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Buying & Selling Real Estate

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James Robert
  • Flipper/Rehabber
  • Cincinnati, OH
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Do I sell and set myself up OR keep as a break even rental?

James Robert
  • Flipper/Rehabber
  • Cincinnati, OH
Posted Mar 2 2024, 20:35

I currently have a house 3 bed 2 bath in one of the best neighborhoods in Cincinnati. I paid 325k for it with 5% down in June 2023. Comps for this house fixed up are now trading in the 5's.. My mortgage is 2.8k and it would rent for 2.8-3k a month on LTR. I don't want to deal with Air Bnb either. Property manager said it would gross around 5k on average but after paying their fee and cleaners and my utilities its the same as LTR. I flip houses as my main job now but am also a licensed realtor. I save 3% when I list my properties myself but this is my primary. If I put 20-25k into this house and sell it for 525 I would walk with around 170k pre tax.  That would have me sitting at around $300,000. I turn 27 in May. Its tempting to just sell it while my market is hot and see what I can turn that $300,000 into. 
Please comment your thoughts. 

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Jason Wray
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Jason Wray
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Replied Mar 2 2024, 22:04

One way to avoid that Tax is to put it back into another property with a 1031 Exchange.  You can still take some cash to replenish your capital but the cash injection into another property avoids the hit.  Then in 6-12 months do a cash out refinance and take out cash "Tax free".  

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Steve Milford
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  • Vancouver, WA
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Steve Milford
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  • Vancouver, WA
Replied Mar 2 2024, 23:10

@James Robert What is the point? To say you have $300k? Yes you can sell your primary, but where are you going to live? Gotta live somewhere.

Once you figure that out, then you will know if it is worth it.

In my market, once rates come down, prices are going to shoot up, we just don't know when. Maybe that is same for your market?

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James Robert
  • Flipper/Rehabber
  • Cincinnati, OH
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James Robert
  • Flipper/Rehabber
  • Cincinnati, OH
Replied Mar 3 2024, 09:23

I’m a single man, finding somewhere to live is of no concern for me. I have so many options, rent a place for a few months until I find a new primary, stay with friends or parents for a bit, hell I could even live in one of my flips since that’s my main source of cash and always have one going on. I’ve sold my primary before and rented for 4 months and boosted my bank account significantly. I’m still on the fence about selling it but based on my experience sometimes it’s good to sell right after a record breaking comp in your neighborhood sells. Still on the fence about all this but sure is enticing to take the money 

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James Robert
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  • Cincinnati, OH
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James Robert
  • Flipper/Rehabber
  • Cincinnati, OH
Replied Mar 3 2024, 09:24
Quote from @Jason Wray:

One way to avoid that Tax is to put it back into another property with a 1031 Exchange.  You can still take some cash to replenish your capital but the cash injection into another property avoids the hit.  Then in 6-12 months do a cash out refinance and take out cash "Tax free".  

I don’t think 1031 exchange on a primary is legal

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David M.
  • Morris County, NJ
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David M.
  • Morris County, NJ
Replied Mar 3 2024, 10:32

@James Robert

So basically, its just betting whether the property will appreciate more or less than what you can do/invest with the cash proceeds?

(yes, its your primary so you can't 1031...)

The $170k pretax (I'm just using your numbers here).. is the same post tax because of the sec121 exclusion...  You've got another ~$80k to go until you max that out since you are single.

So, I guess what is the effective opportunity cost for your $300k?  not sure what are you investment intentions or assset classes (e.g. I invest in other classes than real estate).

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Theresa Harris
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Theresa Harris
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Replied Mar 3 2024, 10:38

I don't know the answer to this, but if you did move into one of your flips and made it your primary, how would capital gains tax work when you sold? 

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David M.
  • Morris County, NJ
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David M.
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Replied Mar 3 2024, 10:45

@Theresa Harris Oh do the sort of live in flip?  In the US, he'd have to stay for at least 2 years to get the capital gains tax exclusion.  Yes, very common in the early 2000's.

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James Robert
  • Flipper/Rehabber
  • Cincinnati, OH
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James Robert
  • Flipper/Rehabber
  • Cincinnati, OH
Replied Mar 3 2024, 11:29
Quote from @Theresa Harris:

I don't know the answer to this, but if you did move into one of your flips and made it your primary, how would capital gains tax work when you sold? 

In June I’m at the 1 year mark. This means I only pay 15% tax rather than full capital gain. I wouldn’t make my flip my primary, I’d just live in my flip house until I found a new primary to buy or rent something 

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James Robert
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  • Cincinnati, OH
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James Robert
  • Flipper/Rehabber
  • Cincinnati, OH
Replied Mar 3 2024, 11:29
Quote from @David M.:

@Theresa Harris Oh do the sort of live in flip?  In the US, he'd have to stay for at least 2 years to get the capital gains tax exclusion.  Yes, very common in the early 2000's.

After 1 year it’s 15%. In June I will be at the one year mark 

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James Robert
  • Flipper/Rehabber
  • Cincinnati, OH
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James Robert
  • Flipper/Rehabber
  • Cincinnati, OH
Replied Mar 3 2024, 11:31
Quote from @David M.:

@James Robert

So basically, its just betting whether the property will appreciate more or less than what you can do/invest with the cash proceeds?

(yes, its your primary so you can't 1031...)

The $170k pretax (I'm just using your numbers here).. is the same post tax because of the sec121 exclusion...  You've got another ~$80k to go until you max that out since you are single.

So, I guess what is the effective opportunity cost for your $300k?  not sure what are you investment intentions or assset classes (e.g. I invest in other classes than real estate).

Having 300 would allow me to delete hard money lenders from my flipping business. My profits per deal would become larger versus what my house would gain in value not selling it

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David M.
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David M.
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Replied Mar 3 2024, 11:37

@James Robert if you are flipping, even if you hold the property for 1yr, the profit is still taxed as ordinary income.  You need to show true intent and activity that its an investment property.

So, flipped property is treated as dealing in inventory, not investment property.  As such the profit is taxed as ordinary income subject to self-employment tax.  Its not capital gains tax at all.

So, none of what you just replied to technically works.

Of course, consult a qualified professional...  But, we've been saying this on the boards all the time.

Back to your $300k..  Well sounds like you'll be saving ~12% and ~2pt per deal by using your own money.  Unless you think your home will appreciate faster than that, it could be a way to go.

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Jessie Dillon
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Jessie Dillon
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  • Hopedale, MA
Replied Mar 3 2024, 12:36

if your goal is cashflow, but you don't want to self-manage a STR or MTR, then selling to make that equity work harder for your somewhere else is the only thing that makes sense.

q: would your time be better spent focused on flipping & letting that rental break even, or going through the process of turning that equity into cashflow via a 1031? 

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Jason Wray
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Jason Wray
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Replied Mar 3 2024, 21:00
Quote from @James Robert:
Quote from @Jason Wray:

One way to avoid that Tax is to put it back into another property with a 1031 Exchange.  You can still take some cash to replenish your capital but the cash injection into another property avoids the hit.  Then in 6-12 months do a cash out refinance and take out cash "Tax free".  

I don’t think 1031 exchange on a primary is legal

 Yes it is possible to do a 1031 exchange on a primary home I have helped other investors in the past.  Check out Section 121 of the IRC.

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Mike Klarman
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Mike Klarman
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Replied Mar 4 2024, 06:42

So, you are young.  This one asset will not make or break your portfolio, like you said it won't even cash flow well so really it's in the portfolio to pad the number of houses in the portfolio.

On the other hand...

170k pretax is around 102k clear after short term capital gains tax.

That 102k gets you liquid and keeps the journey going.  You can get into two more deals comfortably and as you look for these deals you may find one that BRRRRs nice and actually pays 500/month in cashflow.  You may find a 3 - 4 unit that cashflows 1500/month.

I'd say keep going.  You are young.  You haven't even found your gems yet so keep looking.