House Hack a Quad-Plex New Build? Or Just buy a quad-plex and force appreciation?

Question

Hi, I'm thinking about how to start off with real estate and this seems like my bet.  Which one should I do and why?

1)     The Game Plan for Quad-Plex New Build:  Pull out a one time close FHA Construction Loan. This packages the purchase of the land, finances the build, and all other expenses involved for the process.  I would then rent out 3 of the units and live in the 4th unit. This would pay for the mortgage, maintenance and all that and give some cash flow back.

My question is can I do a cash out re-finance on this after 12 months and then take the funds to do a 1031 exchange?

Next, I would then force appreciation into a purchase that needs some work and BRRRR from there? or just keep building like the first process?

P.S. I grew up around construction and my father owns a company. So I'm familiar with a lot of the construction portion. I would probably do the foundations and roofs myself, and hire a builder for the rest of the project.

2)    OR   do this:

Buy a Quadplex or duplex that needs some cosmetic stuff done and force appreciation. Carpet, paint, siding, landscaping or some curb appeal mayb??? And then do the cash out refinance? or 1031 exchange?

Maybe if someone can summarize how to go about this?

Thanks

Julien Jeannot · Answer

@Matthew McManus

Both options can work.

1. Figure out your end goal first, then work your way backwards to today.

-Assess risk tolerance

-Assess level of involvement, time, and cost requirement to rehab

2. Play out the numbers in each scenario over 2-5 years. Don't forget the holding cost in the build option.

3. Don't worry about the 1031x prior to acquisition in this case. I doubt you will have enough equity in 12 mo to worry about diffing capital gains on a house hack after selling costs.

Ryan Thomson · Answer

@Matthew McManus I like both options. You should note though that a 1031 exchange is for the proceeds of a sale. There is no tax on the money pull in a "cash out refinance". The "cash" is technically a loan not income.

I like that you are thinking about step number 2 after a year. Don't complicate the process though. Sometimes its best to get started instead of thinking through all of the possibilities of how to optimize the investment. I say this bc I worry you will get stuck in analysis mode. I say this bc I worry you may give up getting a great first investment if it doesn't allow you to buy a second investment a year later (it may not and it may take more time than one year to get enough equity to cash out refinance).

Jason Wray · Answer

Matthew,

When you refinance and take cash out its tax free you would not need to do a 1031 exchange.  Have you looked around for any rehab/renovation projects that might be less expensive instead of ground up and having to wait a year to get into the home.

You could simply purchase a 3-plex or 4-plex and do an FHA 203K rehab loan instead of ground up.

Benjamin Sulka · Answer

Amen to that

Jake Andronico · Answer

@Benjamin Sulka

Good call, I believe that's correct. But, always want to confirm w/ a CPA :)

Benjamin Sulka · Answer

@Jake AndronicoOn Section 121, I thought you needed to owner occupy for 2 of the previous 5 years in order to avoid capital gains (up to $250k of gains if you're not married I believe). If he only plans to have the property for a year, I don't think he can take advantage of that.

Please correct me if I'm wrong!

Jake Andronico · Answer

@Matthew McManus

Lots of nuance here. My understanding is an FHA 203K construction loan has very specific guidelines for specific licensed GC's who follow strict guidelines, map out a plan and stick to it, have calculated checks and balances, etc.

If your father owns a construction company, this may not be less of an issue (but talk to a lender).

Talk to a CPA about the logistics of a 1031 exchange when you're house hacking. My understanding is you may be able to take advantage of both Section 121 (selling an owner occupant property) AND the 1031 exchange for the other units that you are renting out.

BUT - always check w/ a CPA that will know your specific situation.

It sounds like either option could work, with the existing property less of a risk in my opinion.

Best of luck to you!!

Christie Gahan · Answer

Hi Matthew:

Let's simplify.  You get a payday when ...

A) You have a cash flowing property

B) You have a property that you can sell for more then you owe.

Both of these happen Faster when you buy something that can be rented on Day One.

Trevor Naumann · Answer

Depends on what area your in. IMO building is hard. I would leverage your construction experience to fix up a fourplex rather then build new. IDK what part of NY your in but where i am it would be hard to cashflow with a new build fourplex because of modern building standard’s as apposed to fixing up an older property. Especially if while fixing up an older property your able to reconfigure and add bedrooms to the units.

House Hack a Quad-Plex New Build? Or Just buy a quad-plex and force appreciation?

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