Rent or sell current primary residence in SF Bay Area

[Brian Beck]

Hello,

I hope what I'm about to write is clear. 

Step 1)

Our 3-5 year plan move from California to Tennessee and in the meantime move back in with my mother and rent out our home (comparables rent for $3,000 and our new mortgage is $1,870). While living with my mother, we would get her house ready to sell or rent (needs major cleanout).  We purchased our home in 2011 for $335K.  Refinanced to a 15 year FRM in 2014 (got $70K cash out) and remodeled kitchen, added a back deck, installed French doors and replaced windows.  We are currently refinancing back to a 30 year FRM, and the house is now worth $660K.  

Step 2)

Sell our home (netting $400K or so) use profits to purchase land / house for less than $120K and use remaining funds to invest in rentals to become financially independent within ten years. Moreover, we would sell or rent my mother's house (valued at $270K rent for $1,700) and she would live with us.

So, I have a few questions:

1) If we rent our house for more than three years (triggering the capital gains tax) will we be taxed on the capital gains based on the original purchase price ($335K) or the value of the home when we start renting it ($660K)? 

2) Using the BP rental calculator it said, we would have a cash flow of $325.  Does this sound right?  I know I'll need to budget for repairs and expenses but $800 a month in expenses seems excessive.  But, I only just started learning about real estate investing this week, so I know little to nothing.

3) Assuming that we sell the home and net a few hundred thousand dollars, would it make sense to purchase rental properties outright or make down payments and mortgage the rest?

Thank you for taking the time to read my long post and for any advice you might provide.

[Account Closed]

@Chris May and @Brian Beck,

Welcome to Biggerpockets gentlemen.  It's hard to argue with someone who has 40-50 years of experience in the real estate industry.  I can see why @Account Closed is so passionate about this topic while I had already gave up on it.  Shame on me, but it seems like every man will have to learn his own mistake although it's much cheaper to learn it on someone's dime.

I guess the reason Bob is so passionate about this topic because he has seen quite a few investors got taken to the cleaner by the cash-flow shysters in fly over states.  Why did I guess that?  I have an older fellow attorney/RE broker/investor friend, who got taken to the cleaner by these shysters.  He talked about this subject with a passion when I brought it up 3 years ago.  LOL!  If you understand where Bob is coming from, you'd understand his argument in addition to the appreciation history of the Bay Area.  I understand it only takes a few bad apples to ruin the entire industry, but most of the time the grass is not greener on the other side.  

Brian, you and I have about the same working capital with different timing. When I first started out in 2009, I had $100k in savings and a $266k HELOC. Of course the HELOC was from the appreciation of my house. I was fortunate enough to get into the market at the right time and build it into a multi-million dollar RE portfolio in San Jose with a 6-figure net cash-flow. The appreciation helps with additional acquisitions while the cash-flow will explode with rent increases.

As a hockey analogy "A good player goes where the puck is while a great player goes where the puck will be."  Come up with your retirement plan and work it backward to see how you will get there.  Once you've gotten to a critical mass, you'd get there much faster than you have anticipated.  

I started out with a goal of 1 unit/year over 10 years.  That's a tall order for the Bay Area.  Once I got to 10 units in 4 years, I told myself to go for 20.  I got to 20 in year 6, then I told myself why I don't I get to 50 in 10 years.  You know what?  There's a high probability I will get there.  So don't sell yourself short.  Come up with a plan that makes the most sense for your family and execute it.

Best of luck with your decisions.