I've been looking at a foreclosure house for sale and I'd like some input on whether it makes sense to buy with the intention of living in it for two years and reselling after we meet the two year time limit for capital gains tax.
Background, I live in an area where real estate is pretty cheap. Current house is a fairly nice home with 2300 square foot living space. We like the house but it's not in a convenient or bike-able location so I'd like to move at some point in the future but we aren't in any rush. Value is probably ~$150,000 and we owe $40,000.
The house I'm looking at is a mansion (by my standards) with over 5,400 square foot of living space (plus a full basement) not including a small detached rental duplex. The 5,000 square foot does include a 2BR, 1 bath area with a full kitchen that could be rented out or used as a mother in law apartment. It sits on 11 acres with a pond and a picnic shelter. It's easily "worth" $500,000 and would cost more than that to build. It's currently on sale for $280,000 but I may be able to get it for $250,000 or less. If I purchased it, the goal would be to live there for two years and then sell it to make a ~$200,000 profit. There are some minor repairs and upgrades needed on the interior but most of the work is external (grass hasn't been mowed all summer, needs painting, etc) The detached rental needs more work than the main house.
Upsides:
Potentially doubling my money in 2 years while living in a nice place. (potentially making $100,000/yr to live in a mansion)
Tax free (no capital gains tax) money that is in after tax accounts would be nice for early retirement. Currently most of my net worth is in my 401K or my house. If I made $200,000 or more that could be my buffer for the 5 years of the roth conversion ladder from my 401k.
Potential to rent out from 1-3 "units" and cover some expenses. The one that's part of the house we would probably only want to rent to family or friends. Potential rental income is $500-$1500/month. But, do we rent when we aren't planning to stay long term?
Downsides:
Risk, what if I can't sell it in a reasonable time? Houses in this price range don't tend to move very quickly in my area. It could be a long process and with the much larger tax, insurance and mortgage I would need to dial back some of my other investments to cover the difference.
Having to move twice.
Risk of getting used to the larger house and not wanting to downsize.
I've bought foreclosure's twice to live in and saved money each time. Both of them were about $100,000 dollar purchase price. Other than that, I don't have a lot of experience in real estate but I'm interested in getting involved. This would be a large first step. Would it make sense to do this or to start smaller?