Looking for Advice: Single Guy Loaded with Equity

35 Replies

Hi Everybody, 

I'm looking for some ideas/advice and wondering "what would you do" if you were in my position. This is for fun but I'm seriously looking at hitting the reset button for the next chapter of my life and I'm suffering analysis paralysis. I have too many options, to much equity, and not enough education or experience to feel comfortable making a decision. I'm hoping to bounce some ideas around to kick me out of this funk I'm in.

This is probably the third or forth time I've written this post over the past few months and I always delete it since I can't seem to word it in way that makes sense. I'm just going to blurt it all out and clarify any holes if there are any replies.

1. I'm a single guy, 41 years old, no wife no kids, I work in IT in the SF Bay Area but after 17 years I'm tired of it. I bought a rental SFR a few years ago that nets me $1400/mo. I paid 175 cash and it's worth about 230 now.

2. My primary residence has about 600k in equity so if I sell, which I'm considering, then I'm primed to take a big hit in cap gains taxes and fees and who knows what else that will eat up any buying power that I have.

3. I'm pretty much also tired of living in CA and would like to relocate out of state. I'm looking to move somewhere I can buy a couple of houses as rentals and something small for myself. I would then start the process of starting my own property management company as a new career.

My thinking is if I could have 2-3 rentals of my own (paid cash) and ~25 rental units to manage that over time of building the business I could live a pretty good comfortable life. I'm not trying to get rich I just want to enjoy life, ride my Harley, and go fishing every once in a while.

Areas I have looked at are Texas, Montana, and Tennessee (I really have my eye on Knoxville, not sure why). How cool would it be to work on a Business degree at UT while building my own PM business on the side and living on my rental income? It has my attention.

OK I'll shut up now. What do you think, am I crazy? If you had the chance to be in my shoes how would you approach your next move?

P.S. thanks in advance for any advice!

JC

If single, the IRS regs state you can make up to 500K TAX FREE if your primary residence 2 of the last 5 years. You other option might be a HELOC to buy more income producing assets.

BTW--you must be a licensee?

@Jason Clark , the limits for the primary residence exclusion that @John Thedford was referencing is actually $250K in profit.  If you sell a property you have lived in for 2 out of the 5 years prior to sale you can take the first $250K in gain tax free).  You're right you would pay tax on the other $350K.

But that being said, as a young (I'm allowed to say that) single guy who's mobile, you are a perfect candidate for a primary residence conversion.

Convert that property into a rental.  You do it by moving out and renting it.  How hard is that.  Move to Knoxville and rent the property for a couple of year (but sell it before you have been gone more than three years)  When you sell you can now do a 1031 exchange on the property because it is investment.  Buy your next properties in Knoxville with the 1031.  But because you also sold it when you could still claim that you had lived in it for 2 out of the previous 5 years you can take $250K of profit and put it in your pocket tax free.  You will still have to recapture depreciation for the time as a rental but...

In exchange for a year or two of patience you are rewarded with.

1. two years more appreciation

2. two years of cash flow from the rental

3. $250K tax free.

4. The remainder of the sale tax deferred into new rental properties wherever you want to go.

As always I was partly right thanks Dave

Excellent response, @Dave Foster , that's a great strategy!  USE that tax code!  

And @Jason Clark , you've got an enviable Problem... Myself, I'd choose montana any day, but you have to love winter as much as summer for that.   Also I'm not crazy about humidity...

As far as investments go, I'm kind of perverse when it comes to using leverage on everything. My favorite is anything like the BRRRR strategy where you use your cash to get the property, then do what it takes to refinance it so that you pull out all of your cash. Then, as long as it cash flows, your return is INFINITE, since you have none of your own money left in the deal. You take that cash and do it again, and you're realizing excellent 'velocity' on your money. And you still control all of your money!

I know the temptation to use all cash so you see really nice dividends every month, but you're only using a tiny percentage of the potential of your money.  From where you're sitting, you have the potential to have an empire using other people's money.  

When we start talking PM,  in my humble opinion, that's a terrible idea!!  So sorry all you awesome PM's out there who are happy as a PM... to me, that's the worst part of RE investing, and the first thing I put in my pro forma for properties is making sure I can FIND a good PM and of course that the property will support paying one well.  Because the only way you can make any money at property management, is by having a boatload (like 200 plus) properties.  (please tell me I'm full of BS, all you PM's, if this is not true)  That's the only way you can scale it up to hire all the people you need for Leasing, bookkeeping, etc, and to be able to have an after hours service to handle emergencies, so you can ride your harley on the weekends and sleep at night without being interrupted.

Instead of taking all the time and headache of building a PM business, I'd use your money to find and buy and sell investment properties.  It's SO much more fun and pays better too, I'd say, if you do it right.  It does take a little time (though not nearly as much as building a profitable PM company) to get good at it, but finding someone you like with great experience to help you should not be a problem.  Partner with them and learn the ropes... using a little caution, and spending time researching the markets you want to buy in, you can see some fantastic returns, and then it's amazing how fast your portfolio can exponentially grow.  I invest for cash flow, but I love the sneaky creep of bonus appreciation... as you've seen, if you pick your market well (as you did in SF), you might see appreciation (on single family up to 4 family) of a minimum 5% and sometimes 10% or better on the full value of your property... that means that if you have a million dollars worth of rental property, which you only have maybe $250k invested in, you might see $50k to $100k in growth per year ON TOP of all the cash flow and tax savings and mortgage paydown.  That's between 20% and 40% COMPLETELY passive income on your $250k investment.  I love that.  

Most people say don't buy for appreciation, but I've seen sharp folks with deep pockets buy in hot markets with negative cash flow because they have enough money to gamble and still survive if they lose, because they are banking on that appreciation.  And they win big in a couple years in the right markets.  Or not!

Anyway, good luck and think other people's money!

Just remember, if you manage properties that are not your own, you’ll need to have a broker’s license.

Good luck.

Keep in mind the opportunity value of cash when investing. If you put all your cash into a property, no mortgage, your return on investment is minimal. You would earn a greater return invested in a REIT or income fund. 

To use your own numbers...you have $830K in equity in your two properties. With a opportunity value of 10% your dead equity is costing you $5196/month on your personal home and $1991/month on your rental in lost income. The rental has negative cash flow to the tune of $591/month.

If you want to make the maximum return on your investment you must use leverage. Too much equity will wipe out any possible cash flow on a rental.

Thanks for the tips fellas! 1031 is something I have considered and may be an option as well so thanks for reminding me of that. I have a friend in Colorado (where I used to live in Denver) that is willing to help get me on my feet out there and offered a room in his house for cheap. If I rent the CA house and the other rental income I should be ok for a couple years, barring any major costs which are a concern. It's good to have good friends in good places! But Denver got really expensive since I left and it's full of Californians now so I might as well stay put if I want to live with high taxes, crap schools, and high crime.

The BRRR method is actually what I did with my first purchase. I forgot to mention in my post that I also own another SFR in the same town as my rental but I bought it for my mom and her husband, they live in it now. I made the down payment and put it in a 30 yr fixed. Since I only charge my mom half the mortgage I can't claim it as a rental so for taxes, my CPA has it as a second home. Bought at 195, owe 130, and it's worth about 250 now, not bad.

I did get discouraged after the purchase of my rental which has me thinking I may not be able to do BRRR in the future since banks won't loan to me anymore. For the rental I used a HELOC from my primary residence to pay cash for the rental property and put about 20k into it. I then rented the property and refinanced the mortgage for my primary residence to pay back the HELOC. This way I figured I would just have my primary mortgage be higher than it was but the rental income would cover it.

To qualify for the refi the bank made me close the HELOC which I was ok with as I figured I would just open it again when I was ready to buy another property. Well they didn't let me do that saying that I didn't make enough money to cover three mortgages if all of my renters were to vacate at the same time (I work in IT in SF, I make pretty good money). I tried a different bank and they said the same thing. So now when I hear of people using BRRR I get a little annoyed because I wonder how they get the loans for 20+ properties and I can't get more than 2. That's when I decided to just keep what I have and start a PM business (once licensed of course).

I've considered doing live in flips as well since it's just me and I don't mind living in the mess. I'm always working on my house anyways so it's no different than now other than I need to sell if I want to make money. 

Anyways thanks again everybody. 1031 is an option, starting a business is an option, BRRR is an option if I can figure out how to get loans, but staying in CA is not an option, I'm outta here! It's just where I'm going to end up that keeps me awake at night. Thanks again.

Updated about 1 year ago

Update

Originally posted by @Jason Clark :

I did get discouraged after the purchase of my rental which has me thinking I may not be able to do BRRR in the future since banks won't loan to me anymore.

Well they didn't let me do that saying that I didn't make enough money to cover three mortgages if all of my renters were to vacate at the same time (I work in IT in SF, I make pretty good money). I tried a different bank and they said the same thing. So now when I hear of people using BRRR I get a little annoyed because I wonder how they get the loans for 20+ properties and I can't get more than 2. That's when I decided to just keep what I have and start a PM business (once licensed of course).

This just isn't true. You need to find another bank is all. If you are buying in your own name Freddie Mac lenders will give you 10 mortgages. Portfolio lenders (in this context I mean banks that don't resell their mortgages to Fannie for Freddie and thus can originate more than 4 and 10) Alternatively you can set up an LLC (or other legal entity) like many other investors and start getting commercial mortgages of which you can have an unlimited number. I had to call over 30 banks and credit unions before I found the one that made sense for me to work with. I promise you can do it. Don't get discouraged!

Originally posted by @James Masotti :

This just isn't true. You need to find another bank is all. If you are buying in your own name Freddie Mac lenders will give you 10 mortgages. Portfolio lenders (in this context I mean banks that don't resell their mortgages to Fannie for Freddie and thus can originate more than 4 and 10) 

Thanks for the info James. I'll have to make some calls and see where I'm going wrong here. 

Originally posted by @Jason Clark :
Originally posted by @James Masotti:

This just isn't true. You need to find another bank is all. If you are buying in your own name Freddie Mac lenders will give you 10 mortgages. Portfolio lenders (in this context I mean banks that don't resell their mortgages to Fannie for Freddie and thus can originate more than 4 and 10) 

Thanks for the info James. I'll have to make some calls and see where I'm going wrong here. 

 Generally speaking if you're talking to any big banks, you're talking to the wrong banks. Start talking to credit unions and smaller banks (20 branches or fewer). This isn't a guarantee but it's definitely where you'll be having more success. 

Great advice from everyone so I won’t echo it. . I will say that Tennessee is a great state. Knoxville is also a great city. I live about 45 south towards Chattanooga. Good luck with your decisions.

@Jason Clark also try mortgage brokers. They have multiple lending sources so where one might say no there will be others that say yes. 

PM is a terrible RE business IMO. The whole point of RE is freedom and flexibility. Being a PM is like owning a restaurant or diary farm. You/your business is on call 24-7. Keep in mind that lower priced markets have lower rents. I would think it would be vary hard to live on the PM income from 25 SFR properties in any market in KY. I could be wrong but if I am it's because you would be in a niche.

My advice is to watch out for any new "girlfriends" approaching you  in your life with the title of this post :) 

@James Masotti is onto it. You've just got to find the right lender. You'll hear from some banks things like you've got to wait 2 years to count rental income on a property towards your debt/income, which can obviously affect lendability. 

And in addition to what has been said, you might want to do a big push to buy your properties before heading off. You can certainly do this quickly if you put the work in, but the second you move you're going to run into more potential hurdles with lenders that want stability. Especially if the move involves quitting your job. My spontaneous urge to move across the world and stop working for months at a time has been quite a problem for getting bank financing :)

And if you're wanting to get into managing 25 units then you might be a bit crazy haha. PMs have all the bad parts about investing and none of the good parts. Doesn't seem like the direction you want to head in, and I think a lot of folks on here would agree. 

You're actually in a better position to buy a 25 unit building and hire a property manager! If you want the easy life then you might consider trading up your equity and putting 10% down on a $4 million building. 

@Jason Clark I’m curious to know what your primary would rent for there in CA vs your mortgage payment. I’ll bet along with the value appreciation your area has seen a lot of rent growth too. If your primary cash flows well it would be worth pulling a large HELOC on it and renting it out. That way you can keep the house that will likely continue to see appreciation and rent growth over time and still have capital to buy wherever you move to. I’d be really hesitant to get rid of a house that appreciates so much in a state that has seen values rise sooo much and so consistently over the long term.

Wow so much to process. Thanks again everybody. I don't know much about real estate but what I do know is to go to BP when I'm stuck! You all came through big time and I really appreciate the well thought out replies. 

And no worries about girlfriends getting in on this action, my dating life is awesome and I have no plans to marry any of the women I'm dating. My family calls me Charlie Harper, it's the best compliment I have ever received! haha

As for appreciation on the place I'm in now it's insane how much it's going up every month. That is the only thing keeping me here. My commute is 1.5 hrs each way on a good day, 2 hrs if there is an accident. It's exhausting. But according to Zillow my area (95123) averages about 8k/mo appreciation. That's almost 100K/yr for doing NOTHING. It's nuts. 

I am starting to like Dave's idea more and more. If I rent my place out (plus rental income from my other property) I'll be able to break even on an apartment near where I work. It's about $2500/mo for a 1/1. That allows me to bank my income from my day job, continue appreciation on the house, then get the tax benefits when I sell in 2-3 years. That "2 of last 5 years" catch allowing me to pocket the 250k plus use the rest in a 1031 was biggerpockets GOLD. I was aware of 1031 but that 2/5 years deal was the hook I needed to really make sense of all of this.

And finally thanks for the input on the PM business. I have another friend in Denver that has offered me to work for a PM company that he is friends with the owner. That could be a good option as well as I still get to do the PM stuff, plus be in the industry and while driving around I can scout investments for myself. It's so much to take in. 

Thanks again folks, you're amazing.

Not much to add here, but did want to throw out a vote for Denver's quality of life. Great beer, legal pot, 300 days of sunshine, and the mountains an hour away. 

I am familiar with a niche type of property mgmt, more like personal assistant services.  It's taking care of higher end clients and their personal properties (think vacation homes, a relatives house, errands, etc).  It's like being the manager for the  #1 real estate broker in town ; handle his/her cars, both investment & personal houses, sign and verify construction work, etc.  Because my business focuses on wealthier demographics, 60% of my efforts goes to less than 10 homes and I delegate the remaining 40% to my staff of 2.  It is a 24-hr, 7-day business and every month there's issues but man the freedom and I love moving about, getting the sun and sweat on me.  Healthiest I've ever been and that's after years of office, law enforcement, consulting, military. The mileage I do on my van a week is like 180 miles because I barely get on the freeway; my properties are highly focused near me .  

If you have light construction knowledge, I say try it out in Denver or where ever you can.  We've all heard good handy man or general contractor is worth their weight in gold.  You're established in your world now, you can experience other things so go for it.  The obvious risk is another 5 years on that 2 hr commute and doing something you haven't show more than %2 learning growth from the previous year.  Learn my investors.  Keep hungry for knowledge AND experience.  

In summary you are NOT lacking equity, funds, stability, better housing.  The highest risk is doing the same thing and not doing something you have interest in and may love.  Property Managing may pump that blood in your veins by knowing it's a living thing with faces, families, working on the facilities, something with your hands.  

Originally posted by @James Masotti :

@Jason Clark - Do you have a status update on your current plans?

Hi James, thanks for asking. Things are still fluid right now but I will be making some sort of move in the spring or summer. I still have the same problem of having too many options and I'm fighting analysis paralysis. I know that's a problem a lot of people would love to have but I want to be careful and make the right move. 

One thing for sure is that I'll be renting my house in San Jose for two years then 1031 the equity into either single or multi units. Where I end up after I sell I do not know yet but I'll let that play out over time (Fresno, Denver, and Knoxville are tops on my short list). Until then I'll just keep doing my homework and educating myself. BP is worth it's weight in gold that's for sure. 

Thanks again.

Originally posted by @Drew Leo :

In summary you are NOT lacking equity, funds, stability, better housing.  The highest risk is doing the same thing and not doing something you have interest in and may love.  Property Managing may pump that blood in your veins by knowing it's a living thing with faces, families, working on the facilities, something with your hands.  

Hi Drew, Your message reminded me of the Mark Twain quote where he says, to paraphrase, "in twenty years we will not regret the things that we did do, will will regret the things we did not do". I certainly do not want to continue running in the hamster wheel any longer than I have to. It's exciting and nerve wracking at the same time to finally be in control of my destiny. 

Thanks for your post, it's great to see someone doing what they love, very inspiring.

not crazy @Jason Clark . Like you I’ve been in the IT world for 17 yrs and looking to make a transition. Mine hasn’t been so dramatic as I do have a wife and kids and not as much equity. We started on this journey a few years ago and starting to feel the snow ball affect. Let’s connect if you want to bounce ideas or ID10T stories. 

@Jason Clark

Well I am biased but you won’t regret Montana!  We moved here 7 years ago and love it! 

Seems to me you could use that 600k to buy 4 properties for for 110k here. And then buy yourself a 150k house and have quite the comfortable life. Each property could rent for about 1100 per month. 

700 per month x 4 properties would be $2800 add that to your $1400 from California and you get $4200 per month.

It’s not a ton of money but you could live rather comfortable in billings with that income and NO morgtage payment. And of course you could still freelance once and awhile for extra spending cash if you wanna go crazy. 

Lot of Californians moving up here every year. Winters are really not to bad. 

Originally posted by @Joshua D. :

@Jason Clark

Well I am biased but you won’t regret Montana!  We moved here 7 years ago and love it! 

Hi Joshua, thanks for the message. One of the best times I ever had in my life was in Billings back in 2006 for a HOG rally, back when I lived in Denver. I'll never forget it as long as I live! A real man doesn't kiss and tell but I'll just say it involved a great time with some girls my friend and I met downtown after the concert. They thought we were in the rodeo so we let them think whatever they wanted, lol.

Earlier today I was looking online at properties around Bozeman. We stop there on our way to Sturgis, I didn't realize it was such a pricey town. I could easily live in MT, I love to hunt and fish and winter is just an excuse to chop firewood and work on my bike projects in the garage. So many options! 

See folks, this is what keeps me awake at night, ain't that a nice life?

Thanks again.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here