Sell Or Hold??
We have a house that we bought for $43,000 and we put $17,000 in it. It looks brand new with new carpet, paint, oak cabinets, etc.. This is only our second rehab and we can't decide whether to sell it or rent it out. It is expected to appraise for around $80,000. It is in a great location. What factors do ya'll use when deciding whether to sell or hold??
Thanks.
Just because it will appraise for 80k doesn't mean it will sell for that. At least in my area you can get appraisals for more then you could get if you sell the property. What is a realistic sale price? Does your 17k figure have holding costs included?
80,000 Sale
- 4,800 Commission 6%
-43,000 Orig. Purchase
-17,000 Rehab
---------------------------------
15,200 Gross
- ?,??? Closing costs
- ?,??? Holding Costs??
(ins., taxes, loans,
grass cutting, etc)
----------------------------------
??,??? Net
That's the problem..... I think it could sell for close to $80,000, but I'm not sure. When you calculate the 6% commission and 32% (federal & state) tax, and closing costs, it only leaves around $8,000. Not too bad for 2nd rehab, my husband has only spent about 80 hours working on it b/c a lot of the rehab was hired out, but it seems that in the long run $675/month for rental ($500/month 15 year mortgage) may be best option. I'm just not sure.
Thanks.
I would seriously consider holding it and getting that appraisal done, opening a line of credit on this house and use that money to fund more rehabs… Is there enough equity in the house for you to pull enough out of it to find more deals? Just consider it!
Good Luck!
[addsig]
and will the rent cover the debt service.
See if an apprasior will do a paper apprasial for free.
Do you have a strategy to minimize the tax?
Yes, we have a 15 year note, with $500/month due.
On the tax side, the only thing that I have thought about is that if we hold it over 1 year, we would could pay LT capital gains tax instead of ST capital gains. If we hold it 5 years, then we could sell, pay LT capital gains tax and walk away with close to $20,000.
The income taxes due on a short term gain is always a large amount so many times the numbers look better if you hold.
Do you really want to have a rental and be a landlord (even if you use a property manager)?
You could exchange the property using a 1031 exchange to delay when you might have to pay the taxes.
Some investors believe you should never sell. The gains that happen when you build a portfolio and let it rise over time are very significant.
I am a buy and hold person. Others just sell and figure it is like having a day job (the income taxes vs. the gains).
John
[addsig]
That $500/month does that include debt service for the $17,000 or just the purchase price?
Look into the line of credit, it delays the income taxes and you only pay for it when you need it, so you aren't paying for the money when it isn't being used. Also a 1031 is probably not applicable here if you rehab it and sell it, but check with your lawyer and acountant.
Finally think long and hard about being a landlord. Your debt coverage is pretty small so it looks like you are holding to avoid taxes/accumulate appreciation instead of cash flow. That is fine if that is your plan, but without cash flow landlording is a lot less rewarding on a day to day basis. Renting seems like the best deal when it goes well, and the biggest headache at all other times!
The $500/month is the total payment for purchase price + rehab costs. I know that cash flow will not be good, but I'm thinking if we could get 15 rental properties and pay them off in 15 years, then we could basically retire at 40 and live off of rent income
Depending on the market a hold isn't bad if you can pull it off cash wise. IF your market is appreciating 8-10% a year then it will increase the amount of cash you get out of it over the time held. If I had a 200K home that was cash positive on rent and the area was like Bend Oregon with 10% per year valuation increases I would hold it as long as I could and look at it like my own personal piggy bank that my frieds were putting money into
[addsig]
Why not consider refinancing taking your profits and then renting it out?? That's if you plan on holding it for around 5-7 years. Anything less than that then I would do a HELOC for short term use.
Any differing opinions?
Shamund
I used the buy and hold strategy for 15 years. The properties would pay for themselves in 10-15 years. I had a regular job which vanished a couple of years ago (corporate America). I didn't have much cash flow initially, but tax writeoffs were wonderful.
Now I work for myself as an investor. I flip properties and hold some. The appreciation, tax savings, and cash flow are hard to beat.
ItzMe
I love your 15 year retirement plan, and the suggestions that you setup a LOC against the equity in the rentals is good!
Everyone can give you their opinions and methods, but only you can decide what you really want to do. Just because someone here likes to buy and hold doesn't mean that you will. You're going to have to decide your own plan of action.
This is actually part of your business plan that you should have already laid out. If you're going to buy and hold, fix and resell, or something in between, if you've got a business plan then you've already got the decision made.
Taxes should only be a small consideration when deciding what to do. Each method has it's advantages and understanding them, and your tolerance level, is the key to deciding correctly which to do.
Roger