Formulating My Buy-and-Hold Strategy, Feedback Appreciated!

10 Replies

Hello all, I am about to have some money saved up and I want to spend it smartly. I’ve been reading about real estate and the like for a few years now and I’m really interested in pursuing it for some long-term wealth/security. This will kind of be a long post, so I apologize in advance if this should have been in another forum or a blog- I’m new to this community- so just tell me if it should be somewhere else and I’ll move it immediately.

A little about myself: I'm 27, recently married with a 5 year old daughter. I'm active military, and own one property that I rent out. I am debt free (aside from a low-interest car payment and the mortgage) and I've got some decent money saved up. After my next deployment, I'll have something to the tune of 80-100k in the bank set aside to invest. I bought my condo (high rise, downtown San Diego) in Nov 2012 with a zero-down VA loan that it currently making $650 a month in positive cash flow, which is only $200 a month if you take the HOA fees into account (which has meant in effect that I am taking a slight loss with maintenance). The condos in the same building of comparable value have appreciated from 50-70k in those couple years, by my reckoning. My wife and I make enough that we're willing to put some risk into the money, because we're still going to be able to pay the bills if all this money gets hit by a meteor or something.

I’ve been reading the forums here and my own books voraciously and I think I’m ready to put some options out for general scrutiny. If you take the time to read this, thank you in advance, and please pick apart anything you think might not be a good idea.

Sell my condo after some minor upgrades, and best case scenario make 70k on it. Add that to the savings and have around 150k to throw around. Use this money to make 25% down payments on 3-4 properties (or a multifamily) in SD or Phoenix (where I’m from and my extended family lives) and from there, use the cash flow to save for more properties. Refinance when it makes sense to maximize returns and continue until 10-15 properties are owned, pay down the loans, and be set for retirement.

Sell the condo I currently have, then do the same thing as above up until the 3-4 properties (or a multifamily) are bought, but use the cash flow to pay down the principals on the original properties, refinancing when it makes sense until the homes are owned outright and then use the income to buy more properties, rinse and repeat.

HOLD ON to the condo I currently have, put the saved money into a refinance, and then make at least $800 a month in cash flow. Use the cash flow to pay down the loan, refinance as needed. Assuming the value of a high-rise condo with a view in downtown SD will continue to rise, make use of the cash flow until the value is attractive enough to sell, then sell, use the money to buy more properties, rinse and repeat.

I’m assuming that some of what I said doesn’t make a ton of sense to an experienced professional, but that’s why I’m here, haha. Thanks for reading and any feedback would be awesome.

@Mike M.  Welcome aboard. I am new as well and am still absorbing information and getting to know my way around BP. Seems like your biggest dilemma is what to do with the condo. Being in downtown SD that is some prime real estate. There is a lot of  potential for future appreciation. But at the same time, keeping it could be a financial burden. Listening to a lot of BP Podcasts, they tend to advise to stay away from investment properties with HOAs, since as you outlined, they eat up your profits. 

I think you should take advantage of the strong SD market and sell it now and add to your existing capital and go after some good SFRs or Multi family units with positive cash flow and build from there. I am interested to see what the other members advise. Good luck! 

You have to think about your tax bill from a sale You might be better off moving back into the condo to get your 2 out of 5 year exclusion and pay no taxes on a sale. i would let the condo run its course and accrue as much appreciation and equity year after year then  you can use a home equity loan or your own cash  or combo for a future deal. 

Taxes, they always ruin everything. But since Mike is active duty military, this may apply. 

"If you rented the home to others because you were on "qualified extended duty" with the military you can "suspend" that period of time in the capital gains calculation for "the last five years" timeframe. But, a suspension period can't be more than 10 years."

"If you rented out your place for a reason other than moving under government orders, you still might qualify for a partial exclusion if you are now moving because of a permanent change of station. As with all things tax related, consult your tax adviser."


My husband is active duty navy and we are buy and hold investors. We buy at every duty station possible as a personal . We also use my income to invest in pure rentals! We have done well through this 2 stroke strategy. I love leverage so we try to put as little down as possible .

What are you "actually" losing on the condo? We deal with very small margins but have found that since our houses are in great location, newer homes and we self manage our costs are actually quite low! So we do well on $200-$450 margins!

What will you get on the condo when you buy you sell it with all the expenses. Real estate has a lot of expenses to sell property so make sure you are accounting that!

Another thing you need to watch is the number of new loans you are qualifying! Check with your brokers has some have rules regarding only counting rental income in taxes. So you might have trouble qualify if you have too many "fresh" loans!

Good luck! Investing in the military can be a great strategy!

@Mike M.  welcome to BP brother! I'm an Air Force guy myself and just started investing back in April. You're definitely at a point of advantage by being debt free and having a nice chunk of change saved up...well done.

I'm not familiar at all with the San Diego market, so take what I say with a grain of salt. But if I had the choice of making $200/month in cash flow on a condo, or selling it and making a cool 50k-75k, I'd do the latter. The margin just seems pretty tight, and I tend to shy away from HOA's. Also, I've never done this myself, but I'm pretty sure you can do a 1031 exchange in order to avoid getting taxed on capital gains after you sell. All you'll have to do is prove that you spent that 50k-75k on another investment property (I hope someone else can chime in regarding 1031's though, because I don't want to lead you astray).

If you do strategy one (and if I did the math correctly) you'll have anywhere between 130k-170k saved up to spend on real estate when you get back from your next deployment? That's awesome! At least in my market...thats the downpayment on about 5 SFH's or 2 small MFH's. At that point, you'd be well on your way to 15 properties and a pretty awesome retirement.

Originally posted by @Steven Picker :

You have to think about your tax bill from a sale You might be better off moving back into the condo to get your 2 out of 5 year exclusion and pay no taxes on a sale. i would let the condo run its course and accrue as much appreciation and equity year after year then  you can use a home equity loan or your own cash  or combo for a future deal. 

Actually, if the property has been held as a rental property and you move into it, the gain will be allocated between the number of years that you have rented it out vs. the number of years that you have lived there in order to determine the amount of the gain that will be taxable vs. the amount of the gain that will be tax-free under Section 121 of the IRC.  It will not be 100% tax-free.

@Mike M.  You have some great ideas! I just wanted to let you know that conventional financing maxes out at 10 mortgages and also if you plan to do cash out refinances on properties, it is easiest on properties to do this when you have the first four properties. 

Mike, you wrote: "...currently making $650 a month in positive cash flow, which is only $200 a month if you take the HOA fees into account (which has meant in effect that I am taking a slight loss with maintenance)...". My understanding is that the cash flow is only positive IF the income exceeds ALL the outgoings (once averaged out over the determined time frame - usually per year)? Not knowing all all the tax implications and costs involved in selling your condo, my instinct (and yours?) leans towards selling the condo now while the market is fairly hot/stable. I tend not to worry about how much profit the next buyer might make if turns out to be not the top of the market yet, so long as what happens with the proceeds is calculated to be at least as good a deal. Cheers...

@Mike M.  I like strategy 1 the best out of the 3.

What concerns me the most is that you are slightly negative cash flow if you include HOA fees and maintenance. Did you include all your other expenses in that calculation? (taxes, insurance, management, utilities, repairs, vacancy) You might be more negative cash flow than you think. It's a good thing that you have so much money set aside so you have a lot of reserves in case your unit goes vacant for a couple of months or you have an unexpected and expensive repair.

I don't like negative cash flow unless it's temporary and for a very good reason. IMO, it's best to sell the condo and find rentals in areas where the numbers make more sense. Be careful not to overleverage as you expand your portfolio. Continue to hold sufficient reserves. Since you're married with a kid you need to be more careful with risk management than if you were single with no kids. 

Will selling your condo free you up to get another VA loan?

Good luck!

Thanks to everyone for the responses; it's helping me out a lot. 

@Steven Picker , @Paul S. , I lived in the condo for the first year, and then I was in Afghanistan for about 7 months (it was rented out), and then I got home, lived in it for another few months, and then rented it out for about the last 8 months. Later this year, I'll deploy again and my family will move back into it while I'm gone. All that to say, if you count the time I had to rent it out while I was in Afghanistan (assuming that qualifies as being moved under orders) I should have the requisite 2 years of primary residence to qualify for the tax break. Obviously, I need to talk to a tax lawyer, but that's my understanding. 

@Elizabeth Colegrove, @Andreas Mirza, @Brent Coombs    In the cumulative year or so of having the condo rented out, I was at first just breaking even on rent, and now I'm making about $200/m positive on it. Because the condo is so new, so small, and I've been careful about selecting tenants, I have had barely any expenses on it, and were it not for one month of vacancy I'd actually be at a net gain right now. BUT, that month of vacancy cost me 1800$, and on 200 a month positive cash flow, well, it takes a while to do anything but make the payments. So in summation, I'm not making any money on it, but I'm not losing my *** on it. The (assumed) drastic appreciation of the last couple years has made it much easier to bear. And @Andreas Mirza, yes, selling the condo would free me up for another VA loan as a primary residence, which would be a big plus for my family.

@Tyler Flagg , I have considered doing the 1031 exchange, since I really won't spend those capital gains on anything but another investment. I need to read up on it some more, but that's definitely some good advice. 

@Bill Exeter , I had not heard of that rule before. Thanks for setting it straight. I was under the impression that for that tax break, the amount of time you spent using the home as the primary residence made you proportionally eligible for tax-free capital gains. And being married, living in that home for around 2 of the first 3 years would make us eligible for something like a few hundred thousand dollars tax free, well below the profit we'd make on the house. Tax law is pretty confusing, haha. Do you have a resource where I could read up on this stuff so I don't walk into someone's office with unrealistic expectations?

Thanks again to everyone who's helping me out.

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