My First Property... and what to do with it

[April VanCleve]

Finally! My husband and I are buying our very first investment property!! It took 15 years to get out of student loan debt, pay down all other debts, get our kiddo through the bulk of a good private school we really wanted her to go to, and then save. 

The original plan was to save 5 months of personal reserves and then save 40K for a down payment on a house flip property. (We live in Ohio so it's cheap.) We would sell the flip, use what equity we got from that, maybe do that one more time and then eventually buy a BRRRR.

Well, we made it to reserves and 20k but...our neighbor's house came up for sale and it was a really good deal. There are a few things that need to be done to it but nothing crazy. It's in great condition. Here are the options:

1. Short or mid-term rental: 

Pros: 5 minutes outside a college town (think parents & professionals that visit). National tractor pulls yearly. 25 minutes from a new Meta data center that is about to start construction. I live next door and love hosting and cleaning. I would need to rent it out 8 days a month to break even. Occupancy rate in our area according to air DNA is 44%. (I'm thinking I could get more if I am pet friendly.) Big yard, only one neighbor, deer from time to time. Plus we could use it when our parents or in laws come into town. 

Cons: The city is small and safe but several houses look like crap (until you get back to where we live.... I am the only neighbor this house has and the rest is woods and big yards.) It's near train tracks- trains do come by occasionally but not everyday. I am worried about the vacancy. We can make the monthly payment on our W-2 incomes but things will be tight because we are using everything we've got cash-wise to make it happen. We have plenty of reserves in a college fund, several retirement accounts and a large HELOC. We will have to start from scratch on reserves though.

2. House flip- since we are buying this at a good deal, we already have some equity in the home. If I added a half bath upstairs, or even just put fresh carpet and paint I could probably flip it pretty quickly for a decent profit. This would be following my original plan and get us some more reserves to continue renovating or buying another house with less financial stress. 

3. Long-term rental: we could rent it out and make $100-200 cash flow.

I don't know. What do you guys think? You guys are the experts! 

[Tony Hibler]

Hi April,

Is there an option for you to move into your neighbors home and rent out your current home as a long term rental?  The idea is buy your neighbors home, as primary residence to get the best mortgage rate, live in the home for two years while you are fixing it up...then when you sell it the gains would be tax free (IRS allows you to take the first 500K in capital gains from he sale of your primary residence if you have lived in the home for 2 of the last 5 years). Assuming you are cool performing a live in flip and your neighbors house is big enough for your family.

In the end you still get your rental and save on some taxes.  

Just a thought...