Capital Gains Tax: From Primary Residence to Rental Portfolio | 3 of 4
The last two Posts.
First we teased 3 ways to avoid capital gains tax. Really, its two ways to defer, and one exclusion from the IRS. But still worth knowing and understanding.
then we discussed laying the groundwork for your investment portfolio by buying your first home. So much easier to qualify, get a great interest rate and come to the table with less down when you do it this way.
Now we are going to jump into part 3. This is where the plan really takes shape.
lets get into it.
Part 3: The Plan. Going from your Primary Residence to Rental Portfolio
Buy a home that has a reasonable, comfortable payment. It’s okay if it’s a touch of a stretch because, in the next year or two, you will likely make more money. Because you have a mortgage, your payment won’t change - unlike rent that can go up every year. Try to make sure that the home you buy now can work for you for the next 2-5 years.
Keep making money and saving it as you did for your first place. As you get pay increases, don’t increase your lifestyle. Try your best to be content with what you have, and find joy in saving, not spending. This is the hardest part for most.
Keep It as a Rental:
After a few years of homeownership, the goal is to buy another property to move into and keep your departing residence as a rental. By doing so, you’ll be having someone else foot the bill while you benefit from the compounding effect of paying off the principal while simultaneously enjoying the appreciation of your property. Many people focus solely on cash flow, but it's important to remember that cash flow is a defensive position. Let time be your ally here. After a few years, rents in your area will be the same or higher than your mortgage. That’s what makes this work. By maintaining the property as a rental, you can tap into the power of equity growth and capitalize on the “icing on the cake”—appreciation, while maintaining debt service.
That's the basic strategy. Buy your home. Live in it for a couple of years. Continue to save like mad. Buy another home, and keep them as rentals along the way. Wash, rinse, repeat.
What’s the future look like?
From the time you purchase your first home, if you took the next 10 years and bought a home every 3 years you’d have 3 rentals and one primary residence. Those three rentals will set you up nicely for additional funds for your retirement.
If you can purchase every 2 years, or have a 20-year runway - you can really build yourself up a decent portfolio with very little effort.
There are two criteria that have to line up to know when it’s time to buy your next primary residence:
When local rents cover your mortgage (Debt Service)
When you have enough saved for another down payment. Now, the amount you are able to put down could be 3, 5, 7, 10 - or even 20% down - just know that will set the tone for your monthly payment, and your monthly payment juxtaposed to future local rents is the litmus test for the first criteria.
Following this plan can set you up for long-term success in real estate investment.
Here's what happens next: Stay tuned for the next post where we’ll delve into advanced strategies to maximize profit and minimize taxes. This is where the rubber meets the road, and if its not clear to you yet, the next post should make it really easy to understand what I'm sugesting for you.
If you're making a move, reach out, and lets chat. Happy to brainstorm and come up with a solution that gets you a tangible and actionable plan that fits your unique situation.
Best,
Justin H Gazabat
Broker | PNW, Seattle, Ballard, East Side
Your Friendly Seattle Neighborhood Real Estate Professional.
www.JustinGazabat.com
P.S. I sincerely appreciate your continued trust and generous support of me and my business. It truly means the world to me when you think to connect me to your friends, family, and co-workers.
P.P.S. If anyone in your social or work circles is considering a move, just send an intro text or email with their best contact info, make sure everyone is CC’d and I’ll take care of the rest! I promise to take great care of them, serve them well, make you look really good in the process. Plus help them get great results! Referrals are crucial to our business, and we genuinely value the opportunity to serve you and your network.
