First Investment Property

[Christian Lawson]

Good evening BiggerPockets friends,

I am currently in the process of purchasing my first investment property in Louisiana.  I need advice and opinions on which strategy will be the best for the deal and current times.  I will outline the details of the deal below.

We are purchasing the home from HUD for $210,000. The home needs around $9,000 worth of renovations to be in perfect condition that we will pay for with cash. I will be acquiring a 1 year, $0 down interest only loan for around $900/month. The insurances will be a combined $2,000/year and taxes will be about $1,400/year. The comparable properties in the neighborhood have recently sold between $259,000 and $265,000.

Should we flip the home and take the hit on taxes and get our initial money and profit out since it is a hot real estate market?  

Or should we refinance into a 30 year fixed mortgage and rent the property out for at least one year to capitalize on the 1031 exchange?

Any advice is appreciated!

Christian Lawson

[Dave Foster]

@Christian Lawson Your intent and how you can demonstrate it will determine whether or not your property would qualify for 1031 treatment.  You said you're not usually a flipper.  And past history is certainly one way to demonstrate intent.  But when you're asking the question well in advance of the transaction.....?

The market of course will determine your course.  But my money is on there not being enough profit to worry about the tax once you complete your renovation.  If you sell for 100% of the low listing range and have normal closing costs you'll have a net sale of around $240K.  

You're buying at $210.  You will have some carry costs of interest.  And you'll be putting $9K into the renovation.  This is also your first project.  So you wanna factor in the rookie tax (we've all paid it my friend).  You could very easily have $230 - $240K in that property without even sneezing.   That's not a lot of margin left to pay tax on.

All the above would tell me that if you like this property, it's a much better fit for a long term finance and let time, appreciation, and a tenant build your margin up.