Here’s a common mistake you absolutely must avoid as a move-up buyer.
Converting a principal residence into an income property is one of the biggest mistakes move-up buyers make that you need to avoid. Why? Let me give you an example.
Let’s say you’ve owned your property for a few years, it’s worth about $500,000, you have a $300,000 mortgage on it, and you’re ready to move on and buy your second, million-dollar property. Let’s also assume you’ve done well for yourself and don’t need to sell the first property to have the money to purchase the second one. What are you most likely going to do? Refinance that first property, take out $100,000, add some more to your down payment (potentially), buy the second property, and put a tenant into the first property.
However, when your principal residence becomes an income property, you can no longer sell it tax-free. Time and time again we see that when we run the numbers, it’s not worth holding onto that first property for an additional few years. Eventually, the tax cost erodes the appreciation.
What I suggest doing instead is selling that first property. If you sell that $500,000 property, you’re getting all of your money out of it, and that enables you to buy two $1 million properties. One could be a rental income property, while the other could be your principal residence. Instead of benefitting from the appreciation of $1.5 million, you’ll benefit from the appreciation of $2 million.
My team and I help clients with these kinds of scenarios all the time, so if you have questions about this topic, don’t hesitate to reach out to me. I’d love to hear from you.