Buy, Hold, or Pull Equity out of my personal home?

Question

Wanted to ask this question to BiggerPockets community as I value the insight from everyone here greatly! I currently live in Denver, CO and my home has appreciated to, in my opinion, insane levels. We may move out of Colorado to be closer to support for our kids so we would not be looking for a new home here in the Denver market.

Question is do I sell and use ROE to purchase a home for us to live in, in a less expensive market, and use the rest to invest in markets that have potential to cash flow (that is our RE strategy)? Do we keep the house the AirBnB with fairly decent return? Or do we attempt to keep the house do short/long term rental, pull some equity out, and use that to invest?

Not really sure if option 3 is a sound strategy but it was mentioned to me so again figured I would ask the community.

Thanks so much for any input or advice!

Yuri

Ian K. · Answer

Keep in mind the 5/2 rule so you don't get hit with a huge tax bill. You can rent out your primary home for up to 3 years as long as you have lived in it 2 out of the last five years and not have to pay capital gains tax when you sell. If you rent it one day longer than 3 years you will have to pay capital gains tax on the appreciation.

Jim Howell · Answer

I agree with Taylor about running the numbers. It's always a pre-requisite to making any kind of move. I also agree with evaluating your risk tolerance and researching regulations (My in-law bought a condo in Green Bay a mile from Packers stadium with AirBnB in mid. Then the city outlawed short-term rentals). I have properties in several states now and I can say that a good property manager (again, run the numbers and figure in this 8-10% expense) is as important as any of your other criteria. We moved out-of-state (from Maryland to Colorado) to help our children with their children. We never looked back. I took the proceeds and invested in some other areas. The key for me at the time was cash flow as opposed to appreciation. No one has a crystal ball (Denver in 2011 or 2012 was very different from what it is today). For what it's worth, I would still consider option 3 as a viable strategy

Yuri Woitscheck · Answer

@Jim Howell@Taylor L.@Bonnie Griffin Kaake@Marc Rice@Jon Kelly@Ian K.

Just wanted to say thank you to all of you for the great insight. Only numbers I have not run are what loan details would like to take out equity (up to 300k these days) to reinvest in smaller markets.

I think based on numbers we may keep for AirBnB which the city allows and we will have a property manager for and if/when needed pull out some equity to reinvest if markets cools a bit.

Thanks again! Really appreciate it

Taylor L. · Answer

I think there are a few homework items for you to do to make a decision: define your long term goals, Run the numbers, and research local regulations.

Define your long term goals: Set this property aside for a second. What do you want? What do you want your days to look like? For example, if remotely managing a rental horrifies you and you wouldn't want to do it in a million years, then there's a good indication about a few of these scenarios. Or, some people hate having any kind of debt, even mortgages on investment properties. There's another potential indicator for you.

Run the numbers: look at each situation independently. Consider if you're able to use the primary residence sale capital gains tax exemption or not.

Research local regulations: can your property legally be a short term rental? Should be easy to figure out. If it can't be, then there's an answer!

Stuart Grazier · Answer

@Yuri Woitscheck Be careful with choosing the short term rental option in Denver. Unless the rules have just recently changed within the last couple of months, my understanding is that most of the city does not allow STR's unless it is your primary residence that you currently live in and you are allowing them to rent out a room, or basement, or unit (if it's a 2-4 unit), ie the house-hacking strategy. I could be wrong, but I believe there are very few areas within the Denver metro that actually allow STRs at all. I recommend double checking into that before you choose to go that route.

I'll echo what most others have already said about running the numbers, but from my experience most single family homes in Denver don't have positive cash flow as a long term rental property because the rents don't come close to covering the expenses, unless you purchased it a long time ago before Denver became so expensive, which may be the case for you.

Just to play devils advocate - It may be worth looking at taking the tax advantage of living in the house and not taking any capital gains tax when selling and capitalize on the current crazy market and go buy some better cash flowing assets in areas less expensive with better rent to purchase ratios. You could probably purchase multiple properties in the midwest that cashflow WAY better than your one Denver property. Just a thought...

Justin Phillips · Answer

@Yuri Woitscheck My wife and I faced the same sell/keep dilemma with our home. We decided that keeping it as a cash-flowing rental, while having access to equity was the best of both worlds.
We Refi'd into a specialized Heloc that allows us to access up to 80% of equity, with a much longer term and more stability than traditional helocs. It's been an awesome tool for us. We've continued to enjoy cash-flow and appreciation, and we have that large line of credit ready for when the market turns. I always recommend everyone educate themselves on the loan, as it's a huge asset in building wealth.

Marc Rice · Answer

Good luck!

Jon Kelly · Answer

@Yuri Woitscheck I agree with the other posts. Defining goals and running the numbers is always sound advice.

Honestly, all 3 strategies would work. The main point is to capitalize on your appreciation and buy/hold income producing assets. Don't go buy a $1.5M home just because you can.

I'd add that for option #2 you should be able to AirBnB and pull out equity or use a HELOC to invest in other properties.

Marc Rice · Answer

@Yuri Woitscheck

The difficulty in this market is every market is similarly competitive so the price you’ll be paying is inflated at a similar level. With a HELOC you could still tap into the equity, but not have to worry about moving, and go to a Midwest city and buy rentals around the $100-200k range per each and just put 20-25% down on them.

But overall as everyone said above, it’s important to define your lifestyle goals and then fine how real estate can get you there.

Bonnie Griffin Kaake · Answer

@Yuri Woitscheck Option 3 may be a very good strategy. If you do long-term rental on your Denver property, you can accelerate the depreciation and increase your cash-flow for your next property. If you do short-term rental on it (provided the city and any HOA) permit STR, you can also accelerate the depreciation and get cash-flow the first year you do this as well. Keep in mind that the LTR will be depreciated over 27.5 years whereas the STR will need to be depreciated over 39 years. Cost segregation can help you get a considerable amount of that depreciation on either 27.5 year or 39 year property the first year you turn this property into a rental. Let me know if you want more information or have questions.

Buy, Hold, or Pull Equity out of my personal home?

Buy, Hold, or Pull Equity out of my personal home?

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