Not sure what to do? Rent it, Sell it, Lease it?

General Real Estate Investing
1

I bought a Condo and rehabbed it. All cash deal.

I am now struggling with what to do with it. It’s not that I didn’t have an exit strategy, I in fact have three, two of which help me accomplish my goal of personal debt reduction.

Purchase Price = $21,700.00
Improvements = $8,800.00
Market Price = $ 74,900.00

I see my options as being:

  1. Rent it at $750/mo, Net will be $365.00
  2. Sell it for 74,900; Net should be about 36,400 after expenses, and income tax (short term CG)
  3. Lease it with an option (I don’t fully understand how this works, but realize it is a good tool in the right situation)
  4. Rent it and pull a mortgage for $56,500, leaving $18,400 in equity, Rent will cover mortage, taxes and operating expenses. Deal with tax burden at a later date. (perhaps a bad idea if we elect a Dem. president.)

I am not sure how to weigh the pros and cons of each one.
A summary from someone with more knowledge than I have will be helpful.

Thank you.

2

You purchased this property as a flip (right?), your intention was to repair and resell? If so any gain on sale is treated as ordinary income and not capital gain. Thus your overall tax burden will include federal tax at your marginal tax rate plus self employment tax which will put you all in at say 43%. Leaving your net after tax gain in the mid-high $20’s. Consider turning this into an investment property and renting it. You can leave it unleveraged or borrow against your equity as needed. Then in a year or two depending upon your circumstances sell the property and take your capital gain. One caveat though, no one knows what the capital gains tax rate will be in the future.

3

Ugh! Self Employment tax? I didn’t calculate that one…

Any benefit in running it through my company and taking it as dividends? or some other financial vehicle?

4

JasGot,

 Can't you do a 1031 exchange for another "like kind" property? I know that if you do too many in a yr. the govt. may consider you a dealer and tax you accordingly. Since you don't have any mortgage on it, I think renting it out will be your best option. If you're able to get $365/mo. positive cashflow, you can use that money to go towards your debt reduction. Why not just keep it and collect the cashflow. You have an asset that produces cashflow and will appreciate in value over time. That's how wealth is built ( so I've heard  :biggrin)
5

That’s a possibility. I was hoping to pay down the debt a little faster than that. Maybe I should Lease / Option it and get a smaller mortgage?

6

I don’t kow how much debt do you need to pay down. But you can refi at an 70% LTV as one option. Just be sure that your added debt will be paid by the condo’s income and still produce cashflow. Right now you have an asset that pays you money and will generally increase in value. Hang on to it. You don’t have to sell it to get money out. With CONSERVATIVE use of leverage, you can acquire many properties just like the one you have or even better. what if you had 10 properties that produced $200/mo cashflow? If you keep a rental for the long term, the cashflow will give you more than if you sell it. Unless, of course, you don’t want to be a landlord. In that case, just forget what I said and sell it… :shocked :banghead :beer

7

We have decided the Lease / Option is best for us. One comment you made strikes me as needing more detail. You said to make sure it pays the mortgage and still produces cash flow.

Is there a rule of thumb for that cach flow? ie; Mortage, taxes, HOA other expenses should not exceed “X” of rental income?

Like 90%? So even after all expenses including the mortage, there is still $75-$100/ Month as Net Profit?

8

Basically you subtract 50% of the total gross income for operating expenses. What’s left is for Mortgage and your cashflow. The taxes and insurance are included in the operating expenses. Propertymanager uses a $100/mo. per unit minimum cashflow. I like that idea. Since you don’t have a mortgage on the condo, you subtract 50% of the $750 and you have your cashflow. Any added debt would have to cost you no more than $275/mo. oder to achieve that $100 minimum cashflow. I don’t know you’re stucturing the Lease option, but I was speaking in terms of renting it out. In my humble opinion :cool, you can refinance the property and take out what you need to pay your debt down. In this case, the amount of the refinance should not exceed $275/ mo. This way you can kep the asset, have it pay for your debt and provide you with income each month. You have a bunch of options because you own the property outright. I hope this helps. :beer

9

Could you go over these numbers? How did you get to $36400 net?

By your numbers, your cost basis is $30,500. If you sell yourself for $74,900 so you have no sales commission, your gross profit is $44,400. Subtracting 25% for short term capital gains tax leaves you $33,300 net. Any selling expenses or closing costs you want to add to the mix only reduces your net even further.

With $33,300 net after taxes you have done a little better than double your money by selling. Does not matter whether you sell outright or on a lease option, your net after taxes will still be approximately the same.

If you decide to hold the property as an investment rental, suggest you just refinance enough to get your invested cash back out. At 6.5% interest, a 30-year fixed rate mortgage for $30,500 will cost you $192.78 per month. If your net operating income from this property is $365, then you have $172 monthly cash flow for the rest of your life if you keep this property that long.

In 15 years, with just 3% annual appreciation, your $75K condo would be worth $116,847 and you will have collected another $30,960 in cash flow.

Add your cash flow to your mortgage payment each month and you own your property free and clear again in just 9.5 years and then you have $365 in free cash flow each month for as long as you keep the property.

Of course, I am giving you the best case scenario. Realistically, you will have vacant periods with no income and repair costs every now and then, but the income and appreciation you will get from your property will still be attractive.

I recommend keeping this one in your rental portfolio for the long term.

10

31,059.21 Investment (All Inclusive)
74,900.00 ARV

43,840.79 Gross Profit

$1403.00 Self Employment Tax (Use this calculator: http://www.calcxml.com/do/inc05 )
$6,365.67 STCG (AKA Ordinary income, when under 12 months)

1,872.50 (Real Estate Transfer Tax)
34,200.62 NET Profit (based on FSBO)

If I rent it, the NET rental income would be 365.88; This will buy a 30 yr fixed mortgage at 6.75% of $56,500.00

So, if I keep it and take all the profit out up front, I’ll get much more than selling it and my tenant will pay the mortgage. I can then sell it later, after I have incured some more expenses and deal with the taxes and gains later.

Also, I can raise the rent $50 per year, and in two years have cash flow of $100/month in addition to the $56,500 I pulled up front.

The above scenario still leaves me with 25% Equity; $18,400.00

Not too bad. Unless of course I am missing a hole the size of the one that sunk the titanic!

11

I think you get the idea now. But keep this in mind. You don’t want to “max out” your equity. I’d say that 70% LTV will give you some breathing roon in case you have to sell for some reason. But here’s what I like, you NEVER have to sell the property ever! When your tenants pay down your mortgage, you can just refinance again. You’ll never be taxed because a refi is considered a loan ( because it is) not income. But your bank account doesn’t know the difference betwen a loan or income. You just keep doing this over and over. Refinance and pull money out. Let the tenants pay it off for you. Repeat. If you keep investing the money you pull out into properties like the one you have, you’ll build wealth.