House Hack Exit Strategy to Finance Purchase of Forever Home

[Boris Suchkov]

My wife and I have been house hacking a duplex (we live in the larger front unit; the back unit was a long-term rental first, and now we're experimenting with AirBnB). We are thinking of moving on to our "forever" home, but we need a source of cash for the down payment. We plan to build an ADU at our forever home so there will again be an extra source of income in 1-2 years. What's the best solution? We have discussed a few options:

1) The simplest is to sell, which would net us a nice profit but we would also have to pay depreciation recapture and capital gains taxes (not to mention the realtor fees) on the rental portion of the property. Not the end of the world - it would basically wipe out the rent collected over the 2 years - but something we'd rather avoid. (We will own the duplex for 2 years as of a few months from now, so the capital gains on the owner-occupied portion is not an issue).

2) Do a cash-out refi and rent out both units. The new mortgage would be too high for the property to cashflow (even with the current mortgage, we would be losing ~$200 month after PITI, maintenance, and property management). This is the best long-term outcome as we would hold on to a significant piece of real estate for the long run, but we have to make ends meet in the short run.

3) Take out a HELOC on the current property. Same issues as above except there would be an option to pay interest only for a couple of years until the ADU is bringing in income, and then pay down the principal in 5-10 years.

4) Sell and do a 1031 Exchange on just the rental portion (50%) of the property - but we can't afford to buy both a rental (the loan on it would have to be at least 50% the size of the original property's loan to meet 1031 criteria) AND a new primary home.

Any other ideas? What we need is almost like a lease option with a down payment - I don't know if such a thing exists - so we can get a lump sum up front but not have to sell for a few more years to keep the cashflow coming.