Flip Or Hold
I need some advice about a property that I bought last month. It is a single family home. Owner contract with baloon due in two years. The property would sell on the market for 85000 to 90000. I bought it for 53000 with 10000 down. Just finished the rehab (about 2000). Now what do I flip the property I have around 45000 worth of equity in it. Or do I rent it out, I can make 250 a month in rent. If I hold the property I will refinance soon, but i hear many different ideas from a lot of people but none of them have any experience in the buisness. I own 1 other house that is currently rented out. I do not want to get hit with hight capital gains taxes so i do not know where to go to from here. Thanks for all your help
If you want to avoid capital gains tax, you might do a 1031 exchange and roll your money into a new (bigger) investment property. Just a thought.
Consider your Taxes as a zero interest loan with a balloon that is due sometime in 2005.
Take your profit, reinvest it wisely and do so twice this year.
At the rate you're going you will have close to 100K under the Christmastree, and money in the Bank to pay Uncle Sam in 2005.
Happy investing.
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Quote:
On 2004-01-30 01:02, Hawthorn wrote:
Consider your Taxes as a zero interest loan with a balloon that is due sometime in 2005.
Take your profit, reinvest it wisely and do so twice this year.
At the rate you're going you will have close to 100K under the Christmastree, and money in the Bank to pay Uncle Sam in 2005.
Happy investing.
UNLESS you live in California where they have this wonderful (sarcasm) law that withholds 3 1/3% of the TOTAL SALE price of the property in taxes to offset any capital gains that might be owed. So in California, Uncle Sam gets the zero interest loan. Kind of makes you not want to sell your property until late in the year or you could potentially have to wait at least a year to get any of your money back.
Imagine if you did 4 or 5 flips a year and held some properties so the depreciation deductions eliminate your tax liability. Imagine what your tax refund would be!!
Geez I hate California sometimes!
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I would sell this house now and use the money you make to do it again and again and again!!! The taxes will not be due until April15,2005. Let your money work for you instead of you working for money. It may just allow you to quit your j.o.b.-just over broke.
I agree with all of the above!
Sell
You did a good job of finding this one,
with the minimum 30k split between what it is worth and what you bought it for. Now go out and take your profit young man and find two more!
Jeffrey Adam
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Thank you for all of the help. But I cannot get over the "why not hold philosophy" I can refinance and pull out the down payment plus extra and still make money off of rent. I know the managment of rentals plays a big role in everyones decision. My long term goal is to own 30 single family homes by the age of 35, I am currently 23. So should I change my goal to a bank account total and try to flip some of the big money properties. I am just learning but have as much motivation than anyone can in this business. I just want to do the right thing, I appriciate all of your comments and keep them coming. Thanks
I am a buy hold guy myself, but I think we are missing one very important fact that has not been said...... We need to know if you rehabbed for rental or retail, this is a big part of the your answer given you have already done the work.
I couln't sell my rentals to a bum, they meet code and that's it. I'd get killed selling them vs. holding, because I bought them with the end in mind. They were given birth through rehab by me to be raised as rentals and they will die as rentals.
retail flips on the other side of the fence new all new shiny stuff, fixtures, goodies, nice front doors, lighting, polish and sizzle. I would only do these things if I was going to sell retail.
So, what did you do?
I think the rest of the advice you were given is dead on.... 1031 exchange is like the investors BFG (gun on the game Quake) and should always be considered. Trade up, Trade up, Trade up.
My philosophyon the sell vs. hold lies somewhere in between. I also purchase SFH below market, contract some rehab work and then...my exit strategy. I just went into contract with a second Rent to Own, (otherwise known as a lease option). Advantages vs. renting: 1) higher cash flow 2) less repairs 3) don't really have to landlord. Advantages vs. selling: 1) sell for a higher price 2) no realtor 3) quick sale.
I just sold one through this method. I had over 50 people leave me a message within 2 weeks of running an ad in a small town paper. I was able to PICK who I wanted in the home. Obviously, there are some drawbacks to this method, but if you can handle keeping your money tied up and tap some through a HELOC it makes a lot of sense. Your situation sounds about perfect for it.
Quote:jonathanlawton wrote:
My long term goal is to own 30 single family homes by the age of 35, I am currently 23. If your goal is to own several rental properties in a short period of time, you will never get there by flipping everything.
You might adopt the attitude that the more of your own money you have in a property, the quicker you might want to get it back out. You have only $12K invested in this property, you can get it all back with a cash-out refinance, and you are projecting a healthy rental income. Why not hold onto this one?
On some properties you might find the holding costs to be too high, or the cash flow just isn't there. These are the properties to resell for profit.
A personal example. In 1998, I bought a 3/1.5 townhouse for $49K, and put another $7K into the rehab. I considered reselling for $85K (comps were $90K), but because the rental demand was so good and the cash flow was there, I kept the property in my rental portfolio. Last week, I signed a listing agreement to sell at $130K when my tenant's lease expires at the end of March. I have a total of $12K invested in this property (10% down plus rehab). I will use a 1031exchange to replace this property with two condos. Without contributing any more cash to the deal, I will replace one income producing property with two income producing properties and double my cash flow.
Guess what, I have another property identical to this one that I acquired in a 1031 exchange in 2001 for $69K and put $8K into the rehab, all with exchange proceeds and new financing -- none of my own money. I will also sell this one later this year, listing at $130K and 1031 exchange for two more properties -- once again doubling my cash flow without adding another penny to the deal. Since I had put only $7K of my own money into the first property that I relinquished in a 1031 exchange to acquire this one, I guess I still have $7K invested in this deal (but only if you ignore the $30K in cash flow I collected throughout my holding period).
The point of my story is that you can have the best of both worlds. Hold this property now for the cash flow, then sell later when appreciation improves your net worth and you can use tax deferral strategies to add to your long term holdings -- increasing your net worth and improving your cash flow. Not all your investment decisions have to be "sell" or "hold"; there is also "hold for now, sell later".
Contrary to some of the suggestions you have received in this thread, a 1031 tax-deferred exchange does not apply to "flip" property. For flips, your profit is ordinary income and may be subject to self-employment taxes too. I have the same caution with the flip-by-lease-option strategy proposed by halesmob.[ Edited by DaveT on Date 01/31/2004 ]
A cash out refinance would be good only if everything pencils!
Best Riches,
Jeff Adam
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This one would be a definite flip in my books. Any time you have that much equity in a property you need to get it out.
Another option would be to rent it and refi, if you do this right you will get the majority of your cash out and have positive cash flow.
The bonus here is that you pay no taxes as your cash out is financed money, not profit.
I'm a big fan of cash out refis because most of the time, if you plan on holding the property, you can increase your monthly cash flow by lowering your monthly payment because of the lower rates usually available when refinancing especially with the amount of equity you've been able to gain.
Also, think big picture. Right now we are seeing interest rates at 40 year lows. I'd try to accumulate quite a few properties at these rates and hold them for the long term. Five years down the road if mortgage rates are back around 8-9% a 6% or lower rate will look awesome! Don't regret then not holding onto properties now.
Just my .02 worth,
Q
You mention that you would ultimately like to acquire around 30 properties. Have you decided what types of properties you want to acquire for rentals? If this is the type of property you want, I think it would only make sense to do a cash out refi and move on to the next project. However, as gtrzndrums mentioned above, there is a huge difference between how you rehab a rental, or rehab a house you plan to sell.
The main thing is to determine what you are looking for in a rental. I like cashflow but others go for appreciation.
WOW thanks for all of the information. I have decided to cash out refinance. I will be able to pull out around 17000 and my monthly payment wil rise 3 dollars. (since the original payment is on a 15 year and I will go to a 30 year) My payment will be around 368 a month. It will be able to get 650 a month for it. Washingting Mutual has a program which I am going to use they will give me 70% LTV, 6.3% rate, 30yr fixed. I know I could get more but I want the monthly cash flow. I will be able to get my 10000 I invested initially, the 2000 I put into the house plus an extra 5000. I already have another property that I have an offer on that looks to be as good if not better than this one. So thank you for all the help, My new propspect looks like a flip property. It is going to be a money maker, but is not what I want in a rental.