by: Bruce W. Ford
Here's another awesome question I received from my discussion board. The question; Why bother keeping property after it's rehabbed? Why not sell it after the rehab and GET PAID!
Of course, the first questions that you must answer is how emergent is your need for quick cash? You can likely generate the most SHORT TERM cash by selling a freshly rehabbed house. But, you will give much of it away in taxes come next April.
If you keep it, you stand to make more! You will also enjoy some great benefits while you own it such as cash flow, a tax break, and MORE cash with the future appreciation. You can still pull some nice cash a few months after buying it when you refinance (post rehab) the property from your hard money (at 70% loan to value) to long term financing (at 85% or 90% loan to value).
The short answer is an investor is going to make considerably more money by hanging onto a property after it's rehabbed. There is a downside to it. You have to be a landlord, and you have to decide if you want to do that. I don't think it's too bad as long the landlording is done correctly.
Let me illustrate the difference in overall money between rehab and sell, and rehab and rent investing with this example;
Let's say appreciation rates are 5% in your town and the average price of a freshly rehabbed property in the neighborhoods investors buy in is $100,000. Let's also say there is Bill and Fred.
Bill sells his properties after rehabbing and makes $15-18,000 per house. Good boy Bill!
Fred keeps his rehab projects and cash-out refinances, pulling out around $10,000 per house within 3-6 months of ownership. (Fred trades his 70% loan-to-value (LTV) ratio hard money for long term, 30-year mortgages at a lower interest rate with an 85-90% loan to value ratio. He pockets the difference between what it costs to pay off the hard money and the new mortgage less closing costs. This works out to about $10,000 per property.)
Bill (rehab and sell) makes a great living. Ten houses per year is $150,000-$180,000 per year...nice jingle! The downside is that Bill has to keep rehabbing to keep making that living year-after-year and pays taxes on all that money as regular income (ouch!). So his $150,000 per year is in reality somewhat less.
Fred (the rehabber) also makes a great living. Ten houses per year makes him $100,000 or so in tax free, spendable cash. But, Fred controls a million dollars in real estate and it's going up in value year after year. Also, Fred pays no taxes on that money he gets from the cash-out refinances. It's part of a mortgage, so must be paid back, therefore is not income! I love that part!
Let's look at what Fred's doing more closely.
Let's say Fred bought 10 houses valued at $100,000 each, owes $90,000 on each one (after the 90% cash out refinance), so he controls $1,000,000 in property. If he keeps them 5 years (assuming a low appreciation rate...which is pretty conservative):
Purchase year - 10 houses x $100,000 = $1,000,000
Year 1 - Same 10 houses X $105,000 = $1,050,000
Year 2 - Same 10 houses X $110,250 = $1,102,500
Year 3 - Same 10 houses X $115,762 = $1,157,620
Year 4 - Same 10 houses X $121,550 = $1,215,500
Year 5 - Same 10 houses X $127,627 = $1,276,270
Essentially, Fred makes an extra $50,000 per year for keeping 10 properties. After owning them 5 years, if he sells, he puts $276,000 in his pocket.
Remember
- Some parts of the country will appreciate much faster than 5%. Heck some places properties will double in value in 5 years.
- No tax benefits of keeping the property is included here. That equates to thousands of dollars in real income.
- This is ONE ten-house year. Let's say you want to "top out" at owning 30 houses. Well, in just a couple of years your buying will slow down to a trickle and you'll start selling and cashing out of properties. I mean, how many ten-house years to you need to string together before you are set for life?
- What if you hold these houses 10 years? The numbers get pretty exciting.
If you're like me and you don't want to do this for too many years, then holding properties for a few years makes a lot of sense, especially if you don't have much personal money invested in them.
So what of poor old Bill? Chances are, Bill will satisfy his need for short term cash, then start holding property. What do you think?
About The Author
Bruce W. Ford is the editor of Rehab-Real-Estate.com. Get his important Special Report entitled "12 Things Real Estate Investment Gurus Won't Tell You" at http://www.Rehab-Real-Estate.com.
|
How Do I Prepare for Retirement?
How Do I Prepare for Retirement?
by: Stuart Simpson
When the day finally arrives, will you be ready?
What do you need to do?
How do you need to prepare?
Well, if you are over 10 years from retirement, then just sock away tons of money in your 401k for now.
This article is focusing on people a little closer to retirement.
So you are about 10 years from retirement.
What should you do?
What should you look at and what things will come up that you typically don?t think about while you are working?
There are 5 guidelines for you to look at to prepare your financial retirement.
Do you have an emergency fund?
Some experts say you should hold between six and 10 months worth of living expenses.
When we were younger, that seemed ludicrous.
How could you save so much and be expected to eat?
We had kids to raise and educate.
But now, think about...
Tax help > How Do I Prepare for Retirement?
What Does Extending Your Taxes Mean to You?
What Does Extending Your Taxes Mean to You?
by: Tiffany J. Morisue
Introduction
As the tax filing deadline is quickly approaching, many procrastinators and those who legitimately are just not ready to file their returns become stressed out and frantic, trying to meet what may virtually be an impossible deadline.
Many would rather rush to get their returns prepared than file an extension.
Common concerns include, but are not limited to, being flagged as a late filer, being assessed penalties, or being more likely to be audited.
If you are one of these individuals, I hope that I can put your mind at ease and inform you of what it really means to extend your tax return and the benefits of doing so.
A few notes before getting started:
- This article is written assuming a tax year that is the same as the calendar year, which is the case for most individual taxpayers.
- If a tax deadline...
Tax help > What Does Extending Your Taxes Mean to You?
What is a Structured Settlement
What is a Structured Settlement
by: Amit Laufer
A Structured Settlement is an agreement between a personal injury victim ( a Plaintiff ) and an Insurance company ( the Defendant ) to compensate the Plaintiff by the defendant with long term periodic payments instead of a single cash lump sum.
Payments can be tailored to each individual plaintiffs needs, to help meet expenses such as on-going medical and living expenses, education, children needs & support etc? The fixed annuity payments are tax-free to the claimant, a cost-of-living adjustment (COLA) feature is available, that can help offset the effects of inflation over time, payments can continue as long as the claimant lives thus providing him the maximum benefits.
Structured settlements are encouraged by plaintiffs lawyers, Courts, Insurance companies and the legislators alike as they all agree it is the best solution to all parties involved especially for the claimant.
...
Tax help > What is a Structured Settlement
Business Entities ? A Quick Guide
Business Entities ? A Quick Guide
by: Richard A. Chapo
Business entities comes in so many types that business owners can easily get confused. Here?s a quick guide that will hopefully shed a little light on business entities for you.
Business Entities
"C" Corporation: A corporation whose shares are held by shareholders. The entity stands apart from the shareholders for legal and tax purposes. The shares of the corporation may be ?taken public? and traded on stock markets. Google is an example of a publicly traded ?C? corporation.
Foreign Corporation: A corporation doing business in a jurisdiction beyond where it was formed. Microsoft is a Washington corporation. When it does business in New York, it is considered a ?foreign corporation.?
General Partnership: A business effort involving two or more people, known as partners. Each partner is liable for all partnership debts and obligations regardless participation and contribution...
Business Entities ? A Quick Guide
Tax help > Business Entities ? A Quick Guide
Accounting Community Supports KPMG
Accounting Community Supports KPMG
by: Thomas Johansmeyer
With the US government?s case against KPMG settled, the battered firm can refocus its efforts on its core businesses.
Enabling this refocusing is a series of internal mandates that have rippled across Deloitte & Touche, Ernst & Young, and PricewaterhouseCoopers.
No poaching!
Leadership in each of these firms has instructed the respective partners not to take advantage of KPMG's weakened condition.
There does not appear to have been any collusion between the other members of the Big Four, and smaller accountancies have supported this position.
Deloitte & Touche, Ernst & Young, and PricewaterhouseCoopers agree on the importance of KPMG?s continued success.
The large accounting firms have received intense criticism since the implosion of Andersen as to the lack of competition and increased concentration of service providers.
The collapse of KPMG...
Accounting Community Supports KPMG
Tax help > Accounting Community Supports KPMG
Why Buy A Hybrid Car?
Why Buy A Hybrid Car?
by: Ron King
For anyone interested in saving money at the gas pump and helping the environment, the new hybrid cars are an excellent choice. Small and fuel-efficient, hybrids are now being made by more manufacturers than ever.
Although hybrids cost more, and can be hard to find due to high demand, it still pays to choose a hybrid. Consider the following reasons to buy a hybrid next time you are in the market for a new car.
Smaller, More Efficient Engines
The hybrid's fuel efficiency is increased by its small size and the use of lightweight materials. Periodic engine shut-off is another fuel saving feature of the hybrid. When it is stopped in traffic, the hybrid's engine temporarily shuts off. The engine restarts automatically when the car is put back in gear.
Hybrids are powered by the combination of an efficient gasoline engine backed by an electric motor for acceleration. The electric motor is powered...
Why Buy A Hybrid Car?
Tax help > Why Buy A Hybrid Car?