Use my current property to start in REI

7 Replies

Hello all,

Just signed up after reading a few posts and have plenty more to research. I'm trying to find some advice on how I can use my current property to start in REI.

My current property is worth about 210-220k. I owe 155k remaining on my mortgage, so I have decent equity. 

How can I use my equity to get started in REI? I bought this place with the intention of it being an investment and would like to grow my money even more.

Thanks in advance for any advice!

There are 3 things that come to mind right away for me.

1) You can rent out rooms in your house. Might not be the most fun to live with your tenants, but you will get landlording experience and don’t have to invest more money to do it. A variation of this, if it appeals to you, would be to move out completely if you can live elsewhere cheaper, and rent out the entire place.

2) You can pull out some equity from your house through a refi or a HELOC. That may give you enough capital for down payments on investment properties.

3) If you have been living in the house for more than 2 years and owned it that entire time (and do this before the tax reform bill in Congress potentially becomes law), you can exclude up to $250,000 in gain from taxes ($500k if MFJ). You could use your equity (less selling expenses) to purchase investment properties.

Thanks for the reply! I was definitely thinking option #3. We've lived in the home since 2012. The idea was to use it as a live in flip and we've gained some decent equity. We did pull a heloc a 2 years ago to pay off some substantial debt. You're saying I wouldn't have to pay taxes on the gains from the sale? I'd be looking at around 40k if so. 

Is that a good idea? Sell and start fresh again?

I am a CPA and tax attorney, so that is an area where I have some expertise. It is Section 121 of the Internal Revenue Code. If you owned a house for 2 out of the past 5 years, and have not used this provision in the past 2 years, you can exclude up to $250k of capital gain on the sale of the house ($500k if MFJ). I would recommend talking to your CPA though.

As to whether this is the best option for you, I don’t know. You would have to run the numbers.

@Nick H. , you did the right thing in refinancing it 2 years ago to pay out all your other higher interest rate debt. However, that has left you with barely 25% equity currently.

I don't recommend you leverage higher than that, even if you can find a Lender who'll let you. That is, unless you find a one-in-a-million super-deal that drops into your lap unexpectedly.

But needless to ask, how often does that happen?

What will the numbers look like if you rented out your current primary, and kept the current mortgage? ie. What's the rent-to-value ratio there? 1%/m? 2%? 0.5%?

The answer to whether you should flip it or rent it out somewhat depends on that answer, and also: Does the property have any value-adding opportunity you might not have considered? eg. Can the lot be subdivided?

I like your thought processes of wanting to maximize your equity.

But largely, haven't you already done that, 2 years ago?

Flipping it may only really help you if you go on to find: elusive super-bargains! Welcome to BP!

Thanks Brent. My mort balance is $110k, while the heloc is $44k. 

Due to heloc and high HOA, renting out at $1,500 would result in a loss. Mortgage + escrow is about 900/mo, heloc is about 400/mo, and HOA is 256/mo.

Nick, if you are able to net $40k tax free, I think the question becomes would you be able to do something with that money that would improve your financial state faster than simply continuing to own your home?  Obviously you will need somewhere to live, so that is an expense that needs to be factored in.

You can house-hack by buying a multi and living in part of it, or do you have enough free cash to purchase multiple SFRs (one for you to live in, the rest as rentals)?

Thanks Brian. I believe so, that's the learning piece I'm going through right now. How to invest that cash if/when we do sell. Whether it's renting or doing the house hack (next on my reading list). 

Our nest egg was moving into this place knowing it was an investment opp. So while we don't have much extra cash, we could sustain being we both have good jobs. I just want to start growing that money and hopefully get to the point where we can leave our 9-5's.

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