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Author Topic: Rehab advice and help  (Read 2419 times)

Offline Spydc

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Rehab advice and help
« on: September 09, 2007, 07:06:59 pm »
Hi. My friend and I are going to jump into the real estate game and start investing in rehab projects to either sell and/or keep as rental properties. We are trying to read up as much info as possible at this point. We are specifically concentrating in the PA area since it is so cheap.

Anyway, we did our first part by driving around and identifying some buildings we are interested in rehabbing.. The prices of the homes max out at around $12,000 so it is going to be a cash deal. Here is a hypothetical situation, we plan on purchasing the properties at a reduced cost..($8,000 to $10,000).. then say spend $10k to $15k to fix it up and then sell home for $55 to 60k. Now, can anyone shed some light on the tax situation. Are there any tax breaks/credits on expenses incurred while rehabbing a property? In addition, how much tax has to be paid when the home is finally rehabbed and sold on the market?

We are trying to determine if it would be worth it to rehab and immediately sell or to hold on to the property as a rental. Now let's say for instance we paid $10k (cash) for the property and paid $15k to repair, we would be in the hole for $25k. Now..let's say the new appraised value is $60k. Can we do a cash out refinance or does that only work when u have an existing mortgage on the property? Can we basically resell to ourselves at the new appraised value and cash out? Thanks in advance.

 

Offline Salverston

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Re: Rehab advice and help
« Reply #1 on: September 09, 2007, 10:03:50 pm »
Actually "seeling it back to ourselves" is not needed.  If you plan on keeping the property, just get a new appraisal after the rehab is done then use that, with your documentation of the rehab process, to a lender to refinance it with a conventional, non-owner occupied "investor" loan.  You pay off the investment for the purchase and rehab.

In this case, with a $60,000 ARV that would be a loan of $48,000 (80%) or $52,000 (90%).  Pay off the costs and in this case you will have between $23k and $27k cash.

Of course, this doesn't take into account any covering cost on your purchase price, for instance if you get a hard money loan to do the rehab, you need to consider the carrying cost, plus closing costs, etc.

If you do it this way, the extra money at the end is loaned money, so not a profit, so it is tax free.

Now, if you sold it for $60,000 then you'd get $35k, but you'd owe taxes on this, and this would also be considered short term investment income, which is subject to  the highest income tax rates.

But there are lots of other ways to structure how you finish your rehab.  The main thing is that when you go into one of these, you have one, or better yet two solid exit strategies.  The worsgt thing you can do is to do a rehab on a haouse and find you can't get rid of it at the end of it.  You then become a "motivated seller"

There are lots or articles on this site that talk about sdifferent exit strategies.  There are also lots of courses offered here with lots of great information.

Good luck

Offline dmharp

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Re: Rehab advice and help
« Reply #2 on: September 10, 2007, 08:00:45 pm »
what area of Pa are you looking to invest?

Offline Spydc

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Re: Rehab advice and help
« Reply #3 on: September 10, 2007, 10:25:35 pm »
what area of Pa are you looking to invest?

We are looking to invest in the philly area.

Offline Spydc

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Re: Rehab advice and help
« Reply #4 on: September 10, 2007, 10:37:25 pm »
Thanks for the response.. We are still have A LOT to learn but we are motivated to get in the real estate game. We want to start out with a low cost property just so we can get our hands dirty and see the process first hand. We will either rehab and sell on the open market or refinance and maintain as a rental property. But we will brush up on our exist strategies. Are there any specific links on this site you can point me to in regards to this? Thanks.

Actually "seeling it back to ourselves" is not needed.  If you plan on keeping the property, just get a new appraisal after the rehab is done then use that, with your documentation of the rehab process, to a lender to refinance it with a conventional, non-owner occupied "investor" loan.  You pay off the investment for the purchase and rehab.

In this case, with a $60,000 ARV that would be a loan of $48,000 (80%) or $52,000 (90%).  Pay off the costs and in this case you will have between $23k and $27k cash.

Of course, this doesn't take into account any covering cost on your purchase price, for instance if you get a hard money loan to do the rehab, you need to consider the carrying cost, plus closing costs, etc.

If you do it this way, the extra money at the end is loaned money, so not a profit, so it is tax free.

Now, if you sold it for $60,000 then you'd get $35k, but you'd owe taxes on this, and this would also be considered short term investment income, which is subject to  the highest income tax rates.

But there are lots of other ways to structure how you finish your rehab.  The main thing is that when you go into one of these, you have one, or better yet two solid exit strategies.  The worsgt thing you can do is to do a rehab on a haouse and find you can't get rid of it at the end of it.  You then become a "motivated seller"

There are lots or articles on this site that talk about sdifferent exit strategies.  There are also lots of courses offered here with lots of great information.

Good luck

 




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