[Jamie]

Looking for advice. Trying to FIRE asap but cannot decide which direction to go next. I’m 39 years old. Husband is 44.

Kids are 8 & 9. We both mostly work from home, both self employed. Live in CO. No debt other than these 2 house mortgages below.

We have 1 car we paid cash for 10 years ago; but probably need a second again soon.

House #1: Our old primary that I put in an LLC. We are moving back into this house this year so I can take it out of the LLC and have it be our primary for the next 2 years to avoid the capital gains tax.

$130,000 balance at 2.99% interest (approx $500k net equity if sold, being conservative and leaving money for closing costs; worth about $700k).

Have been long term renting this house, and income used to be really good but with the house value going up on this one so much it’s now only about 5.5% return on the rental income for the amount of equity in the house.

House #2: Primary residence we left last year and rented it fully furnished, did not put in LLC.

(We moved for 1 year to Austin, TX for fun and sun.) $552,000 balance at 2.88% interest (approx $200k net equity if sold, being conservative and leaving money for closing costs; worth about $850k).

This brings in about 10% return on the money for what I’m getting in net rental income for the equity in the house.

Before we left I had added an ADU to this house and was renting to traveling nurses, but you cannot rent them separately per town and HOA rules. The owner has to live in one.

So … if I keep paying down the houses I could have about $7k monthly rental income in 8-9-ish years with both houses paid off, based on mortgage calculators and using the rent income to snowball payment both of these. But, I can’t decide if that makes sense.

It feels like too much equity sitting in them. And I hate to pay off houses at these very low rates. But, we don’t spend much and wouldn’t need too much more beyond that $7k/month.

(Also have $300k in investments) Do we stay in House #1 as our primary because the payment is tiny ($1500/month) and can use our money to bulk up investments and/or pay down the houses?

Do I sell house #1 after 2 years to avoid the taxes and so I have $500k to use for something else? Other advice?

I would love to hear your suggestions!! Thank you!

[Josh]

You will pay depreciation recapture on house #1 even of you move back in for 2 years. You might not get the full capital gains exclusion as well, but I’m not 100% on that part.

Basically ask your cpa more about this.

As for the long term strategy of trapped equity vs cashflow. Yeah 5% sounds bad, but oh that intrest rate is sweet.

I would only sell it if I was going to do a 1031 into something with better cashflow (think small multi family)

[Tony]

I assume your lives involve more than just two rental properties. What about location for schooling, living in an area you *prefer* or want to live in post-FIRE where your friends, hobbies, and interests are, which area COL works best with your annual budget, etc.

Right now you’re focused on the trees when you probably should be more focused on the forest.

Figure out what your long term goals and annual budget is and what you envision your FIRE life to be first and *then* reverse-engineer the path you need to take to get there.

[Dawn]

Keep in mind that if you move back into your old primary, your capital gains tax will still apply to the non-personal use years.

Basically whatever the gain is will be prorated between personal use years and rental years.

[Ron]

where are you living after you pay down both houses so that they generate $7k combined income through renting them out?

[Stacy]

Side note, not sure about your HOA but Colorado pass HB-1152 in May 2024 which I believe gets rid of the owner occupancy rule for ADUs starting in 6/2025

[Author]

Posts