10 Year Plan. Does this make sense to you?

Buying & Selling Real Estate
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10 Year Plan. Does this make sense to you?

Curtis H.
Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes

Hello fellow BP members, 

Does this seem like a good plan for someone who invests part time while having good W2 income and excellent credit?

This seems like a very good strategy for building capital over a 10 year period. In my case...

- I bought a beat up home Sub2 in a great area 2 years ago and fixed it up while living in it and built up $200K in equity. I have satisfied the capital gains requirement and can move on to next house.

- I find another beater in a good area and do it again, while renting out the above house for 2-3 years (I still won't have to pay capital gains when I sell). The cashflow would be minimal, but it would cover the PITI which is my main goal while building more equity.

- Sell the first house and probably net $250K-$300K in profit. I now have been in my 2nd home 2 years, and have satisfied the capital gains requirement. I can move from here and rent it out like I did the first. 

- Rinse and repeat. 

Now this house I'm in currently obviously has benefited from the huge appreciation levels we are seeing in CA. So I don't expect those gains on the future homes, but still they will be nice gains. I would expect $100K in equity per home I sell since I will always buy them beat up and add value, as well as capture appreciation for 2 years. 

- Added bonus would be to take a HELOC out on primary residences during that 10 year period to buy rental properties out of state

Am I missing something here? If people don't mind moving, this seems like an awesome way to go.

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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
9y
Originally posted by @Ron Gosling:

A wise mentor once told me, if you own 10 SFHs, you have tens sets of different problems.  If you own a 10 unit complex, you've reduced the amount of different problems and made common the other issues.  My plan is to take the equity of my six paid off properties and to work a financing deal to purchase a multi-unit property and ideally double my holdings at one shot.  Still a year away but sounds like we have the same goals.  Good luck.

I have owned both multi-family and single family and I have sold off all my multifamily over the years. 

You are correct that some things are common such as a roof and exterior maintenance, but other things like appliances and number of tenants is the same or more.  Yes, you save time by visiting one location. On the flip side, a problem in one of the ten apartment units affects the other nine. Tenant disputes can be a huge time drain and can cause good tenants to leave your property. A problem in the neighborhood will affect all ten apartments. Single family homes are spread around, so a problem in one neighborhood doesn't affect all your houses. My single family homes rent for a higher value than a typical apartment in town, so I can get twice the gross rents per door. For me that means higher revenue and less doors. Less doors means less problems and less time. Don't get me wrong, I know that many large investors own huge apartment buildings. They do quite well. I am just saying for a smaller, part time investor, you cannot beat the passive aspect of single family homes. Way less problems than multi-family. The icing on the cake is that when you are ready to sell, single family homes sell faster. The reason is because there is a larger buyer base, which means if I need to unload properties I can do it quickly.

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  • Curtis H.
    OP
    Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
    9y
    Jerry W. I thought about that but this is not a case of "buy another one". We struck gold with the area and selling to hope to find a deal like this again is risky. This is a slam dunk area and we don't want to sell it. It's not done appreciating by a long stretch. Area is so popular people are signing petitions about parking becoming an issue on our residential streets. The shops on the main drag are all the rage and tons of renovations are happening. This is going to be a million dollar neighborhood in 10 years. We are sitting on a $400k mortgage. I think it's too soon to sell it. I could be wrong, and you are much wiser than I, but if we could just get a Heloc to fund other deals, why would we be quick to sell?
    0Reply
  • Aaron Cullen
    Real Estate Broker · Portland, OR · Member since 2015 · 201 posts · 98 votes
    9y
    Curtis H. Hi, I'm curious what neighborhood are you in? I'm in a similar situation that you were in except I'm in the apartment faze. Great ingenuity to find a house hack in LA! Not easy to do.
    0Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    9y

    @Curtis H., once you are out of your first home for over 3 years you have lost the primary home exemption for it.  While you will be looking at long term capital gain not short term capital you WILL have to pay taxes on the gain.  If you sold in less than 3 years there would be no taxes if you made under $250K or under $500K for a married couple.  You need to figure out the end dollar profit for you and decide which is best.  You can lose your capital tax exemption by not living in the property for over 3 years.  You should verify this with an accountant, and maybe have them run the scenario and give you total taxes using each scenario.  Whichever you do good luck, just be careful about going negative on cash flow.

    2Reply
  • Curtis H.
    OP
    Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
    9y
    Jerry W. Yep I do understand that and that is a good point. I heard moving back in at some point and using it as a primary residence can help with that. I think it will be a prorated capital gains exemption or something like that. What if I 1031 exchange it?
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  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    9y

    There is no reason you could not do a 1031 exchange, but of course tax free is better.  I think the holding time is only 1 year for a 1031 exchange but you have to have had the intent to hold it long term.  You need to ask an expert to make sure.  I have not heard of a pro rated exemption, be sure to check it out before you consider selling so you know for sure.

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  • Ericka G.
    Investor · Atlanta, GA · Member since 2015 · 366 posts · 283 votes
    9y
    Curtis H. Congrats on finding such a great deal in a hot area! Also cool that you got the whole family involved. Can you pls explain more about this point you made: "But creatively, I made it work by paying the past due amount and stopping the foreclosure, and taking over the home Sub2." We actually have an elderly next door neighbor (who has become a friend) at one of our SFH rentals who is sadly in the midst of a foreclosure/pre-foreclosure. I'm not familiar with sub2 but wondering if we might be able to use it to both help him save his credit/dignity and also score a deal? Any tips on how you made that work?
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  • Curtis H.
    OP
    Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
    9y

    @Ericka G.

    Yes you can help them, and possibly help yourself in the process. The numbers have to work though. There are three things you need to do to see if this can work...

    1) Ask them how long they have until the foreclosure date. 

    2) Ask them how much they are behind in back payments

    3) Figure out how much the house is worth AS IS, or if there is any equity in it after making the back payments. 

    If it seems like the back payments are something you can come up with, and quick, then there is a chance this is a deal for you. It doesn't mean you have to have the money, you just have to have access to it (private money, loan from family, etc.)

    One thing I can also give you advice on, is never take the seller's word for it on how much they are behind. You will have to be on the phone with them on a three way call with their lender, and they have to give verbal permission to the bank to talk to you on that phone call. Then you ask the bank (with seller on the phone) what is the amount they are behind, how much to stop the foreclosure, contact info of the foreclosure attorney, principal remaining, interest rate, etc.

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  • Ericka G.
    Investor · Atlanta, GA · Member since 2015 · 366 posts · 283 votes
    9y

    @Curtis H.

    Thanks for the info - we'll run through those questions with the neighbor and try to get a better idea if we might be able to work something out.  I'm guessing he is pretty upside down, but we'll see. Fingers crossed.

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  • Curtis H.
    OP
    Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
    9y

    @Ericka G.

    If they have been in the house longer than 5 years, and didn't get a second loan (took a loan out on the house) then there should at least be a little to work with. Be sure to ask them if there is a second loan. That is important. Many times when I looked at potential deals, and it looks like there is equity to work with, I would find out at the end there is a 2nd loan against the house that kills the deal.

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  • Curtis H.
    OP
    Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
    9y

    Hello all, 

    Just wanted to update everyone and say that the appraisal went fantastic and I was able to get an appraisal for $625K!

    $400K mortgage amount, $625K appraisal. Next up, get approved at a credit union for a HELOC at 90% LTV and start looking for deals! Either here in L.A. if I find the right one for the right price, or elsewhere in a state that is tax friendly. I love the Austin area to pieces but the ridiculous tax prices are making it harder and harder to justify for cash flow. I'm starting to think investing in the outskirts of L.A. where it's cheaper is a smarter move (Palmdale, Palm Springs, etc.) You can still find sub $200K homes and the taxes are half as much as they are in TX.

    The key for me is finding a place that has decent cash flow, but a good upside for appreciation. I like Ohio for cash flow, but not appreciation. I like Austin area for appreciation, but not cash flow. At least not anymore. The place I have there now is cash flowing nicely but that's only because I bought it over 10 years ago. The taxes are killing me at $4.5K a year for a home valued at $190K. It's crazy.

    I'm always really intrigued at retirement destinations like Florida, Palm Springs, Scottsdale, etc. Those seem like great places for flippers, but not buy and hold. 

    Thoughts?

    0Reply
  • Curtis H.
    OP
    Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
    9y

    @Joe Splitrock

    @Jerry W.

    @Joshua D.

    Just wanted to update everyone on the process. In addition to the above post showing how the appraisal went, I also just got accepted into Navy Federal Credit Union. Had to do some interesting things to get in, but it worked. After some research they have some pretty aggressive and attractive HELOC numbers that I liked. The main being loaning on 90% LTV. That is not easy to find, and none of the credit unions around me had anything over 80% LTV. That's a big difference with a home valued at $625K.

    So I assume within a month or so, I will be approved for a HELOC and have $200K or so to play with to invest. I am very torn where to invest. Round Rock, Texas is familiar and I KNOW it will appreciate if I buy right, but those taxes just haunt me. And they are aggressive about increasing your value to tax you more since its their main source of income. Almost seems corrupt to be honest. Ohio seems great as true buy and hold at under $100K for properties, but probably not much appreciation in 12-15 years. So I am thinking the affordable parts of CA (Palm Desert, Palmdale, etc) may be a good choice. Low property taxes, reasonable appreciation, and driving distance.

    1Reply
  • Michael Evans
    Real Estate Consultant · Lancaster, CA · Member since 2014 · 423 posts · 223 votes
    9y

    What's your main goal: appreciation or cash flow? If it's appreciation, then invest as close to the coast as possible. If it's cash flow, invest in the Midwest or South.

    Stay Blessed!

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    9y

    @Curtis H.

    Also add in depreciation recapture into your calculations. 

    If you lived in it 2/5 years and rent for 3 then sell no capital gains....

    But you will pay 25% tax on the amount of depreciation you took over those 3 years 

    If it's a $500k house with land value of $200k building value of $300k and depreciated over 27.5 years = about $11,000 in depreciation a year so $33,000 total = about $8k in tax when you sell. 

    Not a huge swing in the deal- just another element to account for. 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
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  • Curtis H.
    OP
    Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
    9y

    @Michael Evans

    My main goal is to have as many free and clear properties in 12-15 years as I can when I plan on retiring from my 9-5. I figure if I pick up just one per year, and use the cashflow to pay down the mortgage quicker, and refinance when I have a good equity position in them, I'll be in good shape. Now, I don't want 12 properties in Ohio worth $70K each, as I don't think that will get me where I want to be. But if I have 3 in Socal, 3 in Ohio, 3 in Florida, and 2 in Texas, it may get me where I want to go. Then I 1031 my portfolio into a couple apartment buildings and live off the cashflow and interest from buying notes. Maybe I'll do a flip per year to have some play money and something to do, but really I just want to spend my 50s and beyond helping those less fortunate than myself and teaching my kids to do the same. 

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Curtis H., if you're using the BRRRR strategy throughout the years ahead, because you'll be constantly refinancing to recapture your deposits for the next one/s, I don't see that you'll have that many owned "free and clear" by then, even once you succeed in buying the number of properties you want. In order to give yourself any chance for positive cash flow along the way, won't your refi terms need to be for 20-30 year mortgages? Or, are you finding new deposits from your OWN income all the time to speed up the process (remembering your post about your wife's input too)?

    1Reply
  • Curtis H.
    OP
    Investor · Los Angeles, CA · Member since 2011 · 305 posts · 56 votes
    9y

    @Brent Coombs

    Good question. I won't be using that strategy on all the properties, just some of them. My W2 income should be good enough for me to handle down payments on the properties in the Midwest. It's the Socal properties I'll need help with using the BRRR strategy.

    0Reply
  • Adam Allen
    Investor · Austin, TX · Member since 2016 · 8 posts · 4 votes
    7y

    @Sarah Lorenz Love this bit: "I also wish I would have held a property that I was going to move back into as a retirement home at some point, so I don't have to pay the appreciated prices and taxes later on." Sound and noted. Thank you, Sarah!

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