Just starting out, current home sell (and 1031) or rent?

Question

Hi everyone, I am ready to start investing in real estate and have a situation and thought I'd reach out to see what you all thought. I am in my current home and building a custom home for my family. When it's complete later this year/early next, my plan was to move into the new home and rent my current home, thinking this would be a good transition into being a landlord. I would then take some savings and invest in a second rental shortly thereafter.

Given the market is so hot right now and I can pocket a good profit on my current home, I'm now considering selling it and using the profits to just immediately jump into a larger property that would cashflow more. My long term goal is grow my real estate portfolio as quickly as possible. I think pros would be leveraging my equity in current home for a larger cash flowing property for my first investment. Or I can keep my current home to rent to help ease me into real estate investing and I could always sell it later with the risk being I may not be able to get as high a market price as right now. But then again, it could be even higher in a year or two...

For someone that is absolutely 100% getting into this game with a long term goal to grow Grow GROW, how would you all handle this? Thanks in advance for any feedback!

Ray Ochotorena · Answer

@Dave Foster Thanks! Appreciate that info, I had heard that on a BP podcast once but totally forgot about it. I've been in my current home for 12 years. I'll be moving out to our new home in about 8-10 months. So sounds like I meet that exclusion criteria...I just need to decide if I want to make this home my first rental or leverage that profit to get into something bigger for my first rental, assuming I can find a deal at that time.

Dave Foster · Answer

@Ray Ochotorena, You can't immediately sell that house and do a 1031 because it is not an investment property. It is your primary residence. However if you've lived in that house for 2 out of the last 5 years you can sell and take the first $250K/$500K of profit tax free (single/married). This may make your choices more clear.

1. If you meet the primary exclusion requirements then you can sell tax free. That's huge!

2. If you don't then you can only sell now if you want to pay tax on the profit. Worth it or not is up to you.

3. If you rent for a while and then decide to sell while you have still lived in the property for 2 out of the last 5 you will still get the tax free exclusion and will only pay a little tax on the depreciation recapture.

Ray Ochotorena · Answer

Thanks guys for the responses! My current home is in Southern AZ and we can probably get 150k profit based off comps selling recently in my area. If I keep it after I move out, I'm thinking I can cashflow 300-400 per month (~$1500 estimated rent) . If I were to sell it, we'd take that 150k profit as a down payment and 1031 it into something that would work out to cash flow more (I'd add some savings I already have to it if necessary). No specific plans on what that would be, but preferable a multi-family. So my decision basically comes down to easing into being a landlord and rent my current home (est. $300-$400 cashflow) or leverage my current equity to try and get something that cashflows more and jump right into the deep end (assuming I can find a deal that would cash flow higher).

Caleb Brown · Answer

On the home where you'd sell or rent what's it...

Worth?

Market Rent?

Do you own it free and clear?

What would you 1031 into?

Justin Phillips · Answer

@Ray Ochotorena As far as the best way to get started right away, and relatively easily, turning your primary into a rental would be the best option. However, you'll want to run the numbers and make sure it pencils out as a rental.
My wife and I faced the same keep as a rental/sell dilemma, and we decided that the best of both worlds would be keeping our home as a rental, while retaining access to equity. Our primary made a great rental, so it made sense all around.
We ReFi'd into a very specialized loan that allows us to pay down our balance with idle funds, while retaining access to up to 80% of equity. We've enjoyed continued appreciation, monthly cashflow, and every month our available balance to pull from increases. When the market turns, we'll simply stroke a check off our line and purchase in cash. When the numbers work, converting your primary, while retaining access to equity can be a great jump start to your investing career!

Just starting out, current home sell (and 1031) or rent?

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