@Scott Trench ruined my first home purchase. Just kidding...kind of, but in a good way.
This year, May 2017, I bought my first house. Renting felt like I was throwing money away so I thought I was making a smart investment when I bought my house...unfortuately this was before I found out about bigger pockets.
Since finding BP Ive been listening to the podcasts, read Brandon Turner's The Book on Rental Property Investing. And currently reading Scott Trench's Set for Life. I am realizing that my house was probably not the best to get started in investing...I bought it for $260,000 with a FHA loan in Louisville, KY. Mortage is $1600/m...and I have 2 roommates that pay $1,320 of it (so I am able to save more than when I was renting) BUT I could have made a MUCH better investment.
I'm not sure what I should do next and was hoping the BP fam could give me some input:
Should I just keep it for 5 years and then sell (I think I heard on bigger pockets that if you own a house for at least 5 years and lived there at least 2, you can sell it without paying taxes on capital gains).
The house is beautiful but only 3 bed/1 bath (all upstairs), main floor has all original hardwood flooring (living room, sunroom, formal dining and eat in kitchen) and the unfinshed basement has laundry, storage, and an emergency toilet (no walls surrounding it lol). Would it be wise to try to finish the basement and then sell?
Or just put it up for sale as-is and see what happens. (The previous owners wanted 290,000 for it...but I was able to purchase it for 260,000. It appraised for 263,500. Since Ive had it i put a new roof on it.) It is in a desirable neighborhood.
Or maybe just sit tight and keep saving by living frugally? Im currently saving $900/m but hope to increase that to 1000-1200 by not shopping at Whole Foods, ha.
Any ideas, thoughts, or advice would be much appreciated!
Talk to an accountant or CPA before you go ahead and sell with the idea that you don't get hit with a capital gains tax. Nothing worse than getting audited or hit with an unforeseen tax bill.
It sounds like you are house hacking well though. You aren't living for free, but your living expenses have been severely decreased. That's the goal of house hacking. Don't beat yourself up about the situation. Besides, you did what a lot of people don't do: get started. Give yourself a pat on the back for that one.
Before you consider jumping in with both feet on a sale, consider what you would do when you sell. What's your goal of selling? It sounds like it's to run from an imperfect house hack. I think figuring out where you want to go and creating a pathway to get there is really undervalued. As a newbie, I think it is very easy to get focussed on the systems of these sage investors because more often than not they can manage the volume as a result of their systems. Before you can create a system though, you need to know how to operate the system before you can handle volume in any capacity. Getting one call about a toilet is a lot better than getting 100 calls about toilets especially when you don't have a plumber (or aka team).
I think the real beauty of real estate is that everyone follows their own path. To me this means that there is a system of checks and balances that presents itself in your bank account. Is your current arrangement perfect? No, but learn what you're good at and figure out how you can capitalize on your skill set. In the meantime, if you're not happy in your current arrangement because you think you could be profiting more, find a property where you could achieve that and approach the seller with a subject to offer. Subject to referring to you selling your current residence. You're comfortable, but you want to be more comfortable. Don't put yourself in a stressful position and go shopping for a new house until you find something that you think could work.
Sorry for a long winded response, but hopefully it helps.
Apologies if this may be a very amateurish answer, but I think your decision is dependent upon what next steps you plan to take. Right now you are only paying 280/mo (plus taxes and insurance) to live somewhere while having roommates pay into your equity. Will you be moving into an apartment where you could pay even less than that? If you can sell your property for more than you acquired then possibly 1031 it into a multifamily that you live in and reduce those living costs to 0 (or even make money!).
Not sure if this program is still around, but did you get the first time home buyers credit? If so there were stipulations on it. Back when I got it, I had to live in the home for 5 years or they would require me to pay it back.
If the home appraised for $263,000 back in May, don't assume a new roof and will appraise more. That is probably what the house is worth, unless you can prove it to be worth more. Add in closing costs, realtor fees, etc and you would most likely be selling and not making any money on it now.
Sounds like you are saving quite a bit on the mortgage with the roommates. I would keep that going and invest in more property if that is your goal.
Do you have the capital/income to to fund the replacement.... better yet do you even have a replacement identified or at least and idea? I mean you "could" get a duplex or even up to a 4plex... but MFH is popular and expensive in many areas so it might not pencil out as well as you'd think.
@Justine Scheuher I think with the information you had at the moment that you made a great decision!
While buying a small multi may have been a better deal what you did was certainly not a bad idea. You can still househack with a single family and when you do go to sell it you will probably have an easier time.
I would hold onto it for at least two years to avoid capital gains.
You could finish the basement and add more bedrooms to make it a house that you break even on and live for free in. Best to look at the cost of doing this first and see what you can do yourself.
If you need any contacts to do this let me know. My father has been a realtor in Louisville for a long time and I just bought a 6-plex there so we know plenty of people who could help.
The important thing is that you got started (most never do) and are thinking about how you can keep improving your investing and personal financial position.
I'm (sort of) sorry that I ruined this purchase for you! :)
First of all, I think that this is NOT BAD in terms of a home purchase, relative to your average first-time buyer. Many people have no assistance from roommates at all, so it sounds like if you stay there for a few years, you have an excellent chance at doing far better than if you had remained a renter. I'd say that this purchase is at worst average to good, based on the numbers you threw out there!
That said, it sounds like you did not at the time think through the effect this purchase might have a few years after purchase, and what your exit strategies might be. Or, because this is actually a pretty decent purchase, maybe you DID think those things through, but just did not fully optimize for the pursuit of early financial freedom. Regardless, it sounds like you do not believe that this property would make for an excellent cash flowing rental, or at least perhaps not in relation to other properties that are practicably purchasable in your area.
In my opinion (and you know what they say about opinions) a great first home purchase is one that gives the purchaser three excellent options after the first year or two:
1) The option to continue living there happily, indefinitely, at low relative cost.
2) The option to retain the property as a cash flowing rental.
3) The option to sell the property for a hefty (after-tax) capital gain.
Of course, option three is at least somewhat dependent on the market, but still, we can make decisions to increase our odds of achieving that outcome.
It sounds to me that you have the ability to sell the property and potentially net even or achieve a small profit after sales costs, but that it wouldn't produce a great cash flow after-expenses if you moved out. This means that you are 1-2 out of three!
So, I'd say that you have nothing to worry about, and I think that you can continue living there without a significant loss of opportunity until you are ready to make your next move. I definitely would encourage you, however--if you believe that it would not subtract from your happiness in a material way--to purchase a next property that you believe truly achieves all of those goals, to the best of your ability!
Either way, I think that you have a mindset that will help you accelerate towards early financial freedom over the next few years!
@Justine Scheuher , here are a few thoughts:
1- Can you create a "master suite" in the basement leveraging the existing no-wall toilet? You could then move yourself there and move in another roommate
2. With the same basement suite, you could try to rent it or airbnb it
3. Stay for a couple of years while paying down the mortgage mostly through roommates. Depending on the location there is good appreciation to be had, with combined with a lower balance on the mortgage can give you access to cheap money through a HELOC for other investments.
4. Start rounding up your team, whether you are getting a deal tomorrow or in 3 years - find your attorney, cpa, contractors, etc and network using KREIA
5. Do your utmost to find a mentor, even if it means doing menial work for free - a good mentor is worth their weight in gold. maybe partner with them in a deal.
6. Do feel good about what you have accomplished thus far - you are on the right path at an early timeframe.
@Justine Scheuher , Stop beating yourself up - that's an incredible investment you made. It's moved you ahead every day. While most people wait and wait and wait while they educate themselves you acted - conservatively but responsibly. And that just put you ahead of all of them. Now that you're feeling more educated you can make your next steps and not lose a bit of what you've gained to date!!!
Your best bet with that house now is to stay there for another year and a half. The rule of sec 121 is that if you sell a house you have lived in for 2 out of the 5 years prior to sale you can exempt the first $250K of profit tax free. That number doubles to $500K if married so maybe you want to look at some possible candidates since they'd come with a very nice tax break!!
I'd also look at what finishing that basement would run you. If it would add value to the house and you could put another roommate in there to cash flow the improvement that would be worth it. My wife and I (and 4 sons) have had paying roommates for 26 of our 29 years of marriage - celebrate and enjoy the diversity and energy (and cash flow)!
It sounds like you're on your way to putting together a $20K war chest in the next year and a half. At some point in that time period you'll probably be able to buy another property as well. You've got a lot of options and congratulations. You're doing just fine!!!
^Everything Pedro Martin said. Depending on where you purchased AirBnB is doing really well in Louisville.
I like the basement ABB option. Keep us all posted on what you end up doing.
@Pedro Martins I really like the master suite option. I was looking at one the other day that I was going to do that with!
Thank you everyone, for the input and words of encouragement. I feel much more at-ease with where I am at. In a perfect world, I would have liked to find a multi-family unit where I could not only be saving money, but also cash-flowing. It is hard to sit tight, save, and wait but I now see the positives of my current situation too. In the meantime, Ill continue learning, listening, networking, and maybe even do some home-improvements.
@Kristina Heimstaedt Thank you for your response, encouragement, and prospective! I have been so caught up in what I could have done that I haven’t spent much time thinking about the real goal of selling.
@Charlie V. Great questions. My knee jerk reaction was to sell/buy at the same time. Specifically looking for a property that would create a cash flow. However, my next steps, as you said, need to be clearly defined before lacing up my skates and going into a china shop (which has been my default technique in life lol).
@Brian Pulaski I have definitely overlooked the positives of my current arrangement. Thanks for the input.
@Matt K. Yes this was my plan. Using the money from selling my house to purchase a MFH. I feel less of an urgency to do so now. Taking the next year to continue to learn and save seem like a wise idea.
@Jordan Moorhead Thank you for those words of encouragement! I love the idea of finishing the basement. Congrats on the 6-plex!
@Scott Trench Thanks for the input! I’ve been so caught up in the “what I could have done” that I failed to see the benefits of my average-to-good house hack. I can see where having clear exit strategies are VITAL. Next property will meet those goals. It's hard not to get amped up and want things to happen right-meow but taking the next year to save, learn, network might be a wise decision.
@Pedro Martins Love the idea of finishing the basement and Airbnb it...esp for Derby. I think building a team will be key too. Thanks!
@Dave Foster I can’t thank you enough for the pep-talk and encouragement, its greatly appreciated. I’ll keep that rule of sec 121 in mind (and hopefully find a husband by then to increase that tax exemption :P, jk). I love the idea of finishing the basement--It's perfect for an extra living space--its dry, has a side entrance, and a lot of natural light for a basement. Love the term “war chest” too :) Thanks again.
This is more of a home run. You own and live in a nice hood for $280 a month or maybe less after taxes. Get all the ownwership advantages some neighbors probably pay 5 times monthly more for. Investment also doubles as a home. Maybe one day add a bath somehow if it is worth it. Sounds like a smart start.
I agree with some of the others. You don't have enough equity so selling it right now wouldn't make sense and would probably result in a loss.
You should seriously consider finishing the basement and turning it into your private apartment. It wouldn't take much to build a bedroom, living room, bathroom, and small kitchen. You could live there and have much more private space while renting out your third bedroom. That's hundreds more a month you would be saving / earning while gaining more personal space and privacy!
It wasn't the "best" deal but it was a pretty good one and you have a lot of potential to make it even better. Good luck!