I found a vacant 3 plex thats needs cleaned up but within reason.
Issue is the seller owns it free and clear , paid $70K for it over ten years ago. Its been emty for over two years now and he is using it as a project to clean and work on as he sees fit. No hurry to get renters in it. He says his concern is if he sells it then he will be hit with the income tax of it, which he’s older and a bit old school in his thinking. (i think) So thats his reasoning for not selling. I met him at the property and he was suprised i showed because he said he wouldnt sell, but if i wanted to look at the place he would be there today cleaning. So i did.
Question is, what is the way to structure the deal that gives him what he wants and what i want? I want to control the property with no money down. And he want to avoid or hold off on geting hit with the income taxes part of it.
Zillow value now is $210,000 My offer would be close to that if i could get terms.
salsadunes - first I would not base my offer on zillow. I would get real comps from a realtor.
It doesn’t seem he needs to sell. Have you thought about getting a seller’s financing? You may be able to get a good deal in the purchase price and rate. And he would get a stream of income.
Another thought that just occurred to me - has he lived in the property 2 years out of the past 5 years? If yes he can get up to $250k tax free (or $500k if filling a joint return with his wife).
j1dias,
Im definetely not going off of Zillow for a definite value but a ballpark, till i talk with a realtor. Now to answer the residency in the last 5 years, i will have to find out because i know he has one of the places set up for when he stays there. I think its been on a part time basis for the last 5 years he did mention that. what is the specific on that one, do you know about part time basis?
My goal is to get in with nothing down and create income for him and i. My thoughts are lease option. Where he will still get the tax break, income and i will get to control the property.
to get the tax break he has to be able to demonstrate that the property was his primary residence for at least 2 years of the past 5 years. My understanding is that you can have only one primary residence. So if he had stronger ties to another properties (where he spent most of his time maybe), I believe it would be difficult to claim this one as his primary residence.
I dont think i could make it fly with him having the other place as his main. He stayed in the triplex for like wekends and such, only.
Do you know what the deal is with a lease option? How will that effect his taxes? if its not a sale till i excercise my option, does it at least postpone his taxes?
I need to figure out how to have him see the income from it without the tax being an issue? Or will it be an issue?
salsadunes - have you asked him if he would be willing to finance it for you? He would get a monthly income from the property and pay taxes only on the amount he receives each year. You could probably get a good interest rate, considering that he is not a regular lender. Ask if he would be willing to carry the note. This may work for him and you. Good luck!
Definitely try an owner carrying the financing on this. Get an answer from a CPA, it will be worth the fee to give the seller exactly the right information. Principal and interest are treated differently tax-wise, as far as I recollect. You can even take the seller to the CPA for a second visit so he hears it for himself.
You can try for very low interest to keep your payments down, and no or minimal downpayment. Why not own it, rather than lease if you are doing the work? You should get the appreciation or benefit of your labor in rents.
You can also ask for 3-6 months of no payments until you get it up and running. Just set up the payment schedule to begin later, you don’t have to defer interest. I did that with a fixer property and the seller agreed. I had a tenant by the time the first payment came due.
Figure out what works for your seller. The price is going to be less important than the terms if you are holding it long-term. Good luck and let us know what you came up with.
Furnishedowner,
Thanks for the insight. I want to own it yes. My problem there is my stated income and poor credit. I would be looking at HML and even that could be togh as its not in a big city.
Any thoughts???
He might even consider a partnership.
salsadunes - I believe there is a disconnect between what furnishedowner and I suggested and your understanding. We are suggesting you approach the owner and offer to buy the property from him and asking him if he would be willing to carry the note. As furnishedowner suggested, you may even be able to get a no down payment deal if he is trully motivated. The beauty of this approach is that he gets what he wants - he will not have to pay taxes on the whole amount all at once; and you get what you want - purchase a property with bad credit (I believe most sellers will not bother to check your credit history); and maybe no money down (if he agrees with your suggestion). So my question to you - have you asked if he would be open to a seller financing?
I met with the seller again today on this one. I did ask if he would carry the note. And he said he was open to it. I mentioned to him that there was probably a couple ways to purchase his property. He did come across as open to all ideas. I figure the place will need about $15k in fix up $ to get it done quick. He did agree. He’s doing it himself right now, in parts. Like on weekends.
Now im thinking how can i get cash out of it to get it cleaned up and allow for top rents. Im thinking like $30k $15k to clean up, $10k to seller and $5 k for my work/ structure of the deal.
Can i get a loan for this amount under a CFD?
What will you plan to do with the property if you acquire it? If you are turning it into a rental, then you need to base your purchase price upon a number that will still allow you to cash flow.
What are the market rents for comparable properties? Let’s say that the combined rent for all three units is $1800 per month, and your cash flow target is $100 per door. If you can get 100% financing for 30 years at 6%, then the most you should pay for this property is $100K. Pay more or get a higher interest rate and you won’t meet your cash flow targets.
If the market rents are lower, then your maximum offer price should be even lower.
If the owner agrees to $100K, then ask the owner to carry the financing for you. A $100K loan at 6% will give the seller a monthly cash flow of about $600 per month with none of the headaches attached to rental property management. If you default on the loan, he will either be paid off or get the property back through foreclosure. If the seller gets the property back, he can sell it again or keep it and rent it out for himself.
By holding the financing, he has an installment sale. The IRS will only tax his profits and interest income in the tax year they are received. This will help the seller spread out the capital gains tax bite over several years, paying his taxes in installments – small chunks at a time. If he holds the financing long enough, the total interest income he receives on the financing will be greater than the sale price for the property. The longer he agrees to hold the financing, the longer his $600 monthly income stream stays in place (assuming you don’t refinance or sell the property any time soon)
The seller has a point about taking his profits. Even though the sale profits this year are taxed at a 15% capital gain rate, the size of the gain will probably subject him to a higher AMT tax treatment. If he waits until next year to sell, the capital gains tax rate will increase to 20% on Jan 1.
If he agrees to an installment sale, any sale profit received next year or later will be taxed at the prevailing capital gains rate in effect at the time. The long term capital gains tax rate is scheduled to increase to 20% on Jan 1, but a new President and a new Congress could vote to increase the rate even further.