Best way to passively grow real estate value?

Question

Is the best way to passively grow your real estate value to move houses every 6 years? Say you want to buy a home for your family and live there but also want to utilize leverage to make profit by selling the home, trading up, and moving to a new one in your local neighbourhood every 6 years. Assuming you buy your first home when your child is born at age 0, you will have 4 houses before they are independent and can live by themselves (I set the age conservatively at 24). If you live in an area with high yearly appreciation like Seattle and we assume you can get 8% yearly appreciation, here would be the following math for this idea for 30 year mortgages at 6.6% interest :

1st house 500k, value after appreciation from 6 years = 740k, profit = 60k, down payment=100k, monthly payment= 2.5k

2nd house 1M, value after appreciation from 6 years = 1.48M, profit = 110k, total profit = 170k, down payment= 200k, monthly payment= 5.1k

3rd house 2M, value after appreciation from 6 years = 2.96M, profit = 240k, total profit = 410k, down payment= 400k, monthly payment= 10k

4th house 3M, value after appreciation from 6 years = 4.44M, profit = 320k, total profit = 730k, down payment= 600k, monthly payment= 15k

By doing this you can afford houses that you normally couldn't afford through passive income by constantly trading up houses and utilizing leverage to not only live in your house and keep upgrading, but you can also use the profits from selling the house to invest or as a down payment for the next house. This is assuming you have a stable income from a high paying field like tech with household income scaling between 100-550k per year which is possible if you have a wife with a high paying job as well. For further comparison without doing this idea, you would need to make 720k a year to afford the 3 million dollar house on top of having to pay a 20% downpayment out of pocket as well. Doing this idea you would make 730k simply by living and upgrading your home every 6 years (Yes it's a pain in the ass), and each house down the line would contribute to your down payment for the next house.

For comparison assuming you wanted to make 730k through investing in the S&P 500 index in 24 years at 8% annual returns, you would have to contribute 6k per year to get this amount. You could easily sell the house once your kids are independent and move to a 500k house, and have 200k to spend for your retirement. The only caveat is you have to move 4 times while you have a family but you get to keep upgrading while being payed to do so as long as you keep reinvesting in a high appreciation or hot area. This would work even better if you could secure higher appreciation through finding fixer uppers and rehabbing them.

If you own a standard 1M home and don't move for 24 years, you would get 192% appreciation which is 1.92M when you sell the home and assuming you payed a 200k down payment and had 6.6% interest, you would pay 1.85M in total for the loan and cost of the house and make 70k for living in your home for 30 years. That is not a good deal

Is my math right for this idea?

TLDR: If you are a high earner, upgrading and re-investing into a new home frequently generates sizeable profits that pay off your next home down payment and can contribute 700k to your retirement for 24 years of ownership.

Account Closed · Answer

Skipping over the assumption that appreciation is a year to year guarantee, or the exclusion of 6-9% closing costs, I will just ask:

Why buy a $3mil home when you can buy an entire cash producing portfolio? Is a $1mil home not big enough that you must constantly go through the process of selling, buying and moving to make pennies on the dollar?

Lane Kawaoka · Answer

@Mark Weins

As a former engineer, I totally get where you're coming from. When it comes to your salary, what really matters is the amount you can save each year. When I was working my W2 job, I was able to save a good chunk of money pretty quickly. If you're someone who can save a significant amount, like 50 grand or even 20 grand a year, buying a house might not be the best move for you. Many people see buying a house as a smart investment because it acts as a forced piggy bank. However, if you're able to save a decent amount, it's better to be proactive and invest in rental properties.

If your net worth is under a quarter million or half a million dollars, start by buying smaller rental properties or even turnkey rentals in secondary markets. I personally bought properties in Atlanta, Birmingham, Indianapolis, and Pennsylvania between 2012 and 2015.

I don't know the details of your net worth, AGI, or annual savings, but it's possible that diving straight into syndications and private placements might be a better fit for you.

Now, let's circle back to the topic of buying a house.

One rule of thumb I follow is not to buy a house until your net worth is two or three times greater than the house's value. So, if you're eyeing a half-million-dollar house, hold off until your net worth is around one to 1.5 million. I know it may sound a bit crazy like I'm a total prude, but many people jump into buying their house too early. Remember, you're the one paying down the mortgage, not your tenants, and the return on investment isn't always great.

Your money is better off invested in assets where tenants are paying down your mortgage or in syndications where there's value-add potential. That's my general advice on the matter. However, once your net worth hits at least a million dollars, feel free to buy that house and take advantage of Section 179, where you can exclude up to $500,000 of capital gains. Use that to level up to a million and a half, two million, or even two and a half million-dollar house.

At that point, tax savings might not be your primary concern. Instead, focus on keeping your boss and spouse happy by not having to move every few years when your house value goes up by $500,000. It becomes more about stability and personal preference. Overall, it sounds like you're on the right track, my man.

Feel free to reach out to me 👍

Eric Yu · Answer

I'm a strong proponent of buying & holding forever unless you feel the need to re-allocate capital to be more efficient. Like Chris said, you're going to impact your returns a lot with selling costs. In Seattle, assuming 5% commissions, 1.78% excise tax, and ~1% in other fees, you're losing almost 8% each time you sell.

Rather than doing that, if you continuously buy $500k homes every 1-2 years, and keep leveraging low down payment loans, you can much more quickly take advantage of appreciation & add way more to your overall net worth. Of course, you need to identify the right buying opportunities and find properties where rent can mostly offset your PITI / expenses. I know you're looking for passive; you can make it 99% passive as well when hiring in a PM.

Chris Seveney · Answer

@Mark Weins

You are overshooting home appreciation values

Actually wealth is built by staying in your home not constantly moving because of the transaction costs of constantly moving.

Best way to passively grow real estate value?

4 Replies