What am I doing wrong? Flipping my first property. Should I sell or lease?

[Houston_Guy]

I would like you pros to analyze my first real flip.  I have experience in real estate and rehabbing some properties properties. I'm not a pro, but also not an extreme newbie.

In May 2007 I closed on a REO property I purchased for 39k, it was listed on the MLS for only hours when I submitted my cash offer. They obviously accepted. The county has it appraised for 87k and the property was last bought for 95k in 2005. Comps in the area would price that home between 90k-105k.

The home only needed 7k in repairs, since it was mostly cosmetic work. I now listed the property at 99k, hoping to get around that amount since it was bought 2 years ago for 95k. The builder sold 3 consecutive homes in 2005 all ranging from 87k-95k, documented through the MLS and the original loan amount on the county records.

The flipping process lasted 2 weeks, so in less than a month I had gone from purchasing a property at 39k cash, listed on the MLS to relisting it on the MLS for 99k, after only spending 9k on repairs and appliances. I am getting good feedback on the property, so I have no doubt I will sell the property for at least 95k.  I will most likely make at least 45k profit on this extremely easy project. Searching for the right home was a lot harder than flipping this property, since it took me months of searching to luckily finding the right property. Like they say, the money is made when you purchase not when you sell.

Is there anything different that you pros would have done? Considering the amount of money to be made on this cheap property, would you rent this property instead? Owner finance to a potential buyer? Or maybe lease out for a year and then sell? Will my buyers have financing issues because of lack of title history on my part. My wife is a real estate agent, so we made money buying the home and also commission when we sell.

Since I purchased this property, I have NOT seen any other killer deals like this one. And when I do, I submit an offer and end up getting out-bidded because the property was listed low to attract more offers. 

[Nato]

Looks good. Nice job at getting the property at that price. Was this property on the MLS? I also wholesale/rehab properties in the Houston area.

[Houston_Guy]

Looks good. Nice job at getting the property at that price. Was this property on the MLS? I also wholesale/rehab properties in the Houston area.

thank you. yes it was. How many do you do a year? How long have you been in it?

As you know, its not easy finding properties with that type of split. And in all honesty, I was pure luck on my part, I guess the listing agent was having a good day and didnt want the hassle of playing with more offers.

[Nato]

Pm sent. Let us know when the property sells.

[propertymanager]

Is there anything different that you pros would have done? Considering the amount of money to be made on this cheap property, would you rent this property instead?

How much would it rent for?

Mike

[Houston_Guy]

Is there anything different that you pros would have done? Considering the amount of money to be made on this cheap property, would you rent this property instead?

How much would it rent for?

Mike

whoa. sorry, i missed an important piece of information.

Anywhere between 875-1000. The area appreciated somewhat in the last couple of years, but I dont see it going up much more for at least another 5-10 years. The progression in that area is slow. And its Houston, so homes appreciate very modestly.

[Tien]

Depends on your cash position.


If you need cash now, flip it.


If you are after building wealth, go ahead and rent it out or lease option it.


I think the rent payments easily catch up what you pay monthly in costs.



Basically if you have more funds to work with that you can cycle through 2-3 deals with, than you can keep it. But don't hold on to properties if it will prevent you from buying more within the next year.

[campbellgroup]

Sell

[PaulBroni]

Seems like you'd be better off in the long run renting it. It should cash flow.

You'll enjoy appreciation plus a lower tax rate when you do sell.

If you need to pull cash out, refinance.

[Funder]

     You mentioned that you are not finding deals like this again.  If you can qualify for other purchases, then you might consider holding this property for one year as a rental.
     If you flip now, you are subject to capital gains tax.  If you hold for a year, you can do a 1031 exchange and defer the tax.  Please consult with a 1031 specialist before you sell, because if you do not structure it properly, the IRS will make you pay taxes.
     As I see it, you should ask yourself:
    1. How hard you want to work
    2. How much money you can make this year with after tax profit from this deal
    3. How much money you can make if you shelter this money from taxation then use all of it to buy more "like kind" investments after one year (the holding time typically required to perform a 1031 exchange)
     Many investors have the ultimate goal of buying commercial real estate and writing a triple net lease.  This is a gravy train where the tenant pretty much pays for everything and still pays you rent.
     So the important question is: do you want to stay in the rehab business or do you want to get into the rental business also?  I believe that this provides an opportunity to learn about property management and 1031 exchanges, which are two very valuable areas for investors to experience.

[mw]

 

If you flip now, you are subject to capital gains tax.

Flips are taxed as regular income tax, if that is the purpose of the buy and sell...not capital gains tax.

[Houston_Guy]

     You mentioned that you are not finding deals like this again.  If you can qualify for other purchases, then you might consider holding this property for one year as a rental.
     If you flip now, you are subject to capital gains tax.  If you hold for a year, you can do a 1031 exchange and defer the tax.  Please consult with a 1031 specialist before you sell, because if you do not structure it properly, the IRS will make you pay taxes.
     As I see it, you should ask yourself:
    1. How hard you want to work
    2. How much money you can make this year with after tax profit from this deal
    3. How much money you can make if you shelter this money from taxation then use all of it to buy more "like kind" investments after one year (the holding time typically required to perform a 1031 exchange)
     Many investors have the ultimate goal of buying commercial real estate and writing a triple net lease.  This is a gravy train where the tenant pretty much pays for everything and still pays you rent.
     So the important question is: do you want to stay in the rehab business or do you want to get into the rental business also?  I believe that this provides an opportunity to learn about property management and 1031 exchanges, which are two very valuable areas for investors to experience.

thank you. I appreciate your input.

You are correct though. From my reading, I must follow the proper procedures for 1031 exchanges. I might do that for the experience.

I'll be able to find other deals, but maybe not the ones with this kind of profit margin per home.

[christopher w]

What if you did it like this? Lets say it is worth 95K. You do a no seasoning 80% cash-out. That gives you a loan amount of 76K putting 30K in your pocket at closing (minus closing costs). You still have 19K in the house. You hold it for a year let the glut of houses on the market pass and rent it out.If it appreciates just 3% over the year you could sell it almost 98K. After the sale was complete you would have another almost 22K in your pocket making you over 51K over the life of the deal plus whatever you make in rent.

[propertymanager]

Houston_Guy,

I would keep the property as a long term rental.  With an acquisition cost of $46,000 (39K + 7K) and gross rent of $1,000 per month, you should have a positive cash flow of about $200 per month, which is very good.  Obviously, you would also be picking up about $45,000 in equity, which is also good.

If you sell it, you will pay a big chunk of your "profit" in taxes and you'll be done.  Keep the property and it will provide income and wealth for the rest of your life.   I don't sell the goose that lays the golden egg!

I would never plan on holding a property for a year or two and then selling.  Tenants are VERY hard on rentals and you would probably need to rehab the unit again before you could sell it to a retail buyer.  I also would not refinance for more than you have in the property ($46,000), because that would cut down on your cash flow.

Good Luck,

Mike

Good Luck,

Mike

[Houston_Guy]

Houston_Guy,

I would keep the property as a long term rental.  With an acquisition cost of $46,000 (39K + 7K) and gross rent of $1,000 per month, you should have a positive cash flow of about $200 per month, which is very good.  Obviously, you would also be picking up about $45,000 in equity, which is also good.

If you sell it, you will pay a big chunk of your "profit" in taxes and you'll be done.  Keep the property and it will provide income and wealth for the rest of your life.   I don't sell the goose that lays the golden egg!

I would never plan on holding a property for a year or two and then selling.  Tenants are VERY hard on rentals and you would probably need to rehab the unit again before you could sell it to a retail buyer.  I also would not refinance for more than you have in the property ($46,000), because that would cut down on your cash flow.

Good Luck,

Mike

Good Luck,

Mike

Thanks, I've thought exactly about that route. Its just hard giving up that type of one-time profit. But you are right, it would cash flow very nicely. If I do sell, I am going to reinvest or maybe buy a new truck cash j/k