Rental on New or Old

A few questions here.

Cash $70+,Equity $65k, Credit score Early 800s

  1. Do a Rehab… Buy 40-60+ type of fixer upper, example: 20-35k fixing, Sell $105-110k+ later in an OLD BUT revitalizing downtown area.

  2. Buy New construction in highly appreciating area, lease it one year $1300-$1500 a month which I think is ok but might be hard to find renters and the holding cost, then sell it for 8-15% more if lucky. Renters are more qualified, well to do but does not guarantee they are good as well. Takes sometimes 1-5 months to rent out.

  3. Buy older ($120-130s), rent it out for $1000-1050k rental or more in less appreciating but mature neighbourhoods ibut n a more diverse community which can rent out faster to blue collars etc etc or temp workers [not a bad neighbourhood]. maybe a little more headache. But I found that they rent out less than a month at most.

  4. How do I get more funds or loans, Banks or mortgage companies or constructions loans?

with the limited funds I have. Can I qualify for more loans or anyone I can request? What is truly the best strategy and my options. I need someone with a true good advise. suggestions?

I know none of them are 100% bulletproof nor guaranteed as the market changes very frequently

If you have a decent income on top of that all, you have almost limitless opportunities. Most of the newbie investors are lucky to have 1 of those 4 criteria (Equity, cash, credit, and employment income) and you have at least 3.

Have you ever personally worked in construction or been a “handyman”? I worked 8 years in remodeling as either an employee or a sub-contractor before I decided to sink or swim and try doing it full-time on my own. Given this background, rehab opportunities have been my forte as I have the experience it takes to know a good deal from a bad one. Not all cheap fixer-uppers are good deals as things such as foundation problems can turn into a financial black hole. Another thing to think about is that many of the true rehab opportunities will not even qualify for standard financing, so you must pay all cash for them. No bank will lend against a house that is in very bad condition. Hard-money lenders will, but you’ll pay a few more points above prime.

If you have a current job, the best way to go may just be to be a silent partner or passive investor. I know many-an-investor that partner up with an experienced tradesman and make a killing. I have personally been on both ends of this (Ive been the tradesman with a financial backer, and Ive also been the financial backer with a tradesman) and both worked out great. Depending on your leverage in the situation you may be able to pull in over 50% of the profits even though they do all the work, essentially.

New construction has never been worth it for me, but there are obviously many others out there doing quite well. Building single family homes to rent out sounds downright ludicrous, though, if that is what you were thinking. Banking on appreciation at this point in the real estate cycle is ballsy, to say the least. If I were to build new construction I’d probably start out with 4 units, as they are still considered residential, making loans easier to qualify for with less money down.

All in all, there is no “best” scenario. Some guys are great at rehabbing, then selling. Some guys already have a great job and are just looking for a way to park some extra money and get some great tax tax breaks. Still others do wholesaling or “bird dogging”. I, personally, stick to mainly rehab-and-hold properties… primarily duplex and 4 unit structures. The reason I do this is due to taxes, mainly. If you rehab and sell, you’ll get drilled with income taxes (federal, state, and Self Employment taxes totalling over 40%). If you build new construction and hold you’re considered a Real Estate Developer by the IRS and all acquisition, holding, and construction costs become capital expenses and must be depreciated over 27.5 or 39 years, depending on what type of structure it is. In recent years the IRS has bumped up the “section 179” amount to $105,000 a year, though, so you can immediately expense up to $105,000 of these holding and construction/rehab costs in the same year you spend it. This is fine for rehab-and-holds, as I can do at least 3 duplexs a year and still be under that $105,000 total, avoiding having to capitalize any of the expenses (this is a very good thing). Not to mention there’s a 10% tax credit for any structure you substantially rehab that was built in 1936 or earlier. If you build new construction, however, just one single family house will send you over this $105,000 amount allowed to be immediately expensed by Section 179.

No matter what you choose, I’d definitely learn about the tax consequences before you sign any loan papers or even incorporate. CPAs who specialize in real estate are worth their weight in gold.