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Author Topic: Rent or Sell...Advice Please!  (Read 5453 times)

Offline Jerry in OC MD

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Rent or Sell...Advice Please!
« on: October 07, 2006, 10:52:53 am »
 Hi All,

I recently purchased, and am in the process of rehabbing my first investment property. The home was bought at an incredible discount. By the time all is said and done I will have about $135,000 invested in the home. I could quickly turn around and sell for about $235,000 (conservatively), realizing about a $100,000 short term capital gain. I also have the option of renting the property for about $250 - $300 more than my mortgage payment.

Here is the question: What to do? Rent or sell? If I hold the property, I'm confident that properties in the area will continue to hold stedy or rise slightly, in-spite of what's happening in some other parts of the country.

I guess it's a great situation to be in, but I'm just confused about how to handle things. One thing that I am sure of is that I've had a great deal of "fun" in the process. I'm very hands-on, and save quite a bit on labor by doing some work myself. I definitely want to do this again. BTW, I'm a Realtor.

Looking for your input. Thanks.

Offline propertymanager

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Re:Rent or Sell...Advice Please!
« Reply #1 on: October 07, 2006, 12:20:15 pm »
This is a VERY easy decision.  On the one hand, you have the opportunity to make $100K on the sale of this house.  On the other hand, you have the opportunity to lose money each and every month on this property as a rental.  I'd sell it!

Mike
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline henryinma

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Re:Rent or Sell...Advice Please!
« Reply #2 on: October 07, 2006, 08:09:08 pm »
I'd say a little of both, rent it out for a year, then do a 1031 exchange and do it all over again. Put it on the market on the 10th month and say you can only close after the 12th. No short term capital gains tax which if you're in the 28% tax bracket, it's 28k you don't have to pay right away. I think 1031's are getting trickier so of course consult your accountant about all the rules to follow.
Realtor/Rental Property Owner
Boston, MA

Offline Jerry in OC MD

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Re:Rent or Sell...Advice Please!
« Reply #3 on: October 08, 2006, 09:05:51 am »
Found this over at www.bankrate.com. I really might want to look into this option....

You could also get long-term gain treatment if you defer the sale of the first property by entering into a delayed closing with the prospective buyer. For example, you can give the buyer a lease option that could be exercised after you meet the one-year requirement.

Offline austinmkCT

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Re:Rent or Sell...Advice Please!
« Reply #4 on: October 08, 2006, 10:38:47 pm »
I'd say sell it.

Renting out a single family home can turn into a nightmare.
take your money and run.

or, rather than run... take that profit and roll it into a 3 or 4 unit
to get the cash flow.

Offline propertymanager

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Re:Rent or Sell...Advice Please!
« Reply #5 on: October 09, 2006, 06:11:00 am »
austinmkct,

I agree.  There is a very real risk to renting a property that has been rehabbed for sale.  In fact, we don't rehab a rental house in the same manner that we do one for sale.  The reason is that tenants are very hard on everything and can be absolutely destructive.  It is not smart to put expensive components in a rental, as they very likely will be torn up in a short period of time.  

In this case, we're talking about renting a $235K house for little more than the mortgage payment on a $135K house.  That's a great deal for the tenant, but will result in some serious negative cash flow each month.  The mortgage payment (P & I) is not even part of the operating expenses and pretending that you won't have any expenses in a year is not smart.  After the year lease, the property may need to be rehabbed again and then there will be vacancy and holding costs while that is occurring.  All of this in the hopes of saving a few thousand dollars.  We should also consider the opportunity cost of losing the use of that $100K for a year.

I don't see it, but to each his own.  

Mike
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline Rich_in_CT

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Re:Rent or Sell...Advice Please!
« Reply #6 on: October 09, 2006, 12:02:53 pm »
How many months of renting would it take to realize a $100,000 gain?  Food for thought.....

Offline henryinma

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Re:Rent or Sell...Advice Please!
« Reply #7 on: October 09, 2006, 12:52:43 pm »
Making money is about taking risks. The risk adverse strategy is to just sell the property. If you'd like to take on some additional risks and want to reap the financial rewards, wait a year before selling. Short term capital gains would be 28k on a 100k gain if you're in the 28% tax bracket. You could even leave the place empty for a year and it still wouldn't cost you 28k. Of course the risk is that the market may drop more in that time frame and instead of a 100k gain you only have a 70k gain. You probably know your market better than anyone else here so it's up to you to gauge the risks vs the rewards.
Realtor/Rental Property Owner
Boston, MA

Offline prosperme

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Re:Rent or Sell...Advice Please!
« Reply #8 on: October 14, 2006, 07:12:24 pm »
I just heard this in one of Trump's advicer's he never sell's real estate property because of capital gains tax. What he does is he goes to the gov't & asks for refinance to 100% of the value of the property & buy more properties & rent's them out. He gets professional property managers to manage his rental properties. He is now a billionaire. He started with one property just like you. According to him, he still owns the real estate properties that he bought from the time he realized it was crazy to sell real estate properties. His reasoning is for example you said you will have a profit of $100K by the time you sell the property;
your expenses will be;
closing cost (1-2%)      $2000
capital gains tax(25%)    25000
real estate commission (6%) 13500
Total expenses              $40500
Net income is about $60k
whereas if you refinance you will still have your property & still have rent income & buy more properties.  

Offline yrush2000

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Re:Rent or Sell...Advice Please!
« Reply #9 on: October 15, 2006, 10:51:58 am »
I just heard this in one of Trump's advicer's he never sell's real estate property because of capital gains tax. What he does is he goes to the gov't & asks for refinance to 100% of the value of the property & buy more properties & rent's them out. He gets professional property managers to manage his rental properties. He is now a billionaire. He started with one property just like you. According to him, he still owns the real estate properties that he bought from the time he realized it was crazy to sell real estate properties. His reasoning is for example you said you will have a profit of $100K by the time you sell the property;
your expenses will be;
closing cost (1-2%)      $2000
capital gains tax(25%)    25000
real estate commission (6%) 13500
Total expenses              $40500
Net income is about $60k
whereas if you refinance you will still have your property & still have rent income & buy more properties.  

IF you looked at the post, he is a realtor so will save on commissions. Closing cost for sellers vary by states and most times will exceed $2000 depending on when you sell since you need to escrow taxes for the months you own the property.
Captial Gains can be avoiding if you set your companies up correctly. I deal with a tax specialist and YES, for over 5yrs his system is proven and you avoid captial gains tax. MY profits gets passed to me as personal income and pay just federal taxes, but still have all my deductions first. Reality is, I pay about 5% tax on the sale of a home because of all my deductions I claim.

Also Donald Trump started with a hotel he rehabbed. His father was/is a successful investor first and learned from him. Trump does not even buy properties to much anymore. He makes money by lending his name to other investors. All the  Trump buildings you see are other investors that pay him. He collects an upfront fee and then he gets paid per unit as it sells. He puts in his time on each project since it is his name. His name has shown he can get an added appreciation/mark up for 20% on avg to a property.  he is very smart on how he has marketed his name in the business world which is how he is making money.

Offline yrush2000

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Re:Rent or Sell...Advice Please!
« Reply #10 on: October 15, 2006, 10:59:23 am »
Jerry

I would recommend selling your home and carrying a sellers 2nd. This will give you some of the cashflow you would like. Plus you can always sell the note if you want.  Maybe offer a 20% sellers second. You can still make a profit of about $50K if you have no RE commissions to pay out. Carry the note for 5yrs with a balloon at 8-10%. You can make it a PI or I/O payment.

Say you carry a 40K note at 10%, and do I/O, that would be $333 a month in cashflow plus principal is not paid down. Now you have 50K in the bank and $4000 a yr in cashflow.  Take the 50K you make and look for another property.  If you need the other 40K you can always sell the note. Will you get 40K for your note. Not at all..If the note is written right, you can probably sell it for 25K.  But carrying a sellers 2nd will make the home sell fast.  
Also as for interest rates. Since many people are doing 80/20 or 80/15/5 loans those 2nd loans are high rates. Even at 10% your coming in less than the bank many times. Most 2nds are running 10-17% depending on type of loan and score. Plus they all are fixed rated, no I/O so you are offering a smaller payment.

Lease Options are great tools as well. You can always find a great 1yr L/O and take an equity line if you find another deal now.  Learning to leverage your properties is one way to make alot of money fast. Just try and keep the LTV at 75-80%.

andrew

 




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