What to do with 100k.

Question

So, my husband and I purchased our home almost 3 years ago for 209k. It's BIG...4 bed, 3 bath 2600 sq ft. We don't need that much space for us and 2 daughters. The values have gone up quite a bit in our area. Similar homes are selling for $140/ sq ft. We'd like to sell in the next few months but are on the fence as to what to do with the 100k+ we'll have to work with. Here's what we're considering: a multi-family residence where we live in one of the units, a sfr that's needs a bit of help(we're pretty handy) to gain sweat equity, OR a rental in another market that we could get for cheap and hold on to.....OR, a combination of these ideas? We'd eventually love to live solely on income from real estate, but currently work as retail mgrs for around 100k/yr. We're looking for the fastest way to retirement ;)

Brandon Hall · Answer

@Brett McCurdy was headed the right direction with his statement about taxing capital gains. However there are a few points that need to be clarified. @Bill Exeter already did a nice job, but since the OP is still asking, I figured I'd chime in.

@Kristen Martin To qualify for the 121 Exclusion, you need to live in your primary residence for 2 of the last 5 years. You bought your place three years ago, so you qualify for the capital gains exclusion. $250k if single, $500k if married filing jointly.

Brett assumed that if you move out of your current place, you no longer qualify for the capital gains exclusion. This is incorrect. If you move and rent your current place, and as long as you sell it within a three year window, you still qualify for the 121 exclusion. The residence only needed to be your primary residence for 2 of the previous 5 years to qualify.

Bill already clarified, but if you move into a duplex, you can still use one half for the 121 Exclusion and a 1031 for the investment half.

I'd look at the opportunity cost of your $100k of equity. If you moved and rented your place, how much would be generated? If you sold, are there investment opportunities in your area where your $100k can generate a higher return?

Mike D'Arrigo · Answer

@Kristen Martin

First let me say that I'm not a big believe in owning just a single investment property unless it is multi family, so I would not recommend putting the entire $100K + in to one SFR. I would finance a few properties and use the proceeds of your sale as down payment. In my experience, people who own just one property become disillusioned when they have a vacancy or some other problem and don't have other properties generating cash flow to offset the problem one. You're also able to spread your risk over several properties instead of putting all of your eggs in one basket.

Brett McCurdy · Answer

@Kristen Martin

I would have to disagree with the advice given to you so far...

I would suggest either staying in your principle residence or investing in another SFH but NOT moving into it and NOT going the route of living in a duplex (or similar scenario) because:

a) For your principal residence all your capital gains that you have accumulated up to $500k (since your married) are TAX FREE.  The requirement is that you live in your primary residence 2 of the previous 5 years.  If you were to live in a residence that is also used as an investment such as a multi-family then you essentially are wasting this HUGE break.  You could technically jump from house to house if you would like to fix it up some but you must show it's your primary residence and not an investment and you will accumulate more wealth this way on a yield standpoint.

b) DO NOT make the common mistake of buying a new home and renting the house you currently live in because you will essentially be taxed on all capital gains which could have been avoided easily.  If you go the route of buying another SFH (maybe with a few partners to lower your entry-point) then be sure to rent out the NEW home not the one you have already stayed in for 3 years because you will lose thousands of $.

* You pose great questions to get started but be advised on the above items so you don't lose out on before you even begin.  This is why your primary residence is such a great investment!

I would be interested to hear the route you lean towards and best of luck!

Kyle D. · Answer

I like the idea of buying a fixer-upper and selling in a year or two. Build some cash and start your investing career.

Kristen Martin · Answer

Thank you @Brandon Hall , I appreciate the clarification :) I've run the numbers on renting this place for a couple years after moving out...and I'm not loving the  prospect. With tax and insurance, our current mortgage is just over $1400. In this area, we could probably rent our house out for $1500-$1600. Without factoring in vacancy and normal maintainance, it seems like too small of a margin to go that route....?

The multi-family unit is appealing(on paper) especially if we were making it a 2 year stop on our journey. What I'm still wondering is....if we find a place(duplex)for, say $300k that is in fair to good shape. After putting 60k down to avoid any PMI(*is this advised?) our mortgage would be around $1450. We could rent the other side for around $900 and live pretty cheaply for a couple years.That also leaves us upwards of 40 grand to invest, hold, upgrade....travel? There are obviously a lot of variables in that scenario, just wondering if it sounded like a smart plan. Thank you so much for all the insight! This decision seems far less hazy already :)

Jesse T. · Answer

If you are looking to real estate for investment income, the multifamily route is likely to be more likely to meet you needs.  Not to say you can't accomplish it with single family homes, but it will likely take finding great deals, rather than merely a very good deal or two.

Given the appreciation and it looks like your need to sell to get a down-payment, selling your current house now is probably the best idea.  If you have another source for a down-payment consider renting out, but it will probably be best to sell within the 3 year window where you get the exclusion.

Initially I would look for properties that would work using 1/3 to 1/2 of the proceeds as a down payment.  That way you have reserves and funds to potentially buy a second investment property.

Kristen Martin · Answer

@Bill Exeter ....thank you so much for the explanation of 121 exclusion and 1031 exchange benefits. Super helpful information in this decision making process!

Kristen Martin · Answer

Wow! So much helpful insight and advice @Brett McCurdy , @Mike D'Arrigo , and @Bill Exeter . Thank you gentlemen :) I'm glad I have a couple of months to research and finalize our best course.

A couple of questions to follow up on Brett's post:

Since we've lived in our house already for more than 2 of the last 5....we can already avoid the tax penalties, correct? Were you suggesting to just stay living in our current place in hopes of values continuing to rise? I feel like we have a rare opportunity to capitalize on a sizable chunk of equity if we chose to sell. Also, your other suggestion for a SFR as a rental....would this be a turn-key property, or in need of some help? Finally, we're not opposed to moving every 2 years if it means an early retirement for us ;)

Brett McCurdy · Answer

@Bill Exeter

Ok thanks!  I think you summed it up here "You would of course have to determine whether this strategy would make more sense vs. retaining the current primary residence and making the duplex a complete rental property."

Factor in the amount of time to complete these additional tasks as well.

What to do with 100k.

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