What to do with 100k in equity on first flip?

25 Replies

I bought my first foreclosure flip for 213k, put 25k into it (238k note), and now will sell for around 350k to 360k.  After all expenses paid, I should net around 90k-100k.  With the goal of buying and holding and doing some flips along the way, I am curious to what more seasoned investors would do with the money?  I have some external factors at play (i.e. student loans, want to find another live-in-flip, etc.), but I am willing to put a significant chunk into real estate.  I also have an investor who is looking to contribute 40k to my next project.  What are your thoughts?!

@Josh C.

  my first thought is for your first flip that is unbelievable.  making 90 to 100k on a flip in today's market is something to be quite proud of  and to do it on your first one that is really special.

remember you will owe a fair amount of tax on that income so pay that first so you don't get squirlly with uncle.. then I think you just rinse repeat..

sounds like some great margins. you could do a couple more flips like that and then purchase a buy and hold for cash or leverage a couple buy and hold properties into your portfolio. 

keep flipping houses that you would not want to hold onto and use the good properties for your buy and hold strategy.

Well @Jay Hinrichs , I 100% completely stubbled upon this first flip.  I bought it 2 years ago by luck, then I realized that the work required to flip a house is not brain science.  Now I'm hooked! Aaron T. I don't think I'll be finding too many more 100k flips these days, but am happy to continue trying!  I thought about holding and renting out my house.  Rents in the area go for anywhere between 2500-3000, but then again, this is a good amount to reinvest now.  What has been the cutoff you have used in the past to determine whether or not you would hold vs. flip?  For example, if you were only going to make 20k, would you hold and rent... but if you made 50k, would you then sell?  What's your cutoff (if you have one :))?

josh, I have not flipped yet as my strategy is to buy and hold with equity in the property upon purchase. However I do plan on doing some flips in the near future. I would look at what exit strategy's I have per property and see which one suits me best at that time. I want to hold properties in areas that are transitioning with older houses being tore down and new construction going up, or the desirable areas. These make managing them less headache. I would not hold a property that I would not want to live in. It makes it harder for me to be excited about renting it to someone. 

@Josh C. 1st off congrats on your 1st flip.  1st thing you do is get w/ your accountant/tax man & figure out how much $ to set aside to pay the man.  2nd thing- Look @ your currently debt.  If you have a debt in the low thousands that can be paid off, consider paying it off.  While your considering it look for your next flip.  After the 2nd flip go look for a buy and hold.

That is good advice Crystal. I have a related question, when in the process do most investors form their LLC? Do most people do a couple of flips/buy some rentals before forming their LLC because they want to avoid the fees and they can use insurance coverage to cover any lawsuits? Or, do most investors form their entity from the very beginnning?

And Steve, I live in a nice area of Columbus.  It has one of the best school systems in the state.  I will admit that there are not many rental properties on sites like rent.com.  Is there another place to see rental prices other than the obvious internet avenues?

@Josh C. , well why don't you pay off your student loans?  Student loans are not dischargeable in bankruptcy, so if you get rid of them it will give you some room to maneuver.  If things go horribly wrong, you can short sell a house, you can't do anything with student loan debt.

Also, put the max amount possible ($5k?) into a roth IRA, so that it grows tax free until you retire. You can pull out the principal amount you put in (leave the gains) at any time with no penalty if you need it.

@Josh C. You've owned it for 2+ years? You might look into doing a 1031 exchange and deferring all those gains. Speak to a good accountant about it.

Then exchange into a rental. Since you will be putting a sizable piece down, you should be able to borrow against it to fund your next project. 

Great Question and congrats on the success.  I am in Columbus as well and I am going through a similar situation.   I have a few flips closing and being worked on as we speak.   I am also exploring the best way to roll the profits into investment properties.   I once heard a Real Estate investor talk about taking profits from flips and reinvesting in rentals tax free.  I am not looking for Expert Tax or Legal advice but can anyone give a general explanation of that process?....assuming that investor was accurate.



@Chad Reed you are referring to what @Matt M. is talking about, a 1031 exchange.  But yes Matt, I will have lived in it for 2 years this May.  My plan is to sell, maybe pay off some high interest student loans, then invest the rest in flips and/or rentals.  It would be nice to have the additional income now; however, my goal is to build wealth long-term for my kids.  I enjoy hearing what other investors would do!

If you have lived in it for 2 years, you won't have to pay any income tax on the gains. I would definitely sell it. If you can rinse and repeat that would be great! I'd also consider looking for a nice large multi-family to 'house-hack'. In my area you can find some pretty nice duplexes - 3/2/2, 2000 ft2. Or just buy some good cash-flowing rental properties.

@Josh C.

  well that's a little different than a traditional flip since you lived in it as your resi... but still a nice gain on a personal resi.. as stated 2 years and any gain is tax free.. this is why buying personal residence in high appreciating markets is probably the one of the best investments a person can make... and why you have this bay area   VS cash flow debate

good luck

Originally posted by @Matt M. :

@Josh C. You've owned it for 2+ years? You might look into doing a 1031 exchange and deferring all those gains. Speak to a good accountant about it.

Then exchange into a rental. Since you will be putting a sizable piece down, you should be able to borrow against it to fund your next project. 

You need to be careful here.  It sounds like the initial intent was to buy and rehab the property (i.e., sell as soon as rehabbed).  Properties acquired for rehab/flipping do not qualify for 1031 Exchange treatment.  It does not matter how long the investor held the property if his/her intent was to hold for rehab/fix/flip.  The property is actually held for sale (inventory) in a real estate business and not held for investment such as rental or business use. 

Your intent could change, so if you completed the rehab and then decided to hold the property as a rental for a couple of years then you could show that your intent had changed to held for rental and not rehab/fix/flip.  Documentation is key to proving your intent if you get audited.

@Bill Exeter

  AS with many BP posts it takes a while to get the full facts of these transactions.

but it appears he really moved into the property and used it as his personal resi so it really was never a fix and flip it was a buy home and do work to it market goes up and I made equity on the movement in the market and or some fix up.. not really a fix and flip like those in the business do.

Hi Josh,

I misunderstood the use of the property.  In this case, if you bought the property and lived in the property as your primary residence for at least 2 years, then you qualify for the 121 Exclusion ($500,000 tax-free as a married couple). 

@Jay Hinrichs

Thank you for clarifying that. 

@Jay Hinrichs you are correct - I bought this home with every intent of it being our personal residence for a long time.  Then, I realized what I had acquired and fell in love with the industry.  About 9 months ago, I began reading book after book, blogs, podcasts, etc. - trying to learn as much as I can.  Now, it is about time to cash-in on this property and begin building my portfolio.  @Bill Exeter - to clarify, a 1031 Exchange only qualifies if the property you bought was either for personal use or as a hold and rent, then you decided to get rid of it, made some money from appreciation, and plan to role that profit into the next real estate investment?

@Josh C. the 1031 Exchange only applies to property acquired with the intent to hold as rental or investment or business use.  Properties acquired for personal use such as a primary residence, second home or vacation home, or to rehab/sell/flip do not qualify for 1031 Exchange treatment. 

@Josh C. skip the LLC. You will get no financial benefit from it and will incur set up expenses, filing fees, and additional tax liabilities. You technically aren't even in business yet since this was your primary resi. Set up a simple sole proprietorship and look into a good liability policy.

Updated over 3 years ago

Sorry didnt mean to imply you weren't in business. This was just not technically a flip.

Great problem to have! Congrats!

Make a phone call to your trusted accountant.  He is your best friend going forward when it comes to maximizing your profits. 

If you can continue to find flips that have a high spread (over $50k), continue flipping.  If you cannot secure a flip, consider a buy and hold in which you can build equity now, and borrow against in the future for other deals.

@Josh C.

If you get into the business of flipping you should consider Individual 401k (or Solo 401k). It has significantly higher contribution limit (compared to Traditional and Roth IRA) of $53,000 which can be great tool to help you reduce your tax liability.

And, you can use Solo 401k to invest in real estate as well. 

This is all great stuff - thank you for the information everyone.  And @Rob Beland , no hard feelings at all.  You are correct, I would not call one flip a business either.  Let's revisit that topic in a year or two and see where I stand.  Hopefully I have nice little logo on my signature :).

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