First Deal In Place-but Rent or Flip?

Everytime I make a post the list comes up blocking it? Whats up with that?
Anyway....Greetings! I am SO excited - signed contract on first deal after month and half of learning and looking! Take possesion of 15th and cant wait to get my hands on it!!!! But here is my big question....in the formula for figuring offer price and profit - there is no accounting for the capital gains tax you pay in a flip. So while fix and flip was my plan - now i am concerned that my profit will really not be much of a profit in the end. So do I rent and hold - or does that matter? If its not a primary residence there are capital gains either way, right? Maybe I should rent the house I'm in now and move into rehab house? But I fully intend to contract others asap....so I'm just a little confused as to the best way to move forward with it now that I have it!
Thanks everyone for all the great advice and support on this site!

Great feeling, isn't it?!
I do believe there are capital gains with a flip, either way, unless you use the 1031 exchange possibly. Even moving into the property, I believe you have to stay for 2 years to avoid capital gains tax if you resell it. I'll be interested in hearing what others have to say with experience in this area.

I wanted to give you a pointer on the blocked post problem. Dgadmin IS working on that, but the only viewer it affects is the author of the post. Everyone else can see it just fine. BUT, in order to edit if you need to, I have found that if you go up to the address window at the top of your screen and add /edit (a forward slash and the word edit) to the address of your post, it will bring you to the post box and you can edit it from there. Hope this works for you.

Thanks for your exciting post! Keep us filled in with your progress.

Rina

Rina is correct on all points. The problem with the view should be resolved shortly. I've got someone else working on the glitch since I've been swamped. Alternatively you can use firefox (which is arguably a superior and more secure web browser) which isn't affected by it (and can import your passwords and bookmarks too).
http://www.mozilla.com/en-US/firefox/

You WILL have to pay capital gains with a flip, unless you do 1031.

and yes if you make it your primary residencem then you will have to live there for 2 years to aviod cap gains.

thanks everyone! I guess capital gains tax might be something i might figure into my offer formula from now on, because its pretty huge - at least here in jersey! I have been reading alot about the 1031 but find it very confusing and will get some professional advise on that for sure. I am just so excited about my first house, though - as long i come out a little bit on top the whole learning experience is awesome! Just cant wait to accomplish the task and see it finished -learning all about every aspect from start to finish. Who would have thought one of my favorite past times would be walking through Lowes and Home Depot pricing out things haha!And if it wasnt for a sleepless night, ordering Deans book off TV, and all the wonderful people of this site who encourage and support each other I would have never done it! Because there are so many nay sayers it takes alot to trust in yourself and move ahead anyway. Amazing how strangers on a web site can become your best friends! Thanks again! Success of first project will be forthcoming!

you share the details to your deal..

calculate how much capital gains i'm going to pay? SULLY

cost of house plus ALL expensees minus what sale price will be. Diff is cap gain. Times that by your tax bracket. It is taxed just like income.

I've had my share of nay sayers too girl, the great thing is you're doing it and you have the support of all the superstars here! Does it get any better than that? I'll tell ya, this site and it's supporters has done wonders for me!
Let us know how you do... We're all pullin' for ya!

oh my gosh@!!, thats insane, hey D, can you give a figure example? SULLY.

200k house cost
+10k closing when you buy (which may not be deducted-not sure)
+20k repair
+6k est. holding (which may not be deducted-not sure)
-300k price you will sell at
+23k est. realtor/closing

total in 259k
cap gains (profit) 41k (you pay tax on this)

can someone comment on the (which may not be deducted-not sure) ones...

appreciate you taking the time to make it dummy proof, SULLY.

Hi All! Just heard from one of my PMI mentors. It is correct that capital gains are paid on the profit AFTER all your expenses - rehab, realtor, holding etc are calculated. So that is good news - but it still hurts. Taxes between fed and state could be as high as 27-30%!!! In my research since posting here I have decided that i will hold and rent or lease/option my investments for at least a year. That does several things. First, it changes the profit from short term to long term and changes federal taxes on profit from 15% to 5% if I sell outright. Thats HUGE. Secondly, it allows the property to qualify for the 1031 exchange sale which defers all taxes on profit. go here - http://www.1031exchangemadesimple.com/s. and on page is a link to a free download that explains it perfectly and in language we can all understand. My new job is now to find an accountant who is experienced in this type of sales!
As far as details of my deal- it is almost a textbook find.
I was looking at an mls house and on same street found a overgrown, distressed house with a tiny FSBO sign in window. Asking price was 275,000.00 After leaving messages for a week owner finally called back. Gave me code to lock box (its empty) so I could get in. Well - turns out it is an estate sale - it was his parents house-he is in Florida. His father had started renovations and never finished. So all grunt work of enlarging rooms, framing attic for conversion, etc is done! I did FMV and found it to be 320,000. Similar homes in neighborhood - without upgrades/expansions are listed at 335,000. So I did the tried and tested rehab formula and came up with offer price of 235,000. So I called him back and offered 225,000 and he accepted as long as we could do a quick closing, which I of course agreed to. I am using HELOC for 20% downpayment and mortgaging 180,000. Comp rents in area will more than pay those off, with about a $500/mo profit. So things are looking good.
Thanks everyone for your support!

Great job Laura, you're doin' it right girl! Keep us posted, it keeps me motivated...

Elena M.

nice find!, good job aquiring this pristine piece, sounds like your going to do allright, profit wise, hey, how much rehab does the property need? SULLY.

That is awesome. Great job!!! Question how do you find the rent comps in your area?

ps...thanks for the update on cap gains...I thought they were part of it but wasn't 100%.

Hey Sully, Elena and Hazco
My estimate on rehab is 25,000. That includes the general rule of adding 25% for unforseen things. I got a Lowes Commercial Acct which automatically gives me 10% off, and the manager said if I purchase in quantity (order most of what I need all at once instead of room by room) he can make it 20% off! So thats awesome. I also have in my mind that if down the line I sell it as FSBO - all those realtor costs (about 19,500) that are figured into the formula would also be eliminated and in my pocket instead....so much to think about and learn!
As far as the comps in my area I used electronicappraiser.com and paid $20.00. It was very comprehensive, and when I shared it with a realtor they ran one and came up right on target. So that is a good resource if you are not working directly with a realtor.
Thanks again for all support! Where are you guys in your investing careers?

is the web site called electronicappraiser.com?, i am trying to invest in my home town of montgomery county, PA, SULLY.

you added an extra $58,750 to your rehab costs!!?? (25%x$235,000), thats seems a lil' accessive, you think? SULLY.

I found my first FSBO property. It's asking price is 50K below the appraised value and will need 12K to be livable or rentable. I plan to rent this property in this down market. My mortgage broker told me, and it is only the time that we are in, given the condition of the current housing market that banks are lending only for 90% loan-to-value. Any thoughts on financing the entire asking price or getting the 10% down for the loan?

Thanks

for most of the country,how about a 80%-20% loan, or 80%-10%-10% loan?, or even simpler, ask for a concession for the 10% down? Does the seller currently have a mortgage on the property now?, if he does, how bout', WRAPAROUND MORTGAGE?, or even better, better, check this out, ask the seller to take back a 2nd mortgage for the 10% over a period of like 5-10 years (promissory note)?, lots of options here....SULLY.

Firstly- I apologize. Electronicappraiser.com is perfect for comping fair market value and sales in the area. For comping rent I use a realtor as well as reading the local ads in the paper for similar places in the area.
As far as the rehab costs - I estimated 20,000, and then added 25% of that which is 5,000 bringing my total rehab costs built into my formula at 25,000.
With getting 100% financing as mentioned above - my mortgage broker told me its as good as impossible in this market unless you have private investors. Banks just arent going for it. Its tough.

correct, as for the rehab thing, thanks for clearing that up, SULLY.

just gave you a GOLD BADGE, you deserve more badges for your knowledge, good job, SULLY

I'm smilin here - mostly cause I feel so green at this, making use of everyone elses knowledge on this site, and you acknowledge me! It feels amazing to be educating myself, taking charge and changing my life simply by reading, listening to others who know more than me, and researching the heck out of everything! I am honored that I was able to provide anything to help you or anyone else! I cant say enough how amazing this site is!

You ARE doing great! Thank you so much for sharing in such detail. And for relaying back great info. You're really doing your homework. Dedication and attention to detail really pays off! And good job on figuring out your strategy, not jumping into a deal blindly. (Coaches are great too, aren't they?)

Impressed,

Rina

I would like to congratulate everyone on all of their accomplishments. And thank you so much for all of your helpful tips and insights. I'm new to RE investing and looking forward to gaining more knowledge from this fabulous website and Dean's materials. I am currently making my first contacts with sellers and preparing for my first few offers. It was really nerve recking to contact the first one. Especially when you're out there in the field alone with no one to hold your hand through the process. Now I know the true meaning of fake it till you make it. I have to admit. After the first contact with a seller...I am on a roll now. My advice to all the new comers. Don't listen to the nay sayers. Continue to believe in yourself and hangout here as much as possible for support and you will do fine. Looking forward to sharing some of my experiences and stories with you all. To all the seasoned investors here.. and those who are relatively new and giving back. way to go! Giving always pays off!

"The Best is Yet To Come"

We're looking forward to hearing of your success, and your road to it!
Good job on all you've done so far.

Rina

I dont see why we would be talking 1031 here. 1031 is used mostly for trading up or down eg taking a bunch of smaller properties (SFRs) and trading them for one big property ie an apartment. (Or the reverse of course).

Or if you have used all your depreciation.

The real question here: Do you want the house or do you want the cash? If the former, then rent it. If the latter then sell it.

Firstly - you have to have owned the property for one year anyway...so right now the point is mute unless I end up renting it for a year. Then I could consider it. I am definitely going to try to sell it and renting will be my back up plan. I'll be in the plus either way so I have no worries.