This is my first post to the board and I’m looking for some guidance. Here’s my situation…
About six months ago I refinanced my home and pulled out 180k. I then started looking for a fixer upper to flip. I found one and bought it for 58k cash…I set a budget for the rehab at 22.5k and will fund it with cash. This home is about 2 1/2 hours from my primary residence so it took me a few months to finish. I was over budget by about 1.5k so it wasn’t that bad. Ok, so the house looks really great and based on local comps for that area I think I can sell it for about 179k.
I found another house that I could do the same rinse and repeat system with but here’s where I need some guidance.
Should I keep this house that I just rehabbed and have it appraised then get a 80/20 loan on it and then turn around and stick a Section 8 Tenant in it?
Or, would it be best if I just sold the property outright and bought the next rehab candidate with my cash?
Ultimately, I would like to have a balance of income properties as well as a few that I just flip. I’m thinking that if the market continues to slow down I may have to use the flip’s as rentals and hang on to them.
I guess I should have spent more time reading what others have posted. It seems several on this board have the same type of question. “Should I flip it or keep it and rent it out?”
I think you are right. I’ll go ahead and sell it and keep doing the fix and flip routine until I have enough cash reserves to park some in rental properties.
I guess deep down I already knew that would be the best strategy but didn’t want to make a mistake.
If you read these forums enough, you will start seeing a lot of consistent answers. When you do this is a good sign that the opinion offered is “right on the money”. One of these consistent answers is “Know your exit strategy when you buy”…This is key for several reasons, like how much money to put into improvements and where to put them.
I buy cash, fix, rent and do a cash-out refi based on the fixed-up condition. So far so good. I get all (or nearly all) of my upfront cash back, have 20+% equity position, and a $200+ a month positive cashflow. None of these properties have been over $65K.
Aren’t there nasty tax implications when you do cash out refi’s and then flip them or do you get out of that by holding and renting for a certain amount of time?
When you do a cash-out refi, are there any specific criterion you look for when seeking out a lender to do it? Or, do you have a specific lender you use? And further, do you have any that you might recommend?
If I understand cash-out refi correctly(in your situation), you now have a mortgage on the house, which is eating into your cashflow. Is this correct? Do you just pull enough cash out to keep an acceptable amount of cashflow, or do you always try to get back your initial cash purchase regardless of cash flow?
Thanks for your time - this may already be answered in the finacing forum, so I’ll search there as well.
I’m in the enviable position of being in a low purchase/high rent ratio area. For instance, we’re working on a house now that we bought for $48.2K and will do about $5K in fix-ups. It will rent for $750. It will cashflow over $200 a month. My guess is that it will appraise for $65K after fix-up. I will take an 80% NOO ($52K). I will get back the lion’s share of my invested cash, have a 20% equity position, and over $200 a month cashflow. Then, it’s on to the next one.
Again, Keith and I are in agreement. He has a system that works and keeps repeating it. Remember, a house is an asset, and rather than sell it right away and make a small profit that is immediately taxed, why not make your asset work for you for as long as you can? Hold on to it and create a positive cash flow situation.
Creating a positive cash flow is sometimes difficult if you are just renting out the use and occupancy of a home. You CAN create a LARGE positive cash flow if you trade or sell your tenant such benefits as mortgage interest writeoff, property tax writeoff, a share of future appreciation, etc. for HIGHER RENTS. I use a land trust and a triple net lease to get a positive cash flow and the many related benefits.
Keith,
I am not a real-estate investor so I can’t tell you what is the best way to handle that business. I am a mortgage broker and can offer some money advice. I have lenders who will make construction to permanent loans for investment property …the loan covers the cost of rehab and is based on future appraised value of the home. I work with other investors who find these programs to be very successful. I would be happy to discuss in more detail with you if you are interested.
Have you considered to hang on to it for one year or so then sell it and do a 1031 tax defferred exchange. This way you can avoid that 20% or so bite the tax man will take. Remember taxation authorities are an uninvited business partner.
The 1031 exchange is a great vehicle for the part-time investor as it keeps your captial fully deployed instead of taking a hit every time you do a transaction.
Hi everyone, Thanks for all your suggestions and advice!
Here’s a quick update…I decided to put my “flip” up on the market. If I’m not able to sell it within the next 60 days I think I’ll go ahead and get a 1st mortgage on the place and then advertise it for rent in the local newspaper. If I leave 20% of the equity in the house and draw the remaining 80% out, after paying personal property tax and homeowners insurance, my monthly note will be about $750…which is about what I can rent the house for.
If I am able to sell the house at my current figure, I’ll walk out with about $86,260 in profit before having to pay my good friends at the IRS. Not too bad considering I only put in a total of $82k to begin with.
whatsagirltodo suggested that I consider doing a “lease to own” option. That sounds like a great idea but I’ve never done one of those before. What would be the best way to set that up in this particular case?
I have not done any L/O before, but, I am sure someone here will post the ins and outs. There are alot of people here who do Lease Options.
BTW>>>
There is a separate posting area for L/O, so, you may want to take your questionss there!
Got a few questions for you. How long have you had the property you’re thinking of flipping? Sounds like it’s been less than 6 months. Also when you took out 180k, it sounds like you spent a little over 80k of it, is there still close to 100k of that sum left?
From a tax standpoint it would seem that a 1031 is the best way to go, but you need to own the property for at least a year of course. If you’re close, you might want to wait before putting it on the market. You could also do some kind of disclosure where you say you can’t close til it’s been at least a year since you bought it and that you’re doing a 1031. That may affect the price you’d get though. The money from the 1031 could be used to buy two or three other properties but you only have 45 days to identify them, but 6 months to close on them.
If you still had a bit of that other 100k kicking around, you could use that to buy the next fix up property. Perhaps by the time you finish that project, enough time will have passed that you could do the 1031 on the first “flip”.
Just keep in mind that the friendly people over at the IRS will want you to kick over about 28-33% of that gain. And then there’s also state taxes if you have them. Sounds like that might amount to 20-25k or more. Best advice is to consult an accountant or a tax professional.
Oh, and getting a 1st mortage is probably going to be cheaper than paying the taxes. You should get a decent rate too as it’ll be under 80-70%LTV.
I purchased the property on June 22, 2005 and began rehabbing it almost immediately. I tried to perform all of the work myself or with the help of friends. I would have completed the rehab sooner but I found it difficult for a couple of reasons; 1) the property location is about 2 1/2 hours from my residence…so each time I would go down there to perform work I would stay about 10-12 hours and then come home. So I ended up only going down there maybe twice a week. 2) since this was basically my first flip I had a tremendous learning curve I had to get over when it comes to being a “handyman”. I relied heavily on DIY books and the help of some friends. 3) When the rehab slipped into the winter months I re-evaluated when would be the best time to sell it, obviously it would be a better time after the new year or when the weather started getting a bit warmer.
My flip has been on the market now for about 9 days and I’ve received many inquiries about it. I think it will probably sell pretty quickly…or atleast I hope so. I don’t owe anything on it presently so by it just sitting there it’s dead money to me.
I popped over and read some of the comments on the Lease Option forum. I think I may change my listing to include a “rent to own/lease option” clause. If I can find someone who wants to buy it under the LO agreement I could push out the sale date a year or more…which should help when it comes down to paying the IRS. But, before I add the LO clause to my listing agreement I want to get a 1st mortgage on the house and pull out about 80% of the equity so I can move on to my next flip.
WRT how much cash I have on hand now…I live off of the original refinance money from my residence and sunk about 40 grand into some stocks. I have enough left to cover my current expenses for the next 6 months or so.