Paid off my home: strategies for investment? - Posted by Robert Lam

Posted by BrokerScott (Mich) on September 18, 2003 at 08:12:21:

You don’t pay capital gains on rent. On rent you pay income tax on the differance between your rents recieved and you expenses. You pay capital gains on items that you sell for more than what you paid for them. In this case however, this house has been your presonal residence for 7 years- therefore you meet the captial gains exclusion requirement that you have lived there for 2 of the last 5 years. You can sell it outright and not have to pay capital gains. You can rent or RTO it for up to ONE DAY LESS THAN 3 YEARS and not pay capital gains. If you sell it after that time, you do have to pay capital gains.

I have found that the free online services that are available to me (except the MLS) are notoriously unreliable. Any Realtor would be happy to do a CMA free of charge, in hopes of that if you DO list your home with a Realtor, that you would list with them. Frankly, and I mean this in the nicest posible way, your questions reveal that you ought to have professional assistance, or take some time to do considerable additional studying. best, Scott

Paid off my home: strategies for investment? - Posted by Robert Lam

Posted by Robert Lam on September 17, 2003 at 21:47:40:

I paid off my current home. I now would like to move to a bigger house (to live in), but use my existing home as a real estate investment.

What do you recommend is the most profitable thing to do?

For example, (1) rent to someone (and be a landlord–they will help me pay for my new mortgage–I’m not a handy person), (2) sell the house for a profit (my house has appreciated about $10k in 7 years), (3) lease to others with an option to buy, (4) etc.?

Robert

Re: Paid off my home: strategies for investment? - Posted by Frank Chin

Posted by Frank Chin on September 18, 2003 at 07:44:15:

Robert:

It depends on your long term strategy. I have to generalize as I have no idea high much equity you have or the RE trends in your area as you didn’t mention where you live.

The returns are usually low for SFH’s, unless its in a fast appreciating area, such as metro NYC where I am, and you make up for it with equity.

Returns are far higher in multi families. If you sell the home right now, you can take all the money out tax free, and invest it in whatever you want. Put a down payment on the investment property, plus a new home, probably taking a mortgage on both - that’s leverage.

But if you decide the returns are too low five years from now, and then sell it, you’ll wind up either paying taxes or going thru the trouble of doing a 1031 exchange.

I own multi’s and SFH for rental. In metro NYC, the SFH almost quadrupled in price as I got the place as a preforeclosure deal 20 years ago. So I don’t care the returns are low. I also kept rents low to prevent turnover, and collect enough to carry expenses.

I suggest you take a look at some multi’s in your area and see if its something you want to be involved in. From my experience, SFH’s are easier to manage. Small multi’s are mini apartment buildings with no manager or superintendent and you’ll have to have tenants do the work, and make sure its done.

But if you have enough equity, you can even buy a small apartment building where you can have some type on site management. I say some type because for smaller buildings, a tenant gets a large discount on rent to be a part time manager.

To conclude, multi’s have higher returns, but involves more work and management.

Frank Chin

Re: Paid off my home: strategies for investment? - Posted by BrokerScott (Mich)

Posted by BrokerScott (Mich) on September 18, 2003 at 05:52:36:

The first thing is to establish your goals. If you have lived in this home for 2 of the last 5 years you could therefore rent or RTO it for up to one day less than 3 more years and use the capital gains exemption. However you state that the place has appreciated 10K in 7 years? How did you arrive at that statement? It seems very low. Have you had an appraisal or a Realtor do a CMA? If you hold it for more than those 3 years, when you do sell you would be liable for capital gains. As for your saying thatyou aren’t handy, you might want to include in your lease a ‘discount incentive plan’ as described in the book ‘How to buy and manage rental properties’ by Mike and Irene Milan. You charge slightly less than market if the tenats 1. Pay on or before the first of each month and 2. Pay a small deductable ($25 or so)for each service call. This effectively eliminates the piddley service calls, and you can get a handy man for more serious repairs. However you should check with your lawyer to ensure that it is written correctly in regards to your state/local laws. Hope this has been helpful. Best, Scott

Re: Paid off my home: strategies for investment? - Posted by Robert Lam

Posted by Robert Lam on September 18, 2003 at 07:11:48:

I have been in this house for the past 7 years. If I just rent the house out and buy another house, are you saying I have to pay capital gains on the rent that I receive?

If I sell the house, I can see that I will need to pay capital gains on the profit that I make.

No, I have not done a complete appraisal…I was just basing my numbers off of the property appraisal database available through a local city real estate website. I understand that their numbers are not totally accurate.