Keep a property or flip it? need help - Posted by ChicagoMikeW

Posted by Brian_wa on July 20, 2007 at 09:23:47:

And just so I don’t get caught with some technicalities, yes, there are some people who do have 2.2 mil houses that they keep as rental properties. However, these people are extremely rare and they live in a world that most of us would never know.

Brian

Keep a property or flip it? need help - Posted by ChicagoMikeW

Posted by ChicagoMikeW on July 18, 2007 at 05:37:55:

I have purchased multifamily property and rehabbed it.

It now has about $90,000 in equity, and I am renting out the final few units, the property will cash flow about $750+ per month.

I am unsure should I take the cash, or keep the equity and take the passive income?

I have people telling me I should do either or, but I wanted to hear what people with a greater depth in REI thought.

Thank you

ChicagoMikeW.

Re: Keep a property or flip it? need help - Posted by Tim

Posted by Tim on July 18, 2007 at 10:43:08:

If you work out the math you will see that buying - fixing and selling as quickly as possible will always trump buying and holding, regardless of the taxes or the size of the property, as long as you bought it right.

I would also suggest that you need to work out your plan in this business and stick with it. Don’t change direction in mid stream.

Truly successful people are not reactionary; we have a plan that is scrutinized and revisited daily in some cases and stick to it because it has been proven to work.

Good luck,
Tim - VA

Re: Keep a property or flip it? need help - Posted by Penny

Posted by Penny on July 18, 2007 at 07:41:37:

I agree with Jeff’s comments.

From a purely financial view, here are some things to consider. What is your cash on cash return and does it meet your investment goals?

($750/ mo x 12 mo)
______________________ = ?? %
Acquisition/rehab costs

Depending on your LTV, you can exit some of your cash through refinancing or line of credit secured by the property without selling and use it for the next property. If you have already exited your original cash out through such means, then look at return on equity. This would be:

750 x 12 / 90000 = 10%

If your depreciation covers most or all of this, then it is largely tax free income. Bottom line, you would want to look at what return your money is making from this property versus your goals versus whether you could put the money to better use elsewhere.

And as Jeff has pointed out, you often are ahead to repeat what you were successful at a few times, then sell to move up to the next level.

Re: Keep a property or flip it? need help - Posted by Gene

Posted by Gene on July 18, 2007 at 07:22:25:

Depends upon your plans for the $$.

If you could do two similar deals it makes sence to sell. If you don’t see any other deal on the horizon that you need the money for…let it ride.

Gene

Re: Keep a property or flip it? need help - Posted by Jeff

Posted by Jeff on July 18, 2007 at 06:14:09:

If it were me I would keep it for the time being. Your $90k in equity isn’t going anywhere. $750 a month is a good start to a great monthly passive income. I would try and do the same thing you have done a few more times. Then sell all of the properties and do a 1031 exchange and buy a 100+ unit building. Flipping houses might make you rich or well off but holding large multi units will make you and your family wealthy for years to come… Just my two cents… good luck

Jeff

Re: Keep a property or flip it? need help - Posted by Brian_wa

Posted by Brian_wa on July 18, 2007 at 11:29:31:

“If you work out the math you will see that buying - fixing and selling as quickly as possible will always trump buying and holding, regardless of the taxes or the size of the property, as long as you bought it right.”

Except for “as long as you bought it right.”, you are so wrong!

Brian

Re: Keep a property or flip it? need help - Posted by ChicagoMikeW

Posted by ChicagoMikeW on July 18, 2007 at 07:59:39:

Thanks for your input.

I found the property for 34,000 cash and put 55,000 (rehab loan from the bank) for a total of 90,000 in the property

I can take out a loan for the full 90,000 that I have put into the property and still have 90,000 equity (end value of the property 180,000), this loan of 90,000 or 50% LTV will leave me making the 750 per month, in the end I am out 0$ out of pocket.

The depreciation on the 34,000 won’t cover much of anything.

Or I can sell, get my 34,000 back and 90,000 extra and try to do this again, and possible 2 or 3 at time, with the increased starting funds

Thank you again, still looking for thought just filling in more details.

Michael W

Tim is so right on. - Posted by gerald(tx)

Posted by gerald(tx) on July 18, 2007 at 12:46:34:

Traditional wisdom does teach buy and hold.

But what I learned was to buy a nice property right, take my profit, pay the taxes, them immediately reinvest this profit in a replacement property. Each time my equity and cash flow increases and I wind up with a nice free and clear in just a few years.

Meanwhile my ‘Buy and Hold’ cohart is struggling as a landlord getting a hundred or two in cash flow, hoping to pay it off in 30 years. The equity in his property is dead, while mine is dynamic.

What often skews the reasoning for the buy and holders is appreciation. But I would hate to depend on depreciation in the next few coming years.

It took me several years to realize this, before I converted from the buy and hold crowd. I’ve never looked back and my net worth has soared since.

gerald

Re: Keep a property or flip it? need help - Posted by Tim

Posted by Tim on July 18, 2007 at 11:36:36:

Prove it!

It’s easy enough to site example after example of where buying and selling is clearly superior for making more money in a much shorter period of time but you go right ahead and give me an example of where I am wrong.

I’m on the edge of my seat. wawa

Tim - VA

Re: Keep a property or flip it? need help - Posted by Ed

Posted by Ed on July 18, 2007 at 22:35:21:

Thought you depreciate on 90,000, your basis ( cost plus improvements ). Check with your accountant. I am not a CPA, nor am I giving you professional advice.
Ed

Re: Keep a property or flip it? need help - Posted by Penny

Posted by Penny on July 18, 2007 at 13:33:22:

Check with your CPA on the depreciation even though your basis is low. Residential depreciates over 27 years while commercial is over 39 years. However, there are tax strategies to separate out improvements such that you can depreciate them over shorter terms and front load your depreciation. A good CPA should be able to help you here.

You could refi to a 75-80% LTV with a lower but still positive cash flow. Then if you find some depreciation with your CPA’s help, you could possibly shelter at least some of your cash flow.

Re: Keep a property or flip it? need help - Posted by Brian_wa

Posted by Brian_wa on July 18, 2007 at 10:24:51:

If you sell the thing, you have to pay a hefty amount of tax. My suggestion is to do a refi for the amount of $140,000. This way you’ll have about 40k left in equity just in case you have to get rid of the property quickly in the future.

With 140k, you would have then recovered your 90k and get 50k extra to work on other deals and pay no taxes since it is a refi.

If you sell the property, the closing costs, commissions, and taxes would eat up a nice chunk of the profit and you’d ended up with only 50k to 60k anyways…

Re: Tim is so right on. - Posted by Jeff

Posted by Jeff on July 19, 2007 at 11:53:37:

I dont know anyone who would hold a property very long that only cash flows $200. If you buy right and hold you will be better off in my opinion.

I’m not quite sure I understand what you mean when you say
"I would hate to depend on depreciation in the next few coming years."

Most investors who buy and hold make their money investing for just that.

Cash Flow
Equity
Leverage
Depreciation

Investing for appreciation in my opinion is foolish and you may as well buy stocks, you have no control over either.

I think you may have a good plan that works for you but as a lot of investors are learning nowadays “net worth” = $0 if you cant sell.

Can you give some examples of properties you have bought fixed and sold??? I’m very curios…

Jeff

Re: Tim is so right on. - Posted by Brian_wa

Posted by Brian_wa on July 18, 2007 at 12:49:42:

You assume that whoever buys and holds are traditionalists and that he or she can’t do what you do if he or she buys and holds. What if there are people out there who could find even better deals than you and find more of these deals than you who choose to hold because they truly don’t need all the cash in the bank? You don’t think there exist such people?

Brian

You guys have never been in a flat market - Posted by gerald(tx)

Posted by gerald(tx) on July 19, 2007 at 11:47:58:

I can understand why Brian is so brainwashed on the buy and hold strategy. It works great in an appreciating market.

In the late '80s we went thru a period of six years of zero – even slightly minus appreciation. And dummy me, that’s the time I started investing with a few rentals. After about five years, I gave up for several years before re-entering. It just wasn’t worth the hassle of fooling with tenants of the lower strata for almost no profit.

Texas has never had a high appreciation rate. We have a lot of land so we just expand outwards rather than compete for limited space.

In this market, keeping your money working for you, rather than let it sit dead in a buy and hold, works a heck of a lot better.

gerald

Re: Keep a property or flip it? need help - Posted by Eric in FL

Posted by Eric in FL on July 18, 2007 at 12:47:57:

Is this Armando from “Flip this house”? If you are a beginning investor do exactly the opposite of what Tim says.

Best Regards,
Eric in FL

Oh yeah… - Posted by Brian_wa

Posted by Brian_wa on July 18, 2007 at 12:21:09:

I’m on pace to buying about 22 to 25 houses this year, in the Seattle and surrounding area. I have flipped and wholesaled 8 of the 10 houses I picked up so far this year and by the look of it, it’s not worthwhile for me to flip all of them because of all the taxes I will have to pay adn the discounts I have to give to my investors. Looks like I’m gonna have to go back to keeping at least 60% of the remaining 12 to 15 houses that I’m going to buy. Furthermore, money in form of HELOCS or cash in the bank is still money as long that you know what to do with it…

I’m not someone who buys 100 houses a year but 20 houses a year is not that bad anyway you look at it. How many houses have you bought this year?

Also, of all the houses I have bought the past several years, I have not lost money on even a single house.

Brian

Re: Keep a property or flip it? need help - Posted by Brian_wa

Posted by Brian_wa on July 18, 2007 at 12:14:01:

3 years ago, I bought about 10 houses but sold only 2. Granted, I bought them all at great prices. An even more experienced investor/friend bought over 20 houses but sold them all.

1 year later here was what I was able to accomplish:

  1. The 8 properties I bought each appreciated over 20k and have appreciated at this rate for the past 2 years
  2. I was able to get a total of 6 lines of credit of over 100k apiece. I didn’t need hard money from then on as the result.
  3. Even if I didn’t buy anything afterwards, I still be making at least 120k from these properties in term of the appreciation alone.
  4. I also have depreciation advantages comes tax time
  5. when I sell these properties now, I can do tax exchange or pay only 15% in long term capital gains.
  6. When I sell these properties, I also sell them at retail values. If you flip or wholesale, you have to sell lower than retail in order to attract investors/buyers.

Whatever happened to my investor/friend?

  1. When he saw what I was able to accomplish with much less properties, he started holding a few now
  2. He would have made an extra 1 mil if he had held on to only 40% of the properties that wholesaled the past 3 years
  3. He still have to borrow from hard money lenders on his deals now

Brian

Re: Keep a property or flip it? need help - Posted by Penny

Posted by Penny on July 19, 2007 at 19:13:00:

90k as basis - that’s my understanding, too. I’m not an accountant, either. The thing to check is on how the improvements are depreciated. Sometimes it can be less than the 27 or 39 years.