So I think I have a fairly safe way to enter the world of real estate investing but I wanted to post my plan here and see if I was missing anything. I've done a lot of reading & research so I think I have a good handle on the details, hopefully you all agree! To ensure that this is a "safer" play the numbers I've used throughout I feel are conservative.
Small Back Story:
I bought my current house in 2009 in Madison, WI- as you can imagine I got a pretty good deal and today I have about 40k in equity (using comps in my neighborhood as well as a comparison created for me by a friend who's a real estate agent). My house current value is estimated at around 180k, 3br 2bath. I recently got engaged and am lucky enough to have found a fiancee who is financially stable, we're currently saving about 80% of her salary to move in to a new house in 2 years.
The plan starting in 2 years:
We will have a sizable amount saved for a down payment, so my plan is to take about 15k, pay down my current mortgage and refinance (I estimated 120k, 30y, 4.5%). Then put my current house up for rent. We would stay there until it is rented then go live with my parents for a few months while we find our next house. I feel like this greatly reduces the vacancy risk, at least for the 1st year. We will still have at least 20% (probably more) to put down on our personal residence when that time comes. I would rent out my current house for 3 years at which point I would look to sell, conservatively I think my house would be worth at least 200k (hopefully more) with my loan value at less than 114k, even if I paid 10% for realtor, etc. upon sale I would end up with 77k. The reason I would want to sell in 3 years? Since I lived in it for 2 of the past 5 I my understanding is that the IRS would consider it a primary residence, that that 77k would then be mine tax-free. That is on top of the almost $200/mo cash flow I would generate in those three years (math at the end).
At that point I could evaluate how I felt about being a landlord and decide if I wanted to continue, or just cash out if it wasn't for me. If it was for me I could easily turn that 77k in to two other properties, perhaps even 3. My feeling is that even if after 1 year I hate the whole process I could still sell the house, for a profit, and be done with the experiment still financially ahead. Am I missing something or does this seem like a decent way to go?
Math:
Gross Rent: $1,500/mo (comps today are $1,400 so that's my two year estimate)
Mortgage & taxes: $610/mo + $275/mo
Vacancy (1 mo/yr), Repairs (15%), Insurance: $115, $225, $90
Cash Flow: $185/mo
Cap Rate: 7.07%
Cash/Cash Return: 14.8%
Gross Rent: 1.11%
Whew! That was a lot of typing, thanks for reading and you thoughts in advance!
