Wholesale profits = Down payments?

Question

Those of you guys that have been at this awhile talk to me.... Is it a bad idea to use wholesale profits to pay for down payments on rental properties. Obviously one would need some cash reserves ICE. But are there any reasons why this is a bad strategy to employ? I heard about it on one of the podcasts. Could you roll over wholesale profits to a 1031 so you don't have to pay capital gains? Who has used this strategy?

Roy N. · Answer

Ryan D.

I'm not certain I understand this question:

I'm not certain how wholesaling will produce capital gains. If you are wholesaling, you are typically selling contracts, not property, so there would be no capital gain. Even if you did close on properties and then resell them (similar to flipping but w/o the rehab), the real estate would be considered inventory and your earnings would be income, not capital gains.

As far as using your wholesale profits for a downpayment on a property. Like any other employment income, once you give the tax man his share, you can do what you please with the remainder.

Bill Exeter · Answer

Hi Ryan,

The properties involved in a 1031 Exchange must be held for rental, investment or use in a business. Wholesaling, rehabbing, flipping, etc., involve properties that were held for sale and were not held for investment and therefore will not qualify for tax-deferred exchange treatment under Section 1031.

Roy N. · Answer

@Samantha Lotti

A flipper typically rehabs a property and then resells it (either directly, via a realtor or, perhaps even using a wholesaler) ... they add value to the property itself.. The amount of value add and quality of the rehab will vary from flipper to flipper. I suppose a flipper could take a property into inventory and then elect to resell it w/o performing any rehab ... be a far more expensive approach than that of a wholesaler.

Wholesalers typically sell a contract and never take title of a property. In some instances, they may close and resell immediately; technically owning the property for the briefest of times, but probably still never registering title. Wholesalers provide a service to the seller and buyer, but add no value to the property itself.

Samantha Lotti · Answer

@Roy N.

Thanks for the response. I actually thought I read on a blog that a person bought property and without fixing it, resold it to a rehabber. Im pretty sure he specifically stated... "I flipped a property to a rehabber without doing any work to it", so I started thinking they were two different things in a sense.

Samantha Lotti · Answer

@Roy N.

I have read/heard in the past that flipping property is pretty much the same as wholesaling vs rehabbing. Meaning... to wholesale a property is to contract and assign the property to another/investor... to flip a house is to buy a property and close and sell it to another/investor without fixing it up. Is that correct or somewhat correct?

Ryan Billingsley · Answer

Some people do what is known as "wholetailing". Where they purchase the property with cash then sell it as is at a mark up.

Linda Quinton · Answer

I call what you are talking about a Double Close. So you buy a property at wholesale price, own it for literally minutes as it is sold to an investor who will Rehab and sell for a profit. Where as Flipping is buying a property with an aim to Rehab it and sell for profit.

Roy N. · Answer

Flipper get's used for a lot of things ... I use to think he was a porpoise on a 1970's TV show ;-)

Roy N. · Answer

Is working 9-5 at Chucky-cheese a fair method to fund down payments? Probably not a practical method, but its income, no different than wholesaling. ;-)

Ryan Dossey · Answer

Thanks guys! You can tell I this is my first year huh? Good to know that wholesale/flipped property doesn't equal capital gains. I was under the impression it was. With that matter solved is wholesaling/flipping properties a fair method to fund down payments?

Wholesale profits = Down payments?

Wholesale profits = Down payments?

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