Please Advise How Newbie Start Out Based on My Situation

[Emma Chen]

Hello all,

This is Emma greeting from San Diego, California. I recently graduated from my MBA program and currently work on the acquisitions team in a real estate company. I have been listening to the Biggerpockets podcasts for a month and found it very very helpful.

My boyfriend and I are considering starting out real estate investment. We can a couple ideas, please advise based on our situation.

We bought our first property (townhouse 2br/2bth) for living in Nov. 2012 for $300k with 3.5% intereste rate and it has appreciated to be around $350k now.

We have $40k cash on hand and can withdraw $50k more from 401K account without penalty. We both have jobs with total monthly income of $6k after tax.

Here are options we have in mind (please don't laugh:)

Option 1. We can use all cash we have as down payment to buy a 2-3 bedroom single family and rent it out. Use the rent to pay off mortgage for the single family.

Option 2. We take out second loan on our current property to buy another small apartment/condo 1 br/bt to live in and rent out the current 2br/bt townhouse.

Option 3. We sell the property we have and make some money ($50k), and then put all our cash together as down payment to buy a duplex. We live one of it and rent out the other.

4. Use 1031 exchange, which I don’t know how it works, we "trade in" the current property plus our cash for a duplex. In this case, we can avoid some transaction tax I guess. I will do more research on 1031 exchange.

Please please let me know what you think. What you would if you were us.

All suggestions and critics will be highly appreciated.

Thank You

Emma Chen

[Bill Exeter]

Hi Emma,

Only a percentage of your property would qualify as property held for rental if you rented out the guest room. You would need to move out of the property and convert the entire property into a rental property if you want the entire property to qualify as held for rental. If it was me, because I'm more conservative, I would rent it for at least 18 months in order to demonstrate that you did in fact have the intent to hold for rental.