I am going to be buying my first home soon and since I really love fixing houses, looking at houses, and all that stuff I want to make some money off it. I read the articles on this forum and the member’s stories about flipping and I really enjoy it. I read about some people selling a house every 2 years to not pay capital gains taxes and to use as an income boost. They buy a house add equity to it, while keeping a normal job, and sell it in 2 years.
I was wondering to make a profit in 1 or 2 years, what kind of loan would they get, an APR, 30 year, interest only? Do they buy it without a loan? I have lots of money in inheritance and was wondering if I should buy a house with that cash, or put it into savings? I heard that the more money you put into savings the higher the interest rates, so if I put 50k in id get 4% if I put 500k in I might get 5%??? And I heard that there is no tax on that interest?
I would NOT buy the home cash unless you have absolutely NOTHING else to do with that money, you could save interest but there are better ways of making money. If you like the flipping process, you might be interested in purchasing distressed homes, fixing them, and then leasing them out to make that money work for you. The 4/5% you get in savings is not much, and even then, you can put it into online savings account like HSBC or ING.
If you live in a good market and got a very good deal on the home I would get a 15 year year loan, I would stay away from interest only or ARM loans because your situation could change and you might end up not selling the home if things dont go your way. In a guaranteed market, you could get the lowest possible payment with an IO loan. But you aren’t guaranteed anything until it sells. Keep the home 2 years not 1.
There IS tax on the interest you earn from savings accounts.
Im in northern California, the market here is going down right now, so its a good time to buy. I figure that if the illegal imigrants get legalized then they would be able to buy houses, thus boosting the market. Also they are building a 3rd lane to the freeway here and usually that means a boost in home values. I am looking at a house at $320k which was bought in 2005 for 455k. The house is 17 years old and in good condition. I think its a short sale, or the owner wants out fast. There are no comps in that development but the development next too it has houses built in '04 selling for 500k+. If i can turn around and sell this house for 400k id be happy. I am worried about interest payments eating up my profits, in 2 years id probably have paid 24k in interest alone
I have done two homes like you are talking about. Avoiding capital gains is a very nice thing! I usually buy a very run down house and rehab it for about 6 months, then live in it for two years and sell. I also like this strategy because I figure I am going to be paying to live somewhere no matter what, so the holding costs are really not that huge of a deal. That is in contrast to a traditional rehab where you are paying for your primary residence AND the flip house.
As for financing, I would recommend using leverage (a loan) and keep your cash for whatever life may throw at you. I usually get interest only construction loans that make these deals pretty much 0% down. My local bank is very helpful with setting these up, and I usually have them roll over into an interest only 3 year ARM after the 6-month construction phase (which is really just a rehab). Like the poster above stated, if your plans change this may not be the best idea because interest rates are going up. I like the 3 year ARM because it give me plenty of time to rehab, live in and sell the house. This is certainly not a get rich quick plan, but I have been able to clear around $70K per deal so far, so it is a good way to get some working capital for your investing business.
I took a look at the house for 320k today, it seems more and more like a great deal. It is in the desirable part of the neighborhood, the other house for sale on the same street is at 535k and houses in that neighborhood are going for 435k(smaller house), 475k (bigger house) and so on. The house needs almost no repair, not even paint. But it is not selling for 70% below after rehab value, is that a problem considering the considerable profit i can make?
These people are using the house as their primary residence while they complete the rehab. After two years of ownership and use as a primary residence, they can sell and the first $250K in profit per taxpayer is tax free. Selling in less than two years makes the sale a fully taxable event.
I was wondering to make a profit in 1 or 2 years, what kind of loan would they get, an APR, 30 year, interest only? Do they buy it without a loan? I have lots of money in inheritance and was wondering if I should buy a house with that cash, or put it into savings?
The amount of your profit has nothing to do with the presence or absence of financing. Profit is the difference between your purchase price plus improvements and your sale price less selling expenses. Since this is a house you want to rehab and resell in two years, you get the most affordable loan.
I heard that the more money you put into savings the higher the interest rates, so if I put 50k in id get 4% if I put 500k in I might get 5%??? And I heard that there is no tax on that interest?
The APR may be a little higher if you are buying jumbo CDs. Savings account rates are not generally influenced by the amount on deposit. Whoever told you that there is no tax on savings account interest was misinformed.
What have/would some of you do/done?
I believe in leverage. A little money can control a lot of property. If you can get a better return on your investment elsewhere, use financing to the maximum extent possible when purchasing your home. Let’s say you have $200K in cash. You can purchase a property for $200K and let’s say you can resell in two years for $250K. You have a $50K profit after two years, giving you a 12.5% average annual return on your investment, tax free.
If you put only 20% down and finance the purchase, you have $160K left to invest in bank CDs. At 5% after two years, your $160K has earned about $8200 with compounding. When you resell your home after two years for $250K, you still have a $50K tax free profit. Now when you add in the profit you earned on your CDs, the average annual return on your $200K has increased to 14.5%.
Instead of bank CDs, what if you bought a couple of $150K rental properties each generating a positive cash flow of $250 per month. Now after two years, if the rental properties got the same 10% average appreciation rate you got for your primary residence, the $160K equity in your rental properties has grown to $223K, you collected another $12K in rental income, and you still have the $50K profit in your primary residence. When you add it all up, your $200K has grown to $285K in just two years, giving you a better than 21% average annual return on your investments before taxes.
Instead of two $150K rental properties, what if you bought four $100K rentals each generating only $200 cash flow per month. Now after two years, your $200K initial investment has returned a total of $143600 for a 35.9% average annual rate.
Leverage is a great thing. In certain situations, capital reserves trump cash flow. Be careful if you decide to get leveraged. In my opinion, you should be able to get into non owner occupied property for 5% down MAX. Which means you can own and control $1 million for $50 thousand.
If I were you I would put a lot of your "lots of money in inheritance" into paper assets primarily (see a financial advisor WHO HAS LOTS OF MONEY), and try to control your real estate portfolio with as little money as possible. That way, your forced to find and exploit good deals instead of putting your entire net worth at risk for a real estate deal that may or may not work out.
Another opinion that I have is that you should choose your debt instrument based upon the length of time that you expect to hold the property. A 5/1 interest only ARM might give you a great interest rate with low monthly payments, and if you intend to flip in 2 years, you still have a 3 year window to figure out an alternate exit strategy if your primary exit strategy does not proceed according to plan.
