Buy new home and rent out first, or stay and buy a duplex??

2 Replies

Hi everyone,

First time poster here... :) My husband and I are moving forward with real estate investing and would like some advice from tax and legal standpoints. We are trying to decide between:

1. purchasing a new home with a trust and renting out our first home, which was purchased in our names. Then doing a cash-out refi on our first home in Oct 2015 (when we told by our bank we can get out of the PMI) and buying a du/tri/fourplex with an LLC. And after the cash-out refi, putting our first home into the LLC.

2. purchasing a du/tri/fourplex with an LLC and remaining in our first home until Oct 2015 and then doing a cash-out refi to buy our new primary residence. Then renting out both the duplex and our first home after putting our first home into the LLC.

We're ultimately concerned with protecting our assets in a worst case scenario-type situation. We are already planning on getting an umbrella policy but would also like to take advantage of the protections afforded by an LLC (which undeniably aren't too strong in the great state of CA). Which is why we're also thinking about incorporating in Nevada and and doing business in CA.

Any advice and feedback on what we should do - or what we should also take into account - would be greatly appreciated!

Thank you!

Grace

Hi @Grace R. !  I'm not a CPA or attorney, but I can offer a couple of thoughts.  If you buy an investment property (i.e. you don't move into it), you will likely need to put down at least 20%.  If you were planning on doing that anyway, this is not an issue.  But if buy a new personal residence (and rent out your current home) you could put down a much smaller down payment, as low as 3.5%.  A smaller down payment means greater leverage which means better return on invested dollars.

On the other hand, if your current residence becomes a rental, you may only be able to do a cash-out refi of up to 80%.

I wouldn't do an LLC just yet, with only two properties. You need 25% to 30% down if purchasing with an LLC, or would only be able to get 70% to 75% of value if doing a cash-out refi.

Thanks for the input @Larry T. ! We do have at least 20% down saved, so we should be able to move forward with either option. You've given my husband and me good points to consider...

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