All Forum Posts by: Tom Seigold

Thanks everyone. This is helpful.  Sounds like Jenny is right, that I'd have to pay the tax unless I sell within a few years of moving out.  Unfortunate, but that's how it goes...

I'm aware that if you sell a home that you've lived in for 2 years, and use that money toward a new home you will live in, that the tax on appreciation is waived.  This compared to investment properties, where that tax is merely deferred.

I'm considering living in a home for two years and *then* moving out and using it as a rental.  But it sounds like I'd miss out on those tax benefits (I'd have to pay taxes on the appreciation for the period where I lived there).

Is there any way around that?  For example, if I live in the home for 2 years, then move out and rent it out for 8 years and then sell it, can I provide documentation to an accountant and waive taxes on the first two years of appreciation, and defer taxes on the 8 years where I use it as a rental?

We have something of a housing shortage here, too.  In recent years, even pre-2020, I'd frequently hear people complain about how much rent had been increasing.  Right now, the sentiment I'm hearing from people is that it's not only expensive to rent, but extremely difficult to find a vacant place to rent.

My sentiment is that the city is being revitalized.  There are a handful of large development projects underway.  Mass construction of new condos just outside city limits, some new commercial developments inside, and the city is investing millions into renovating certain downtown attractions.

TL;DR: if I build a new house today, can I reasonably expect that it will sell for the same amount I spent (or more) in 4-5 years?

What I'm considering doing:

I'm considering building a small, ~2,000 sq. ft. house for myself, living in it for 4-5 years, and then selling it to upgrade into something much larger.  Since payments on the newly-constructed house would be below my means, I'd have enough extra income to acquire a few rental properties during those 4-5 years.  I'd also be keeping and renting out my current home during all of this.

The lot is a city-owned lot for $8k.  I'd aim to spend $200-300k on construction costs.

The main reason I'm interested in building, versus buying an existing $200-300k house, is that my city offers a decent grant: $25k toward my child's college tuition, as long as I stay in the house for at least four years.  It's the city's incentive for building new homes in neighborhoods that are starting to fall apart (the neighborhood itself is fine/safe).  A free $25k on a ~$250k construction seems like a good return, all other things equal, as I was otherwise planning to buy a house around the same price this year (I need a bit more space; 2,000 square feet is nearly double my current home).

Anyway, my concern is that I'll build the house, go to sell it in 4-5 years, and it'll be worth less than I spent to build it.  Or, at least, less than it should have appreciated to over those 4-5 years.  How likely is that to happen?

 Thanks Luis, this is very helpful.

That's a great idea.  I'll keep that in mind as a potential option if I run into the debt-to-income issue: 1031 exchanging into a 4+ unit apartment with a commercial loan.

After debts and household living costs, I have roughly $40k/year in disposable income to put toward down payments on new properties.  If all goes well, my hope is to average buying $200k worth of property every year (20% down), rent it, and repeat.  Once enough equity exists in a property, maybe every 5 years, either do a 1031 exchange or a cash-out refinance.

My finances:

Gross monthly income: approx. $12k, plus an annual bonus that averages to roughly $1k/month (if that can be factored in)
Current monthly debts (including mortgage, property tax, insurance, car, child support): approx. $3.5k

Debt-to-income concerns:

Time for some napkin math for a concern that makes me worry whether this goal is actually possible...

Assuming all goes as planned, I worry about eventually hitting a wall where I'm unable to qualify for new mortgages at a certain point due to how the investment properties' mortgages will affect my debt-to-income ratio.  I know underwriters want my debt-to-income ratio around 43% maximum (including the new mortgage) in order to approve a new mortgage.

From what I've read, it appears underwriters will consider a certain amount of rental income in my favor, but only 75% of rent minus expenses.  I'm not sure exactly which expenses they consider here (are estimations of repair costs part of that?), but I suppose that means I can only rely on, say, 60% of rent being counted as income.  With that 60% number, and a $200k property that rents for $2k/month, $1.2k gets added to my "income" consideration, while my "debt" consideration (mortgage + interest + insurance + taxes) goes up somewhere around $1k.

So, a change of $1.2k to gross monthly income and $1k to current monthly debt every year means I can qualify for a smaller and smaller mortgage every year, even when things go well.  I feel as though there's a point after a few years where I'll have enough money saved for a new down payment, but won't be able to continue acquiring new properties.  Is that a valid concern?  Is there something I'm not considering?