Please assess my situation with advice for strategy forward?

Question

Home 1 - rented at $2k/mo, 15yr mortgage is $1700/mo, estimated value is $275k with $170k left on mortgage. 2600 sq ft right outside of downtown. Older house but fully renovated in 2016 besides plumbing (I need to check on plumbing health).

Home 2 - We are occupying costing us $1700/mo, estimated value is $315k with $250k left on the 30yr mortgage. New construction in 2017 and low maintenance. 1100 sq ft downtown but probably big enough for 1 kid coming soon.

Our family is growing so we are considering everything - selling all and upgrading slightly, buying a slightly upgraded third and keeping the others and everything in between like: selling Home 1, renting Home 2, and buying a new home.

We live in the RDU area which has seen great growth since we first bought Home 1 in 2015 for $7k down (FHA). That has turned into almost $100k now in equity. During that time, we also had my brother live with us, so we were also paying below market rent.

I'm also a little worried about a possible recession upcoming and the market slowing down. So, we could lock in our profit on Home 1 and sell but then we're paying capital gains on top of realtor fees. I know the cash flow isn't great on Home 1, but because its a 15yr loan, we are also essentially "saving" $1k/mo in equity on the payment.

There are so many ways to think about this situation and possible ways forward. I want to stay smart and objective and avoid ending up like everyone else in $500k houses with 30 yr loans but of course there are risks to what we're doing (and headaches with landlording). Part of me likes the idea of putting Home 1 and 2 with a prop mgmt company and buying a 3rd, but that's also adding even more risk.

Our cash situation is fine. I guess I just want to make sure we're staying on a good route and not making any mistakes undoing any of the work we've done (like selling Home 2 after only living in it for 2 years)

Is there any obvious answer/advice to this situation or better way to think about it? It can be hard to stay 100% objective when you're deep in it.

Ryan Daigle · Answer

Account Closed I'm new to this game and have basically zero experience, but I did stay at a Holiday Inn Express last night so....

I've been doing a bunch of research on the long term population and economic trends of all the major metro areas and I have to say that Raleigh's profile is stellar. Just years and years of steady growth with no signs of slowing down. If I were you I would be looking to maintain the properties I had here to take advantage of the long term prospects of the area. Even if we see a slowdown in the coming years this area's dip will be much smaller than most and our rebound much quicker. So, if you're on board so far I would say the goal would be to maximize the cash flow on both properties as rentals so you can hold onto them with little risk.

For home #1 since it has good equity and a short term mortgage, what if you refinanced to a 30yr to bring your monthly payment down closer to $1k/month? That should give you plenty of cash-flow breathing room and let you keep the property and better weather any economic bumps.

Then, for home #2, it sounds like it might be a desirable home in a cool part of Raleigh (downtown)? If so, I think it would be interesting to consider it as a short term rental (AirBnB). Even though your mortgage payment is higher on this home, the location and size seem like it would be a great AirBnB which would get you the cash flow you need to support the mortgage.

Just some thoughts!

Dawn Brenengen · Answer

Account Closed There are definitely no obvious answers, but some things you might want to consider are 1031 exchanging into a different property.  Do you plan on staying in your current home long term?  Do your goals include long term real estate investing or are you not liking landlording? Does the idea of more property sound good or sound stressful?

Here is the link to the event - https://www.biggerpockets.com/forums/521/topics/654439-raleigh-durham-and-surrounding-areas-meetup

Henri Meli · Answer

Account Closed , are some who are based in RDU and know the local market well. They are also  investors themselves.

Henri Meli · Answer

Account Closed ... maybe it is time for you to graduate to Multi Family / Commercial for either cashflow or value-add investing. Your scenario is typical. Single Family homes can only take you so far, then it gets complicated to scale properly. I live in RTP as well and had that problem a while back.

There are various strategies you can utilize, but which one is the best, will depend on your goals (short or long term). For example, if you sell, you can do a 1031-exchange into a bigger asset. With the 1031, you defer the taxes to a later date. However, you need to abide by the rules for identifying the replacement property (45 days) and closing (180 days). There are other rules as well.  Plenty of 1031 experts on this forum could add more, but your tax person would be your best asset. I did a 1031 exchange myself into a bigger asset (commercial). Also, if you sell an asset you lived in for 2 out of the last 5 years, you don't have to pay capital gain taxes for a portion of the gains. Consult with your tax person for the exact amount and your specific scenario.

If you live in the Raleigh area, we do have a biggerpockets meeting this coming Wednesday. Check the Events page for more information. From the main entry page on biggerpockets, click the "Network -> Events" and type your zip code. You should see our event listed.

Good Luck.

Account Closed · Answer

Just as an update to this thread, @Dawn Brenengen and @Henri Meli, I purchased Home #3 and turned Home 2 into a rental, so we have 2 rentals and one we're living in.

I've gone down the rabbit hole of BRRRR investing and will likely go that route next. I will probably refi and take some cash out of Home 1 to use for that.

Also, thanks @Ryan Daigle for the interesting research!

Account Closed · Answer

Thanks Henry! Great advice, where is the best place to look for Multifamily properties? I guess I should find a realtor specializing in that? It is definitely an option.

Please assess my situation with advice for strategy forward?

Most Popular Reply