Which Way Would You Go?
I am a "newbie". There is a ton of property in my area that you can purchase (single family) for 30k, and with 5k rehabbing sell for 50-80K. The problem being, most of the potential buyers in this price range can afford the house but can not get financing due to credit problems. I know that the prevailing wisdom says to offer a lease option, but is that really my only option? I would rather rehab and sell and move on to the next property. I would be willing to sell a house worth 60K for 50K. Are there investors out there willing to buy my discounted house? The finished house would be the best one in the neighborhood. New roofs, new kitchen, new baths, etc. Thanks.
You never want to have the best house in the neighborhood. Always look for the worst house in the neighborhood, buy it at a huge discount, rehab it and then sell it for its new value. Who wants to live in a mansion surrounded by a slum? You have no control over the entire neighborhood, just over your property. So make sure when you improve your property, the rest of the neighborhood is already of equal quality.
As for the general idea of buying very low, rehabbing, and then selling low to other investors. Sure, there are tons of people who seem to make a great living that way. Nothing says you have to sell at market price. As long as you're getting the profit that you want, selling at a lower price to get a quicker sale is a perfectly legitimate approach.
Thanks...As far as fixing it up better than the rest, I figure that if my house is one step above the rest in the same price range, then I turn it faster. At least that is what I did in my first (and only) house, and I sold it in the first 15 minutes it was on the market.
Before you are too quick to sell quick, take a look at the tax benefits of a L/O or at least renting the house for a year prior to selling. I don;t like getting hit with 35% capital gains tax; 12% SE tax right away - you can be much more creative if you can get past the 1 year holding period.
Also, you can always rent or L/O the prop in as-is condition for 1 year, then when you're ready for top dollar do your rehab in a year (if the current propr condition is ok).
So you are saying that there are advantages to keeping a property over one year. Does this apply also if the property remains vacant, or do I need tenants?
I don't think you would want to leave a property empty for a year (vandalism, no cashflow, etc)
Unless I was rehabbing 4-5 properties at a time, which is feasible for me. Would there then be any tax benefits to me if I were to wait over 365 days to turn over a property??
OK Invenitdave,
You say you are a newbie, and you will likely get alot of advise on this. You opened the can on many different topics.
Sounds like you may have some experience working on houses, but you must have control of your costs even on these low end properties.(you mentioned roofs, kitchens, etc) Especially if you plan to intentionally lower your margins to market to a narrower group.
As for your fealing about taking the cash a run. You are right on that one. You must determine what you can pay in certain markets and how much you then can afford to invest and know in advance what you can realistically expect to sell for. (do this in advance) And you shouldnt make a purchasing error.
People ask me all the time why I dont do rentals or lease. It's mainly beacuse I do this full-time. I am not a passive investor. And I dont want to be a landlord anyway.
On the deal you described I would be happy to take 10-15K (whoesale or otherwise) if that's all it will bear for quick-turn and move on, because by the end of the year I can turn that 10K into potentially 60-100K depending on the properties I can find and how it is reinvested. I would doubt that a landlord on that property has that kind of potential through rents, appreciation, tax breaks, etc.
As a newbie, you may not do more than 5 properties your first year anyway (pessimistic I know) So if you plan for the future and incorporate (corp) now, I believe your tax on 50K profits or less for the year would not surpass 15% anyway. Check with a professional advisor on implications.
You will pay tax eventually. Start making money now! Besides Bush got re-elected, take advantage.
SG
SG-Thanks. I have done just one property-paid 90K, put in 9 weeks and 15K, sold for 170K. But that was a property that I feel I got lucky on. There do not seem to be many potentials like that out there. They exist, but the competition for them is strong.
I can handle everything but HVAC, I build my own cabinets, do a lot of ceramic tile. My big problem is lack of knowledge/experience on markets, on tax laws, etc.-I can swing a hammer pretty good, well, pull the trigger on the nail gun anyway, so paying $$ on labor is not an issue.
I have tried a couple of accountants, and I knew more than they did, which is very little. I would appreciate any and all comments and suggestions.
Though in the future I might want to be a landlord, that is in the future, and it will only be on properties up at the middle to high end.
Right now I just want to make 'em nice looking and sound, and move on to the next one. If I feel I can't turn at least 15K in 8-10 weeks, not including selling time, I feel like I should walk away. Is this reasonable?
Honestly, it sounds reasonable to me. But I wouldnt engrave it in stone.
Most questions or concerns that arise once you get going are based much on the market conditions where you are trying to work. Any responses that you will get here are more widely based and general unless you have specifics.
Our market in S.FL. is very different than yours. Although there are areas that meet the same standards as what you have described.
My AVG. deal is done from closing day to rehab completion in 45 days. Most are under contract within two weeks after that (avg.) Our AVG. profit is around 25K. The key is to create a cycle so that you are continuously purchasing, rehabbing several at a time and consistently selling. Once you have accomplished this, the rest is as simple as taking as little salary, profits, bonuses, commissions...whatever, from your business for a while and re-invest it. (Depending on how you establish your business). You will see the number of deals as well as your profits and cash flow grow exponentially. 15K will turn into 25K, 25K will turn into 50K, etc. 5 deals can turn into 10-15 that can turn into 25. As you grow you will have more choices and can diversify into rentals, conversions, etc.
Create a system, initiate, work, follow through to completion, and repeat.
SG