House buying/shuffling strategy for my situation

[Bearded Man]

I own three houses, converting each one to a rental after living there for at least a year. Right now I'm looking at either buying another house or moving into one of the rentals (that I used to live in) and renting out my current primary residence.

Goals:

1) Move before spring into either new house or old rental house, to get out of HOA.
2) Move in such a way as to minimize tax liability in the future in case I sell any or all of the houses.
3) Avoid hating where I live next (bad neighbors).
4) Minimize moving.


Basic questions:

1) Should I move into old rental house or buy a new house?

2) Should I wait until my full 2 years in the house I'm living in now are up before moving, on the count of tax benefits, or just rely on 10-31 exchange to get out penalty free?


Details for background:

I may sell some or all of these or I may never sell any/all of these houses, but I'm trying to structure it for maximum tax benefit down the road, so that I don't have to use a 10-31 to avoid the capital gains hit. I don't see myself keeping the house in the HOA forever, as I've read that sooner or later every owner or investor has a problem with the HOA. Plus the construction of this house seems really shoddy. In any case, my gf and I are not happy where we live and liked the last house much better, even though the neighborhood was not that great. We would like to move back before spring, for a variety of reasons. Tenants there are on a month to month and will have lived there for almost two years by then.

But then, unless I do a 10-31 if I sell this house I'm in now, I will not have lived here for 2 years and have to move back into it for a period of 4-5 months before selling, assuming I sell it within 5 years of the start of my ownership. Again, that's assuming I don't keep it as a rental for longer than the 2/5 year time frame after I move out, so maybe staying here to meet the two years is irrelevant and I should just rely on the 10-31? I'm already coming up on finishing year 3 on one of my rentals in a few months, and the other rental will be almost 2 years before I move back, if I move back in. So, maybe the 2/5 year thing is not that important, considering I could just 10-31 out and buy other properties. Then again, I could always move back into any of them before selling. Just a PITA moving all the time.

Point is, I may very well keep the house I'm living in now as a rental longer than the 3 year window I have to sell it, so maybe worrying about staying here for the 2 years right now is not that important. That said, I do see myself selling it eventually. Not guaranteed, but I hate the HOA and never want to live or have anything to do with one ever again.

Also while I lose most of that years depreciation by moving back into it, I am still gaining the depreciation on the other house converting to a rental instead. Nothing lost there, yeah?

So, that leaves me with, maybe it's best to buy another house?  I just don't know what we are getting at a new house as far as neighborhood. At the old house we know the problems and prefer those to where we are now, in a ritzy subdivison. We are willing to trade off dealing with the one bad neighbor we know is still there, for the convenience, freedom, homesteadability, etc.

But there is the timing thing with buying a new house. I'd either have to rent it out first, which might end up being a short duration for a renter, months, not a full year, or just eat the mortgage until I move in. Either that or just move back into my old house?

I know, a lot of different things going on, hard to explain, but hopefully the four numbered items above kind of lay out the general idea of what I'm trying to do.

[Bearded Man]

Maybe I need to simplify what I'm asking?

Basically, not happy where we live now, thinking of moving back into old house currently a rental, and converting existing house to a rental.

Risk of buying new place is we never know the neighborhood/neighbors. With the old house, we know what we are getting and feel the trade off is worth the other benefits. Neighborhood is not so great but it's close to things for us and the mortgage is much smaller and we liked the house and yard much better and it's cheaper to live there.

Last but not least, want to structure this in a way that I can keep most of my money, if I ever sell any of these properties. There is the 10-31 exchange option, but it forces me to buy more real estate, when I'm likely selling to be DONE with real estate.

[Bearded Man]

Well, put in an offer on another house, but if it falls through, I will likely just move back to my last house. At least there we know what we are getting and it's only one bad neighbor currently. We were much happier there and can drastically reduce our living expenses again. While it's not the best of neighborhoods, it's also not that bad, at least in the three years I've owned it. I experienced lifestyle inflation when I bought the house I live in now. The last house met my needs just fine.

As I'm considering relocating in retirement, I may be better off not investing too much into real estate in the area now. Plus being in a major earthquake zone would be putting the majority of my nest egg at risk. This way I minimize my risk, and also minimize my costs for cashing out and buying elsewhere. Transaction costs will eat almost 20% of my profits.

[Kouhri]

I  not at all familiar with American tax so not entirely sure what all the tax implications are but from purely a quality of life standpoint isn't trying to meet a 2/5 rule a huge pain in the ass both in terms of moving to houses which make decent rentals (which is often different from what you want in a home to live in) , and having to stick it out somewhere for 2 years that you don't want to live. Furthermore a buy and hold investment strategy results in investment properties doing the "heavy lifting" so to speak at the end once they're (mostly) paid off. Selling asap and your focus on tax minimization may mean I'm wrong, and that instead you are gambling on appreciation of the properties, but make sure you in your own mind know what type of investor you are and what your exit strategy is for the properties you already own. Food for thought maybe.

While I'm all for using real estate as an agent to get you to FI, are your current sacrifices worth it? I would really ask yourself want you want in life and whether your current situation, or which of the many scanaries you have already outlined yourself will get you there.

[former player]

I think the reason you are going around and around on this issue of housing is that you are prioritising the wrong thing.  You are looking mainly at finances - taxes, HOA, and so on - when your real problem is that you are unhappy with the house you are living in and would also be unhappy (traffic noise, bad neighbours) living in any of the houses you currently rent out.

So my view is that you need to stop obsessing about the marginal gains on the finances of this decision.  Your finances are fine: you have a good income, a good savings rate and plenty of accumulated capital.   Your "debt emergency" is not a financial emergency, it's a personal unhappiness with your living situation emergency, and it's sorting that out that you need to prioritise.

My suggestion would be: put the house you are currently living in on the market.  It doesn't sound like a good rental (HOA, construction issues) and there seems little scope for long term value increases over the rest of the market (suburbs, cookie cutter, no special value to the location).   Perhaps then find somewhere you can rent to live in temporarily, and take your time looking for a new permanent home to live in.  From what you say, when looking for that new home I would suggest that your prioritise location and plot over the building.  You can always change a building, and as an experienced landlord you should have the know-how and contacts to do this, but as you are discovering, problems with location and plot are permanent and are likely to be an on-going issue for you.

[Bearded Man]

I think the reason you are going around and around on this issue of housing is that you are prioritising the wrong thing.  You are looking mainly at finances - taxes, HOA, and so on - when your real problem is that you are unhappy with the house you are living in and would also be unhappy (traffic noise, bad neighbours) living in any of the houses you currently rent out.

So my view is that you need to stop obsessing about the marginal gains on the finances of this decision.  Your finances are fine: you have a good income, a good savings rate and plenty of accumulated capital.   Your "debt emergency" is not a financial emergency, it's a personal unhappiness with your living situation emergency, and it's sorting that out that you need to prioritise.

My suggestion would be: put the house you are currently living in on the market.  It doesn't sound like a good rental (HOA, construction issues) and there seems little scope for long term value increases over the rest of the market (suburbs, cookie cutter, no special value to the location).   Perhaps then find somewhere you can rent to live in temporarily, and take your time looking for a new permanent home to live in.  From what you say, when looking for that new home I would suggest that your prioritise location and plot over the building.  You can always change a building, and as an experienced landlord you should have the know-how and contacts to do this, but as you are discovering, problems with location and plot are permanent and are likely to be an on-going issue for you.

Yeah, this advice while well intentioned and geared toward maximum happiness, doesn't take into account facts such as how recently I've owned the current residence, transaction costs, and what to do with said capital from selling it, or the fact that the house is in the #1 market in the country right now.

Selling the house after a mere year of ownership wipes out almost ALL of the gains I've made to date on the house, and it doesn't take into account what to do with the money after. Furthermore, why would I sell a house that makes a good rental in the interim (HOA doesn't currently prohibit it, but legally can down the road by state law), while I let it fatten up, and plan what to do with the money from the sale years down the road?

Also, I've already determined that there is always going to be something I and anyone else, doesn't like about a house or neighborhood. There are dozens of threads on this, including one on this forum that I started. Even if you live in the country you will likely have neighbor issues, and having grown up in the country myself, I know we did. It wasn't generally noise there so much as a bunch of red neck conflicts of easement, land, cattle, etc.

Renting a place is also going to have issues, every place is going to have some kind of issue and if there isn't, you haven't lived there long enough to notice it or for things/neighbors to change. Then what, you find a place and buy, then 3 years later the neighbor gets foreclosed on and an investor buys it and turns it into a section 8 rental where they like to party all day and night.

My GF and I realized that we are not happy in the ritzy community and were perfectly happy at the last community, even with some ghetto trash neighbors. It was closer to our hobbies, commuter routes, stores, and transit, and we can homestead there like we did before. Plus it is significantly cheaper to live in that house than the one I live in now, and I get a better depreciation deduction on the fancy house than the other houses I own.

I honestly would just move back into my first house if it was just me, and give it another try. I'd get some insulation put in, and rearrange the house so the rooms I spend the most time in face the back, which are surprisingly ideally setup for it. It's a really convenient location, and just the right size for my needs 3 bed, 1 bath, with a huge yard, near transit, walkable to stores and restaurants (strip mall style) and a quick drive to the freeway.

Low cost of living, easy commute routes, and just right for my needs.

[Kouhri]

My GF and I realized that we are not happy in the ritzy community and were perfectly happy at the last community, even with some ghetto trash neighbors. It was closer to our hobbies, commuter routes, stores, and transit, and we can homestead there like we did before. Plus it is significantly cheaper to live in that house than the one I live in now, and I get a better depreciation deduction on the fancy house than the other houses I own.

I honestly would just move back into my first house if it was just me, and give it another try. I'd get some insulation put in, and rearrange the house so the rooms I spend the most time in face the back, which are surprisingly ideally setup for it. It's a really convenient location, and just the right size for my needs 3 bed, 1 bath, with a huge yard, near transit, walkable to stores and restaurants (strip mall style) and a quick drive to the freeway.

Low cost of living, easy commute routes, and just right for my needs.

It sounds like you already have your answer.

I get the not wanting to lose out on the gains/future possible gains from your current place but is that the most important thing to you right now? Only you can work out where your priorities lie but I think you've figured out what to do if maximizing profit from the current place isn't number one.
Would it help to think about it this way. You have had gains in the current property which although wouldn't materialize into a windfall on selling due to the capital gains tax means you can walk away without additional debt. You're not underwater. You can get all your money back out. And presumably it'll be an easy property to sell so you can just walk away. You're lucky to be in a position here you have the freedom to just leave an unpleasant living arrangement.

Anyway it's your choice. And you have that choice. Choose your tradeoff between happiness and financial gain.