Affording housing? (not so much for investments)

[Ella]

I want to try and figure out if I can afford to buy a house and I am not sure where to begin. Ideally, I find one in a decent area on the cheaper side and live in it for 5 years. I will make repairs and upgrade things while I am there as I have the money for it, and then sell it in the future if it is an option to do so for a profit. So while it is for investing, that would be a secondary option. I am just trying to find something I can afford and live in comfortable without it needing anything done to it right away. 

[James]

This is a great way to do this. If you live in the home full time for at least 2 of the 5 years before you sell you get a tax exclusion up to $250k for a single person or $500k for a couple. 

The trade up strategy of doing live in flips is a great way to make extra income while continuing to upgrade your way of life. 

You can always pick up a duplex, triplex, or quadplex as your first property and lease out the other units and live in one of them. That way you can reduce your housing expenses which is typically 33% of your overall budget. Sometimes you can make it so you are living for "free". This enables you to save faster so you can buy that live in flip then lease out the unit you were living in. Now you will have two properties one of them is generating cash and the other one is getting fixed up for sale over the next 2 years. 

[Mila]

20 hours ago, James said:

This is a great way to do this. If you live in the home full time for at least 2 of the 5 years before you sell you get a tax exclusion up to $250k for a single person or $500k for a couple. 

The trade up strategy of doing live in flips is a great way to make extra income while continuing to upgrade your way of life. 

You can always pick up a duplex, triplex, or quadplex as your first property and lease out the other units and live in one of them. That way you can reduce your housing expenses which is typically 33% of your overall budget. Sometimes you can make it so you are living for "free". This enables you to save faster so you can buy that live in flip then lease out the unit you were living in. Now you will have two properties one of them is generating cash and the other one is getting fixed up for sale over the next 2 years. 

Teach me these ways. LOL!

I had no idea you could do something like this!! What do you mean about the tax exclusion? Like you can sell the house and not pay any taxes on what you earn from selling it?

[James]

21 hours ago, Mila said:

Teach me these ways. LOL!

I had no idea you could do something like this!! What do you mean about the tax exclusion? Like you can sell the house and not pay any taxes on what you earn from selling it?

Exactly. So lets play with some easy numbers. 

We are going to assume you are single. You buy a home that needs a bunch of time, love, and care for $100k. 

Over the next two years you live in this home as your primary residence and fix it up to bring it to todays standards. 

You list the home after living in it for 2 years for $350k and it sells. 

You made 250k in profit. There will be no taxes on this money because of the rule I talked about above. 

Now say you sold the house for $500k. 

So now you have $400k in profit. $250k is going to be excluded so you will only be paying capital gains tax on $150k. 

Let me know if that cleared up any confusion. 

[Yonder]

Making sure you can afford it is key. I think if you're "just scraping by" I would not recommend it, but if you can comfortably afford the down payment and the mortgage, there is nothing like owning your own house 🙂

[Mila]

On 6/15/2021 at 3:21 PM, James said:

Exactly. So lets play with some easy numbers. 

We are going to assume you are single. You buy a home that needs a bunch of time, love, and care for $100k. 

Over the next two years you live in this home as your primary residence and fix it up to bring it to todays standards. 

You list the home after living in it for 2 years for $350k and it sells. 

You made 250k in profit. There will be no taxes on this money because of the rule I talked about above. 

Now say you sold the house for $500k. 

So now you have $400k in profit. $250k is going to be excluded so you will only be paying capital gains tax on $150k. 

Let me know if that cleared up any confusion. 

This is fantastic! This actually makes buying a home more valuable even if you don't intend on living in said home for good. I wonder why there aren't more people talking about this. I could bet you more younger couples would be willing to buy vs rent if they knew this!

[James]

People don't talk about this because they do not think of their personal residence as being a money producing machine because it would take WORK. 

Scott Trench and Mindy Jensen write about this is their book "First-Time Home Buyer". It has an investment focus because its put out by the BiggerPockets community but it is a great read for any one thinking of following this strategy. 

We make money when we buy things not when we sell them :). 

[Carson]

On 6/13/2021 at 10:02 PM, James said:

This is a great way to do this. If you live in the home full time for at least 2 of the 5 years before you sell you get a tax exclusion up to $250k for a single person or $500k for a couple. 

The trade up strategy of doing live in flips is a great way to make extra income while continuing to upgrade your way of life. 

You can always pick up a duplex, triplex, or quadplex as your first property and lease out the other units and live in one of them. That way you can reduce your housing expenses which is typically 33% of your overall budget. Sometimes you can make it so you are living for "free". This enables you to save faster so you can buy that live in flip then lease out the unit you were living in. Now you will have two properties one of them is generating cash and the other one is getting fixed up for sale over the next 2 years. 

Nice! I had no idea this was an option. I would love to have an additional $250k or more. 😄