Hi. First of all, as you can see from the number of posts, I am new to the forum. I’ve been reading around and I think this site will be beneficial to my new REI business.
The Question:
When I purchase a property that I don’t want to turn around and sell (will be seldom), is it better to rent it out or sell it as a owner finance?
I was thinking the owner finance would give the tenant more ownership, in that they would have to fix problems with the house. Which would free me up to purchase new homes instead of keeping up maintenance (or hiring someone) on that home. Also, if payment becomes an issue, I would have to file for eviction of a renter just as I would have to file for foreclosure on a buyer.
Am I correct in my view of this, or a little off base? I know to be successful in my business, I need to invest money and time, but money is short right now, so I’m going to invest alot of time until I save what I need. Thanks in advance.
You are correct in thinking that selling the property will keep you from having to do maintenence on the home, but it also limits your profit and you may become marked as a dealer by the IRS which will mean that you have to pay taxes on the installment sale at the time of the sale (i.e. pay all the taxes on a $120,000 house even though you have only collected $6.000). I would suggest that you consider a lease option. With a lease option, you collect an option fee and then rent the house to the tenant/buyer for a year and then sell it to them at that point. Only a relative small portion of the tenant/buyers will actually exercise the option, so you may be able to “sell” the house several times, each time collecting the option fee. Since the title stays in your name until the tenant/buyer exerecises the option, you don’t have to worry about the IRS considering you a dealer. Alex Gurevich has an excellent book about increasing your profits with lease options called Suercharge Your Cash Flow. It is well worth the money. I am in the process of doing my first L/O and if things work out as I am expecting using his techniques, it will add $18,000 to my bottom line even if the first tenant/buyer exercises the option. Not bad return for investing $350.
With regard to your comment about eviction vs foreclosure, it takes a few weeks in Texas to evict a tenant, but it takes months to foreclose on a property and then you may have to evict the tenant. How long can you stand having a non-paying tenant in your property?
Thanks again, Wilson. Guess I need to read more on the L/O strategy. Wouldn’t want to lose my investor status and pay more taxes. Just starting out it seems there is so much info and so many different way to do things. Each with its own drawbacks. I can see how it can be overwelming and someone could get analysis paralysis. :-\ Good luck on your L/O!!!
Some caveats to L/O and contract for deeds etc. You will get good T/b’s and you will get bad ones just like tenants. At least you have some of their green stuff in your pocket. Try to do deals that will put even more cabbage every month into your bank vault. Tim Randle gives some great advice in his course Street Smart Sub2 on this very subject. He calls the L/O method glorified landlording. I personally used the contract for deed option and got several thousand down with the contract signing. I did over 20 deals on the East Side of Austin. Some are still working for the Chapter 7 trustee and some did not work so well. If you get a chance go by 1000 Fiesta St here in Austin and you will see the worst case scenario of L/O and rent to own or a contract for deed. They stole the stoves, refrigerators, water heaters, ac units and all the junk they did not want stayed behind in both units. Look at the property at 2808 Lyons too just down the street. Pretty much the same fiasco…
This is just a warning as not all will turn out this bad. It is not just low income either. I nave had the same bad results in higher class properties as well. Be careful and screen your t/b’s better than I did. Do credit checks and talk to previous landlords and go see where they live now if at all possible. Pigs love slop and will always be pigs.
Sorry for such a downbeat message but this is one of the reasons I lost a fortune in REI and wanted to share some of my previous problems and my shortcomings to try to help you do better than I did the first time around. Good luck with your projects.
Some of the answer is how you are buying. Subject to, owner financing, new loan, or cash. Are you buying the property at a discount. On a rentals you prefer to be in to it at no more than 75% of value.
Then what is you goal. Monthly income? cash to pay of credit cards?
You can structure a lease with a triple net feature and have them resposible for maintenance. You start doing that with the wrong approach or contract you run into problems. Be super cautious of selling CFD now because the law is on the buyers side.
Generally, L/O bring you less down than a sale. Even less per month in many cases.
A foreclosure takes a 20 day demand plus 21 days posting and accelleration before a first Tuesday. Depending on the JP court it will take you about a month to evict.
The only way I had been learning was to do preforeclosures and REOs, then sale for cash. The only ones that I would foresee holding would be from tax foreclosure auctions, for ROI purposes. (i.e. money set aside for fed taxes would be invested and taxes paid from the ROI)
I’m just now getting a glimpse of all the other options like L/O, sub2, etc. Since I haven’t actually started making offers yet, I figured my best bet is to learn as much as possible.
I’m thinking of calling some investors in the DFW area and seeing if I can shadow them and help out to gain some first hand knowledge. Is this a good idea, if they agree and their price is reasonable? Thanks
Good luck on your L/O!!!