What should I do with this property??

Question

Hi everyone! I'm new to this blog and new to the rehabbing and flipping business. I currently own 1 property, free and clear that appraises at $400k+. I want to to flip more properties but I'm not sure how to fund it.  Currently, I have rental tenants living in the home. Should I sell this property or take out a line of credit on this home so that I can invest in flipping more properties?

Casey S. · Answer

I agree. Sell it. Would you buy a $400K property to get $2000 a month in rent? NO WAY! The $400K would go a long ways towards down payemnts for building a large rental portfolio or starting your flipping business.

Jon Holdman · Answer

IMHO this is an easy sell.  You're making $1000 a month from this property after accounting for all long term expenses, capital and vacancy.  That's $12K a year from an asset that's worth $350K (after selling expenses.)  That's a 3.4% return.  You can do much better.

I know you probably think you're making more than $12K a year.  Even if its $24K a year, that's still only 6.8% return.  And its clearly less than that because you have (at least) taxes and insurance.

You have a lot of money tied up in an asset that's not producing much return.  That's a bad rental investment in anyone's book.  If you want rentals, I'm sure you can do much better than that without looking too far away. I'd only hold onto this one if you have some reason to believe it could be worth a lot more relatively soon.

Jonathan Sowinski · Answer

A HELOC seems like it would be the best option in my opinion.  Keep the property use the equity...

Jon Holdman · Answer

Uh oh.  Now I do see a can of worms on the taxes front.  I assume from the way you say that you father was still alive when he gave it to you.  So, no stepped up basis.  Further, if the value was more than $10K (or, whatever the limit was when he gave it to you, its gone up in recent years) then the excess would have reduced his tax free inheritance.  If he can afford to give you a $400K house, I would guess that's an issue.  You probably do want to have a discussion with your CPA about the tax situation before you do anything.

Tami Warren · Answer

Thanks guys, this is all truly helping me a great deal. The property was giving to me buy my father and I never intended to live in it so I have been renting it. Even my dad mentioned I should probably sell because it previously appraised for much more. I have been looking for other investment properties but it's expensive here in California. I think I'm going to have to check out some other states to get the most return for my money.

James Aldridge · Answer

With 400k in play you could generate 6-10k in New Orleans right now.  I would sale it or see if the renter wants to buy it. They could finance it for close to what they are paying in rent. Should be an easy sale if they have sufficient credit.

Jon Holdman · Answer

The OP says nothing about a tax situation.   Perhaps she paid cash for this and has no gain.  Perhaps its inherited at a stepped up basis and also has no gain.

If taxes are a big consideration, do a 1031 exchange into something that produces a reasonable amount of income for the investment.  As a cash-flowing rental property, this is an absolute pig.  Again, there may be other reasons to keep it, but from the perspective of a rental property, this one is not a keeper.

That much cash could easily be leveraged into a $1 million property.  I recently looked at some apartment buildings in KC where you could turn this $2000 a month into $14,000 a month with leverage.  By that I mean 30% down on a couple of apartment buildings, with another $50K held in reserve and for up front costs.  I certainly would not recommend Tami do that, but that cash could be leveraged into better performing investments.  Perhaps right in her backyard, perhaps as far away as, I dunno, Sacramento.  Heck, I could turn that cash into $10,000 or so in gross rental income right here in our area.

Chris Colvard · Answer

Selling means tax on sale!  Doesn't take into consideration what he is trying to do.

Why give up an income producing asset to go to cash when the value is equity?

He can leverage this no matter how he intends to raise money for his deals.

Even if an investor/bank/private lender looks at this, he has additional security.

Makes no sense to me???

Dan Schemerhorn · Answer

oops i mean generating $2000 a month and I invested $11,000

Dan Schemerhorn · Answer

i agree about selling it. That's a lot tied up for 2000 a month.

I just bout a 4 plex and will be generating 20000. And I only paid 11000.

Dan schemerhorn

What should I do with this property??

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