[USER]

I am 43 and entering my third year running a small construction business as a general contractor. In 2024, I earned $125,000 after taxes, while my wife, aged 42, earns $75,000 annually.

Together, we have $95,000 in retirement accounts (IRA and 401(k)), $50,000 in a brokerage account, and $100,000 in a high-yield savings account.

Additionally, we co-own a house with a partner; it’s paid off and currently listed for sale at $230,000, so our share is approximately $100,000, which we can liquidate at any time.

We purchased a small house in 2021 with a 2.75% interest rate mortgage but have not built significant equity yet. We have no credit card debt, though we have a $450 monthly car payment.

We are considering using the $100,000 as a down payment on a larger house in our neighborhood and converting our current residence into a rental property.

The rental income would roughly cover the mortgage payments. Alternatively, we could invest the $100,000 in the stock market.

As a family of four, both working from home, we need more space.

We’re trying to determine whether investing in real estate now is prudent, given our circumstances.

Thank you so much in advance for your insight.

[Lori]

I am by no means an expert. But an advantage you might have over others is your GC skills and sub relationships. One of the tricks I’ve read is:

– build your home below retail cost
– live in it for two years as a personal residence
– sell and net the profit tax free
– rinse and repeat

Vs any income you’re making as GC is at income tax rates (is guesstimate you’re in the 22% bracket tho your effective rate would be lower).

How you finance that, I’m not sure. But it feels like a missed consideration from the above.

Please know housing values don’t always go up. So, this is not free of risk. Again, not an expert so validate accordingly.

[Megan]

Define small house. I have generally found that people think something is smaller than it is.

We lived in a 2 bedroom with 3 adults and a tiny human.

[Scott]

Why not sell the small home (I presume it has been your primary residence since 2021 so you will have no LTCG) and with proceeds from the other investment property find the home that suits you as a family of four.

If the rental income ‘roughly’ covers a 2.75% mortgage that suggests not a lot of cash flow.

Since you are self employed that raises income risks so all else equal I’d prefer to stay liquid which the rental home is not and you can cleanly exit now with no capital gains.

The counter argument is if you can live on spouse salary and their earnings are stable and you can presumably do most of the work (repair/maintenance) on the rental, could make holding it a little more palatable.

[Jennifer]

My husband is a GC who does most if not all of his own work. We also had rentals for 20 years. We just liquidated our rentals over the last 4 years or so.

As a GC you may have an advantage over other landlords in that you can do the work yourself saving cash.

On the flip side if you do the work yourself rentals are even less passive of an income stream then you think.

One of the factors on why we liquidated was because we did not want to mange them anymore and my husband did not want anyone else managing them.

You make a statement that is concering…the rent basically covers the mortgage. That is not enough.

You have to be covering mortgage, insurance, utilities (whatever you are required to cover), repairs and maintenance this includes damage from tenants and general repairsand maintenance(we almost never recouped damages past security deposit).

You also need to factor vacancy rates etc.

[Author]

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