How a $50k Down Payment On Our Primary Home Turned Into 3 Rentals & $350k In ROI

Happy Thursday, fellow Hybrids!

In this week's issue, I'm going to tell you the story of how we turned $50k down payment on our first house into 3 rentals & $350k in ROI.

Here we go!

(Today’s issue takes ~4 minutes to read)

Well, it’s official. We sold our first house!

Not only was this our first home sale, but it was also the first home my wife and I ever bought back in October 2017.

Neither of us could have predicted that this would launch us into a new chapter as full-fledged real estate investors!

I’m going to break down how we got 4 separate uses out of this single house:

1. Primary Residence

2. Cash-out Re-Finance (to fund 2 more rental properties)

3. Rental Property

4. Sale

Here is a photo of the home, in all its glory.

In many ways, 2017 was a simpler time for us:

• We were both 27 years old

• Working full-time demanding jobs

• Living in Las Vegas

• With no kids (yet)

We bought this home as a primary residence and had no idea then that we’d be getting into rental real estate.

Here are the specs on the house:

• 4BR/2BA

• 2100 sq foot house

• Built in 1944 (completely remodeled in 2017)

• $250k Purchase Price

• 20% ($50k) Down Payment

• 30-year fixed, 4% interest rate

• The monthly payment (principal, interest, tax & insurance) was $932...

Coming from Seattle, this blew our minds! This same house would probably be $750k and have no yard…

(Beware of the comparison trap, by the way. That’s how you end up overpaying.)

This was our first home, both literally and figuratively.

We celebrated many occasions here:

• We adopted our dog Arnold in this house

• We hosted our whole family for Thanksgiving (paying forward a long-standing tradition)

• We even got married in the backyard…(that’s a whole other story #Vegas). See below for proof.

At $932/month, we were living comfortably and building a life together in this home.

Now in late 2019, we saw another opportunity:

In November 2019 I received an email from our agent that changed our life forever.

He had two houses being packaged and sold together with 5-year leases paying above-market rent. These were home run deals!

In short, we needed a way to fund the deals.

Enter the cash-out refinance!

In the 3 years from 2017-2020, we built up an additional $50k in equity in our primary home.

Using a cash-out refinance, we were able to pull that money out and re-invest it in these two rental properties.

(Important to note: The ReFi increased our monthly payment from $932 to $1,300. This was an acceptable cost to us since we were able to more than make up for it with rental revenue).

To date, these two houses have generated over $72,000 in NET cash flow while appreciating over $230k in value.

Click here for the full deal breakdown of those two properties.

If you’re keeping score, this house already had:

• Given us an amazing place to live

• Funded two home-run rental properties

But why stop there? When circumstances (*cough* COVID! *cough*) forced us to leave Vegas, we decided…

If it weren’t for the pandemic (which uprooted my career in the Concerts Industry), we might still live in this house.

But alas, COVID had different ideas, and we relocated back to Seattle in 2020.

Now usually, when someone moves, they sell their primary home and use the proceeds to buy a home in their new city.

As I mentioned before, Seattle real estate prices are ludicrous!

If we wanted to find a suitable home we could grow into and raise a family in, we’d have to sell all 4 of our rental properties to fund it!

Sorry, but that’s just not worth it…

So we decided to rent a home in Seattle and turn our Vegas home into a rental, and boy, are we glad we did!

We rented the house for 3 years, collecting over $65k in rent and paying down $14k in principal.

Now, in a perfect world, we would have held onto this property forever.

Alas, as I wrote about before, the biggest downside to real estate investing is Illiquidity.

You can have $10 million in real estate equity, but if you don’t have enough cash to fund your day-to-day life, it does you no good.

This leads us to the final use case…

We have been diligent about planning our lives in a way that works for our growing family.

But even still, sometimes life throws you curveballs.

We’re expecting twin boys later this year, so we decided to sell this house to free up some cash.

Luckily, there is a beautiful tax loophole where you can exclude up to $500k in capital gains tax when you sell a home that you’ve lived in for 2 out of the last 5 years.

(Long-term capital gains tax is 15% of the profit in our tax bracket)

We moved out of this house on September 12th, 2020 and we sold it this week (July 17th, 2023).

In other words, we slid in right before the deadline to make our entire cap gains tax-free.

(See below for a real picture of the IRS trying to tag us with capital gains tax before we reached home base before the deadline.)

Here’s the final tally:

Purchase: $250k on October 5th, 2017

Sale: $365k on July 13th, 2023

Initial Investment: $50k

Capital Gains: $110k (tax free!)

Total Rent Collected: $68k

Total Net Cash Flow (after expenses): $10k

I can live with that…

This story was long & winding, but there are a few key points I want to drive home for you.

• A single property purchased as a primary residence can serve many purposes

• While my main goal has always been to buy and hold, life doesn’t always play out how you project it on a spreadsheet.

• It’s ok to take profits and free up cash from your home equity, especially when you need it for another important priority in your life (like having kids)

One thing I know for sure…if we never bought the first property, we’d be in a very different place in our lives right now.

So remember, the first step is the hardest. But in the end, it’s worth it…

Happy investing.

-Aaron