20% max for a rehab?

[carlosguti]

I was told, there was a law, that you can only make 20% off a rehab property. If you sell in less that a year, in other words, I have to keep the rehab under my name or company name for 1 year then I can sell it at a higher profit than 20%?

Carlos

Sorry if I confused anyone with this question

[Roger J]

No law that states that.

Where that number comes from is many lenders that will do financing with limited to no seasoning don't want you, the seller, making more than 20% over what you have in the property.  If you do, then it's possible that they won't finance it for the buyer.

The key is to document EVERYTHING.  If you keep proper records, it's really doubtful if you'll make more than 20% anyway in most cases.

Raj

[carlosguti]

Thanks for clarifying that, I figured 20% is better than 0% but wanted to clarify because the person that told me that does not invest in real estate but is successful in business.

Thanks again!
-Carlos

[kdhastedt]

I would recommend that, in addition to the scrupulous bookkeepping, that you take good before and after photos to show the bankers if they balk...especially if you bought a bad property and made it real nice...

I jumped from $51,500 to $66,000 ( a little over 28%) in about 4 months but it was a HUD house that was structurally sound but needed a lot of cosmetics.  When I got done, the place looked sharp, I got high rent and a good appraisal.

Keith

[black95gt]

im not really sure what your asking here.....but i just bought a house for 9,000 and will have a total of 17k(not including my labor, which i dont put price on)  into it.  I am planning on selling it for $42,000 by owner, or will list it with a realtor for $55k.....that is over 100% profit. I would like to know how much Uncle sam will be taking out of it though.  I am hoping to have the house for only 3 or 4 months.  Also does uncle sam take takes on the profit, or the sale of the entire house?

[Roger J]

black95gt,

I'd suggest that you put a price on your labor and figure out how many hours of labor that you have in it.

As stated, many lenders will not loan on a flipped property that is being sold for more than 20% of what the investor has in the property, especially if it is within 1 year.  There are several factors involved in this decision, like the credit of the buyer/borrower, but it is a pretty standard guideline across the board.

If you haven't figured your labor costs in your figures then you're cheating yourself twice.  First, you'll greatly limiting your ability to sell your house because you are limiting the potential available lenders.  Second, you are robbing yourself of time.  When I worked on my properties, I figured my hourly labor into the costs, and paid myself accordingly.  My time is worth something.  The profit I made on the house over and above that was income that I made as an investor, not a handyman.

Uncle Sam will tax your profit as ordinary income.  That is, it'll be taxed on whatever tax bracket that you're in.  Profit will also be subject to self employment taxes as well.

Profit is determined by subtracting the total costs of the property (purchase, fixup, closing costs, etc.) from the selling price.  The difference is what will be taxed.

Raj

[black95gt]

so are you saying i should figure labor into the cost right....can i deduct that from my profit margin?  I guess i dont figure labor in, as i do it sort of as a hobby. i work a fulltime job and do this on nights and weekends.  i enjoy doing this and it also gives me somthing to do rather than sitting at home watching tv or somthing.  Then it also gives me extra money.  This is only my second house, but do hope to do it as a fulltime job in the future.  I am trying to plan on making about 75-100 per/hour or a 15k profit after the house is sold and taxes are paid on this particular house.  I should be able to at the rate i am going right now and maybe then some.

[kdhastedt]

I think what he is saying is that, to give you ammunition for the fight that you might get from the lender, be able to show how many hours of labor that went into getting it into the condition that it is in...

As Raj stated, you cannot declare this labor in any way, shape, or form for tax purposes.  If you have the property less than 1 year, it is taxed as ordinary income in whatever bracket you are in because of your total income.  If you hold it for a year or more, you are subject to capital gains taxes.  His desrcription of figuring what you will owe is correct.

Keith

[todnat]

I bought a house in '04 and rehabbed it and sold it within 4 months.  When it came to tax time, I thought I got hit with short-term capital gains (appx $6,000).  Are you saying that it should have been counted as ordinary income instead?  I use Turbo-Tax, and just assumed I was doing it correctly.

Someone please clarify!

Thanks,
Natalie

[black95gt]

well how much of a profit did you make off of the house?

[todnat]

Net profit $9500.  Cost basis= $101,800.  Sold for $108,000.  So got hit with captial gains of $6k.  Is that what you meant?

If anyone has any suggestions on how to lower commissions, closing costs, and holding costs so that less profit is eaten up, that would be helpful too!

Thanks for replying,
Nataie

[black95gt]

I think you paid way too much in taxes.  You paid 63% in taxes on your profit.  I dont know how capital gain taxes are  but i wouldnt think its 63% is way to much.  Like some other people said in a different post, you should only be paying whatever your tax bracket is.  Probably about 28% or so.

[todnat]

I just dug up my tax return.  It looks like the $6k was the difference between the cost basis and profit.  It is listed under "other gains" in the "Income" section - so maybe it was counted as ordinary income.  I don't know - I think it's time to get a CPA!

thanks,
nt

[Roger J]

Keith above is correct.

You need to keep up with ALL of your costs in buying/rehabbing/selling (including your labor) of a property.  If the lender requests it, you'll have it, plus it's ready for taxes, too.

If you don't include your labor costs (for actual rehab work), then you're shortchanging yourself.  A fairly minor rehab will likely have 100+ hours of labor.  At $40 an hour, that's $4K in costs.  It makes a difference.  Plus you need to determine your "real" profit as an investor.  If you don't keep up with your hours, then you'll be in for a shock when you decide to start hiring stuff out.

As to taxes;

If you're buying/selling RE, then it's time to get a CPA, preferrably one experienced in the type of RE that you're doing.  It will help greatly.

todnat,
Per your numbers, you made a profit of $6200.  At a 28% tax bracket, you should have paid about $1735 in taxes, and about $950 in self-employment taxes.  Again, this is only an estimation, and you should consult a CPA for exact figures and help.

Raj

[todnat]

Thank you very much for your reply - and I am fairly sure that I have not taken into account my own labor costs - and they do add up!  So you are saying that my cost basis should have been more like $105,800 (assuming the numbers you presented), and my taxes would have been based on the $2k amount instead of the $6k - correct?

Also, you specified "for actual rehab work" - does that mean that acting as a GC organizing the subs to come in is NOT a valid cost?

thanks again,
natalie