Rehabs and selling on L/O - Posted by Mike

Real Estate Investing Vacation Rentals
1

Posted by Frank Chin on January 30, 2001 at 07:50:15:

Dave- you got it exactly right.

We started in Real Estate in the early 80’s. The thinking back then was Real Estate is a good tax write-off. You’ll make money when you sell. Never mind the cash flow.

My wife stayed home since 1995 and took charge of managing several multi-family units. It was OK till the little one came along. Then we settled on below market rents. Yes -turnover went down. We told tenants to take care of things. We let little things go.

I finally realized I’m doing the same thing my 80 year old father is doing. He’s got two stores where he’s charging half of market rent so he won’t have to look for new tenants.

Looking through our portfolio, we have almost 1,000,000 in equity including our home. But, cash flow was less than 20K a year because we were operating as tired landlords. Depreciation is running out and we’ll be paying taxes on the 20K very soon.

I’ve also done well in the stock market. My finanacial planner thought it would be nice to stay in Real Estate as diversification. So I decided to either:

1- Sell everything off- pay the taxes (about 300K), then do rehabs, flips or whatever. This fits into moving out of NYC to a warmer climate. But, we have to find an area of the country where we can do this profitably. Heard from some posts that Ohio is good. But we don’t know how to appraoch this question methodically.

2- Go into larger properties (via 1031) in NYC that can be professionally managed. We started searching since the beginning of the year. We can make 50K to 100K a year based on some of the things we looked at. This way we can still move away.

Yes-I’ve been following this board for ideas for a while for ideas. Based I what I see, people can even make 20K a year with no money and no credit. and based on your posts, Dave, - you’ve done well yourself.

Yes - we’ve decided we cannot afford to be tired landlords anymore. I quit my job to take charge of the transition full time.

And I like to thank you and all the others answering some of my posts.

2

Rehabs and selling on L/O - Posted by Mike

Posted by Mike on January 26, 2001 at 21:10:07:

Hi.

I’ve been in the wholesale/rehab biz for a few years now. I’ve gotton plenty of experience with fixers, but as we all know, the trick to this business is selling. I have a few houses that I rehabbed and sold on L/O. So far so good, I haven’t had any real problems to speak of. I’m wondering how many other rehabbers are keeping their houses and selling on a L/O. I, as I’m sure many other investors, am having a very difficult time finding semi-qualified people to purchase my homes. These are good people mind you. People that simply can’t get financing now, but hopefully will in a year or two.

Am I asking for trouble by refi-ing maybe 7 or 8 a year and selling on L/O or is this a sound business plan. I’m not dealing in the greatest areas, but I really haven’t felt any ill-effects to date.

Any suggestions are appreciated.

Thanks.
Mike

3

Actually - Need Help from You - Posted by Frank Chin

Posted by Frank Chin on January 27, 2001 at 07:22:01:

I know you’re asking for suggestions, but I need some advice from an experienced rehabber like yourself on a fixer I did.

Bought a preforeclosure wreck in 1984. Got it for 80K (market price in 1985 was 125K) - spent 10K fixing it. Spent another 15K through the years.

In 1998, my then and current tenant asked to buy it. Got an appraisal then for 153K. He couldn’t afford it. Prices had since zoomed, and I believe its worth about 185K to 200K based on recent ads. Area prices went up 18% last year based on local newspaper article.

This is the situation:

1- Have mortgage of 75K - paying $1,050 monthly including taxes.
2- Charging below market rent of $1,175. Monthly cash flow of $100.00
3- Market rents now about $1,800 to $2,000.
4- Can sell house for 185k to 200K
5- Needs siding, roof, fencing if we keep it another 10 15 years.
6- Depreciation used up in 3 more years.
7- House in very good area.

Obviously I have to do something soon.

Questions:

A- Taking out 125K sounds attractive. If we ask the current tenant to leave, spruce it up, show it, wait to close - I’m facing holding costs for 6 to 8 months, something like $8,000.00. Is a L/O the best way to do it.

B- If I structure a L/O - how much should I ask for up front option money. Would $5,000 be OK? Would 2000/monthly rent and 200/monthly credit towards purchase price be fair?

C- Should I sell it. Capital gains tax, recapture, state tax would take a 50K bit. But because I held it due t a flip gone bad - its still a lot more than making 35K and paying ordinary tax rates back in 1985.

D- Refinance?. For how much? After closing of 7K , fixing it- another 7K to 10K , theres not much left.

My wife is for kicking the guy out, tough it out 6 months. Her point is, we know we can close on it this year. Its sort of a starter home in the area. Would be best that the buyer can start his kids in the new school year this coming September.

I’m thinking of L/O. I’m getting some good rent - some $2,000/month and the place won’t be vacant for 6 months. Problem is - don’t know when we’ll close if ever.

Actually we never did a L/O and don’t see any newspaper ads for such since there’s only a “for sale” section and a “for rent” section. Do we do a FSBO ad and say owner will consider L/O. Or do we place an ad to rent and say owner will consider L/O.

Renters actually asked about L/O in the past went we place the house for rent. Should I get a Realtor?

BIG Question:

What would you do if you’re in my shoes?

4

Re: Actually - Need Help from You - Posted by Dave T

Posted by Dave T on January 28, 2001 at 14:02:39:

Frank,

Why do you want to sell? Is there a better investment waiting in the wings for you?

If your goal is to just simply increase your monthly cash flow, have you considered refinancing the mortgage you now have? A new 30-year fixed rate mortgage on 75K at 7.5% should only cost you about $525 per month plus taxes and insurance. There should be plenty of cash flow for you with an $1175 monthly rent income.

Are you concerned that the property is fully depreciated, and you are losing (or already lost) your depreciation expense? If the amount of taxes you will pay on the net income from your rental property is so great, just purchase an additional rental property to shelter some of that income.

If you are concerned about the potential tax bite on the sale of your rental property, have you considered selling your primary residence instead? Up to $250K of the profit on the sale of your primary residence is tax free ($500K if married filing jointly). Sell your primary residence and move into your rental property. Use the profit on the sale of your primary residence to purchase a new rental property. Once you have occupied your (now former) rental property for two years, you can sell for tax free profit.

Repeat the cycle again every two years, and the profit from the sale of your primary residence is tax free each time.

5

Re: Actually - Need Help from You - Posted by Mike

Posted by Mike on January 27, 2001 at 21:50:41:

From what I can see, I’d probably refi. and pull the cash out. Since the place is worth 200K you could refi. at 75% LTV and get 150K, basically pocket 75K. Use some of this cash to fix the place up and take care of your 6 months of holding time. Assuming a 150k mortgage at 9% interest, your looking at probably around $1500 in PITI. You get $2000/month in rent and now you have a $500 cash flow. Furthermore, if you sell on L/O you can set a sale price of 205-210k and get 5k down. Not bad…

As far as advertising, I don’t know your market. I advertise in the houses for rent section with a headliner of “RENT TO OWN”. Phone rings off the hook. After that, it’s a matter of screening for the right tenant/buyer.

Anyhow, that’s what I’d do. Hope this helps.

6

Thanks - but Anyone believe in Superstition? - Posted by Frank Chin

Posted by Frank Chin on January 29, 2001 at 06:46:29:

Thanks for the input. My wife and I had been going over this for over the past year. The best option for us was actually to:

1- Move into the house described in my post.
2- Sell the one we live in which we got at a foreclosure autction for 220K in 1993. Its now has a market value of 450K plus. We’ll have 270K net of taxes to go into the next thing.

On the other hand:

1- The origanal seller got the house when his mother died. Then his business went downhill and his wife left him.
2- A later tenant’s young wife went to the hospital for a routine procedure and died went a tube in the oxygen mask got twisted. He was later sick for a whole year, declared bankruptcy and got evicted.
3- The current tenant lost his wife last year to cancer. Is there 10 years and we raised the rent $50.00 the whole time he’s there.

Have a hard time convincing the wife to move there. Things seem to happen to people living there. Its a nice 3BR house in a nice area of Long Island New York.

The wife felt that since we were just going to make 35K on a flip origianlly and paying the taxes, taking 125K out and netting 75K is more than what we expected (15 years later). We realize we can refinance 75K out, and still have cash flow. Then, we had our fill of bad luck tenants - particularly the women of the family.

Or is it just a case of Superstition ???

7

Thanks-That was Helpful - Posted by Frank Chin

Posted by Frank Chin on January 28, 2001 at 07:42:01:

We’ll probably try a L/O along the lines you indicated.

Lets hope my phone rings off the hook.

8

Re: Thanks - but Anyone believe in Superstition? - Posted by Dave T

Posted by Dave T on January 29, 2001 at 23:28:46:

This business should be conducted unemotionally. The approach to each deal should be selected in the context of what makes the best business sense.

In your case, your emotions seem to have limited your real options to just selling outright. Your words tell me that you are tired of landlording. If so, remember that lease options often DO NOT get exercised – keeping you in the landlord business.

If you really want to give up landlording, I suggest the following two year plan. Give your tenant notice that you will not renew when the lease term is up. About two months before your tenant is scheduled to vacate, advertise your primary residence for rent. Convert your current residence to a rental for the next two years, then move into the investment property for two years – converting it to your primary residence.

At the end of the two years, sell the property and keep the profits tax free, then move back into your original house (giving your tenant appropriate notice).

You are now out of the landlord business with all your “investment” profit tax free, and living in your original house.