Pereira , Yes I believe you are right about the density (along "corridors" only). Opticos did touch on 'transition zones' in their last presentation to the Advisory Group, although they call them something else, that extend off of corridors one to two blocks into collector streets.  I will be there as well - time permitting.

Jacob Pereira · Answer

if I spot you, I'll be sure to say hi. If you see a homeless looking guy wandering around there, feel free to stop him, because it's probably me (I stopped shaving in retirement, so my profile pic is a bit outdated).

Jacob Pereira · Answer

@David Forester, it'll be interesting to see, but @Eddie Lehwald has a lot of timing issues, and based on the 10-1 city council's voting record, my bet is that they're looking to preserve the inner neighborhoods and promote density on the outskirts. Purely a guess at the moment, but he also runs the risk of losing the ability to creatively use the land if the mapping goes the wrong way. Either way, I'll be at the Palmer Events Center tomorrow for the consultant presentation on the subject to see if I can learn anything new. Anyone else going?

David Forester · Answer

@Jacob Pereira with the CodeNEXT initial mapping being released in April, would it be wise for @Eddie Lehwald to see how the east side south of 12th is zoned? I know in most neighborhoods the transect zones will bring mostly minimal changes to lots, but I think certain areas like this one potentially stand to gain allowable density.

Jared Watson · Answer

Hell, I'll buy you a beer for the mention, we'll go from there if we progress👊👊

Jacob Pereira · Answer

@Eddie Lehwald, @Kris Wong and I are totally in lockstep. if you've really been there two years it should be easy to prove. I can't imagine you spent a single day without running water, electricity, and gas (if your place has it). If you're really close, you have a tight window, but you could in theory move back in for a month or two to hit the mark. Standard disclaimer that I'm just an internet guy and have no law degree nor tax certifications, but from my understanding the law is fairly lenient on what constitutes proof of residency for this.

As far as investors with experience on more hard-core construction, reach out to @Jared Watson. I've never personally worked with him, but I've seen some of his projects, and we have discussed some ideas in the past. What you're looking at is right up his alley, and he works in Austin.

By the way, Jared, if you end up with a job or partnership out of this, I expect you to buy me a beer.

Kris Wong · Answer

@Eddie Lehwald generally speaking it's not possible to move and not sign some kind of paperwork. A lease, a settlement statement, a change of address form, etc... At the end of the day this only matters if you happened to get audited. For the best info, talk to your CPA.

If you are considering the rebuild route - drive around the east side. You'll see a ton, and probably some will be ongoing. You should be able to find a sign, or a person to talk to, or a phone number, something. Start reaching out to people who could give you any information on how to start down that path. Find a trail back to the investor and offer to buy them lunch or do some odd jobs in exchange for info/learning.

Massive Appreciation-Hold, Sell, Refinance?

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