All Forum Posts by: Clayton Mobley

I am somewhat confused about your end goal. Are you trying to sell both A and B and purchase a new prop (C) in the midwest, or is prop A already in midwest so your goal is simply to move there? 

If you are planning on selling both A and B and then purchasing a new property in the Midwest, you do not meet the requirements for the Sec 121 exemption on your current prop (B) since you've only lived there for 16 months. 

If you're going to sell both either way, and you currently do not meet the Sec 121 requirements for either one, I'd say weigh the costs benefits of each prop. Which would you owe more on? A or B? If B, then I'd stay put for another 8 months and use your exemption there. You could continue renting out A, move back to the midwest as planned, using your tax-free gain on B for a new place there. 

Bear in mind that you will also owe depreciation recapture taxes on A for the time it was in service as a rental, even if you didn't take those tax deductions (always take them!). 

@Chase Burge yes, as long as you have not taken the Sec 121 exemption on the sale of another property within the past two years, you should be able to move back in for six months or more and then be eligible. The Sec 121 exemption does not require that the 24 out of 60 months be consecutive, nor that the 24 months of living there be the same period as the 24 months of owning. For example, if you rented it from someone else from 2015-2017 and then bought it from them, owning from 2017-2019, then you meet both tests with different periods. 

Since it sounds like you lived in this house (A) for 18 months, then moved to your current house (B) while you rented out A for the past 16 months. If you sell A now, your lookback period (60 months) is Feb 2014, if you move back in for 6 months and then sell, it's Aug 2014. Either way, your 24 months of living (and owning since they do coincide in your instance) are within the 5 year lookback period (18 months in A + 16 months in B + 6 more months in A = 40 months total, less than 60).

@Dan Lam if #1 saw some forced appreciation after rehab and they are both turnkey, why didn't #2 have the same increase? How recently have capex items been updated in both? I'd be interested in a scope of work for both properties if they are being marketed as turnkey, because people throw that word around a lot these days and it doesn't always mean the same thing. To me, turnkey means fully rehabbed with new or nearly new capex items (roof flooring HVAC water heater etc). If the units include any appliances, same applies there. 

It sounds like you are leaning toward #2 because the bar for entry is lower. If all things truly are equal quality-wise (though definitely not cash flow-wise) and you are more focused on scaling than you are on income, then go with #2. 

Personally, I prefer to have higher cash-flowing properties and then pour all the income back into paying off the loan more quickly, which saves a ton of interest. If you don't need the income, you could still take #1 for the higher income, and use it all to accelerate pay-down (still all tenant-paid) and then refi or HELOC down the road if you want to pull out the equity.

Just sort of following the math to its logical conclusion:

The difference in cash required is about $60k. So assuming you have the full $115k needed for prop #1 but decide to buy #2 and use the remainder as a dp on a new prop, you're looking at about a $200k - ish property @25% +closing costs. (I'm also assuming that, in either case, you're not deploying your last penny - always keep a cash reserve.)

If you can get a prop that produces more than $12k per year in gross rent (the diff between $78k and 90k on these two props) in your chosen market, then that might be the way to go for you if your primary goal is more doors. 

For me, I'd rather have the higher income and use it to pay off the loan faster or to build up another dp. This is doubly true if #1 was updated more recently (or simply rehabbed to a higher standard if they are both turnkey but only #1 increased in value after rehab). The higher PITI and lower rent on #2 makes it much less attractive to me, but it sounds like our goals differ somewhat.

Good luck!!

@Wayne Bodley @Dave Foster hit the nail on the head. Free money is free money and you could be putting that capital work better elsewhere. An older house is definitely going to end up costing more the longer you hold it, even with the new roof. Time to move onward and upward!

Again, some more specific numbers on your current prop would likely make the situation clearer. If your property is worth $200k but you get $5k per month in rent, well then that's a cash cow you should probably hold onto. Feel free to tag me if you post additional details.

Now, if you execute a 1031 to defer your taxes on the sale of this property (A), they don't just disappear (yet). If you sell the replacement property(ies) (B) normally (ie outside another 1031) at some point down the road then those deferred taxes come due (from the sale of A), in addition to whatever taxes you'd owe on the sale of the replacement properties (B).

BUT there's no rule saying you can't just keep executing 1031s any time you want to sell those properties. Then when you die, your heirs inherit those properties with a stepped-up tax basis (meaning all the deferred CG and deprecation taxes are wiped out). It's a really powerful strategy that can allow you to keep all your capital working for you and create long-term generational wealth for your heirs.

@Matt Hietbrink Personally I would execute a 1031 exchange into something with more income potential. Without your exact numbers (price paid, current value, current rent, $ for any rehab work needed for a new tenant or to sell) I can't be too specific, but I am rarely a fan of having equity sit unused. If you need the income right now, then a paid-off property is great - low risk, high cash flow. If not, then you could be putting your capital to work in a better way.

A 1031 exchange would allow you to defer all the capital gain and depreciation recapture tax (and that's a big one people often forget about, esp if it's been a rental for a long time) and pour all that value into a new investment, or multiples if you like. 

The basic rules are you have to replace the prop with a new one(s) of at least as much value AND at least as much equity. So, using round numbers for the sake of simplicity, if you have a prop worth $200k and it's paid off (ie all equity no debt), you need to purchase a property worth at least $200k in cash. OR, you could take that $200k and use it as down payments on multiple properties and leverage the rest. 

So instead of one fully paid $200k prop, you could have four $200k props that you put $50k into each, with four loans of $150k each. Let your tenants pay off those loans over time, or if you don't need any investment income right now, pour all your cash flow back into the loans to accelerate pay down and save yourself a bundle on interest.

@Aliza Abramson Where to begin is going to depend entirely on your short-term goals. Your long-term goal of 5-10k in passive income per month is one thing, but there are lots of ways to get there. What are your needs and capacities in terms of time and energy you can put into deals? Do you both work full time or have a family? Then doing more hands-on types of REI might not work for now. Flipping is a tough business for new investors (definitely doable, but there's a learning curve like everything else) and doing so out of state while managing rehab etc from a distance is going to be a very steep curve. It's doable, but you'll need to account for trips out to see the prop before you buy, and likely some trips in between to make sure everything is going smoothly.

You also don't mention how much capital you have to work with currently. My guess at 23 is that your first step is probably going to be building up your war chest and knocking out any debt you might have (other than the mortgage on a primary home if you have one). Unfortunately, the first step for almost everyone is to wait a bit until you have the cash on hand to make sensible moves based on analysis and not just on what you can afford. 

Once you do that, or if you already have ample capital to work with, it's about deciding what type of REI really works for your life right now. Not all REI is about owning physical real estate directly. If you don't have the time or inclination to vet teams and manage rehab work from afar (not for the faint of heart or uninitiated) then you might choose a more passive, diversified investment like a REIT (an ETF comprised of real estate investments) or DST (a trust you invest in that owns REI, another indirect way to invest).

If you want to directly own real estate but need to time to learn the ropes of the DIY method (BRRRR and flips) you can look into out of state turnkey (naturally, I am biased towards this option ;) which allows you to own rentals that are already fully rehabbed with an internal property manager already in place (real turnkey companies do everything in-house so you only have one team to vet).

You can also look into Net Leases (buying a commercial space that is leased long-term to a commercial tenant like a starbucks or a dollar store). Depending on the type of net lease (single double triple) the tenant is responsible for some or all of the expenses, which means you just collect your net income each month. 

The point is, there are lots of ways to generate passive income. The most important thing is that you are honest with yourselves about what you can reasonably contribute in terms of money, time, and energy right now. You may not have the capital necessary to get started right away, so be patient rather than jumping into something iffy just so you can feel the rush of doing something (this is a common pitfall for new investors). Everything about your current situation can and will change over time, and so can the way you invest, but it's important to start where you are and not get completely lost in where you think you should be / where you want to go. 

Good luck!

@Dan Lam I agree with @Account Closed , Property #1 has higher gross rents with fewer units, meaning it's in a better area. You're more likely to have stably employed, long-term tenants. If the price is the same, I always go for the higher-class investment - especially since the cash flow is better on #1 anyway. With the revised PITI of #2 @ $5400, this is a no-brainer for me.

@Account Closed I think it sounds like you're talking yourself out of this deal already. Personally, my advice would be to pass regardless, as $230 per month in cash flow AFTER all that out of pocket for a duplex isn't worth the hassle. For the amount that you're looking at leveraging, you could have two SFRs that cash flow that much each right off the bat - but yes you'd need to wait until you have the standard 20-25% dp.

My advice would be to pass on this one and keep saving until you're in a position to buy something that really works, not just whatever you can afford. New investors often get caught up in wanting to dive in, and forget that diving into a bad deal is worse than having no deal at all. This one might work out long-term, but your margins are thin and even once you flow positive your returns aren't impressive.

More importantly, your posts read like you want BP to convince you to buy the property - like you're not even really sold on it but you want the go-ahead from the hive mind to pull the trigger on something that's 'good enough' so you can get started now rather than waiting until you have more capital. If your gut is pulling you away from a deal, that's your answer. If you have to finesse the numbers to make it look good enough, it's not good enough.

House hacking can be a great way to get started in REI but not every property is going to work. Especially since your ARV is only slightly higher than your purchase price+repairs+closing, there's not a ton of 'hacking' going on here unless you're in a market that's going to appreciate quite a bit (which you can't predict). Ideally, you'd find a property that needs some work, move in and do the rehab yourself to force some sweat equity.

From an analysis perspective, one thing you didn't mention is what the repairs are that are needed. Does this include updated capex items like HVAC etc? How old is the roof? Carpet or hardwoods? How old is the water heater? If these items aren't on the repairs list and haven't been updated pretty recently, you're looking at some bigger expenses sooner rather than later. Just something to consider when looking at any deal.

My advice would be to pass and either wait till another house hack with better numbers comes along, wait until you have more capital and just purchase a regular rental property in your area, or explore other markets where taxes and prices are lower.

Good luck!