Advice for selling and reinvesting later

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

9y

@Matt Smith, if you're buying the fixer uppers primarily to resell then they would not qualify for 1031 treatment. If you're buying the with the intent of holding for a period as investment then they would. It's really the difference between turning the property into inventory to sell (fix n flip) or buying hold rental properties and then periodically evaluating them to determine whether it's time to sell.There is no statutory holding period but what your intent is going into it. Most conservative folks will fell comfortable at more than a year. But there is always circumstances that might warrant a hold period of less than (or more than) one year.

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Robert EllisBusiness Member

Developer · Miami, FL · Member since 2014 · 3k+ posts · 1k+ votes

9y

Originally posted by @Matt Smith:

Hi all, I need some advice from any members that might have experience in this subject matter. I have been planning to get started in REI for several months now but a recent job relocation has put this on hold. I wasn't sure what area to post this in.

What I need advice on is the sale of my current home and then what to do when I return from the assignment. I have been in my current home for a little over 8 years. I will be moving from Pell City, AL (40 miles east of Birmingham) to the Columbus, OH area. My plan is to sell my house in the early May time frame. I hope to make about $40-$50K on the sale. I will be renting for 2 years in Ohio and then I will move back to Alabama.

My questions are:

1) What would be the best thing to do with my equity while on assignment (I will also be adding $2-$3k per month to the total for the two years).

2) About 18 months into the assignment, I will be looking for properties on the lake back in Alabama. I want to find a fixer upper for ~$250- $300k and have an "All in Budget" of about $450k. What is my best avenue to look for these fixer uppers? I'll be in Ohio while looking for the properties and hopefully I'll be starting the renovations prior to moving back.

3) Is this type of transaction where the 1031 can be used? If so, how would I do it?

I probably have many more questions as I get into this transition but these are the ones I'd like to start with.

If anyone is a real estate agent in the Dublin/ Powell area near Columbus, I'd love to make contact and understand what the rental market looks like there. We went up last weekend to check out the neighborhoods but we'll need to find a rental by early to mid June as we'll be moving up by July 10th.

Any help/ advice would be greatly appreciated.

Thanks.

Matt

Matt if you are looking for advice on rentals I can point you in a few directions. I have a a real estate team here in Columbus and while we don't work rentals I always try to be a point of contact here so if you need some advice please feel free to PM me.

[email protected]786-494-6766

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Clayton MobleyPro Member

Birmingham, AL · Member since 2014 · 875 posts · 947 votes

9y

@Matt Smith Of course, @Dave Foster is always the expert on 1031s, but I would point out another hiccup for you, which is that your current property isn't an investment property. 1031 exchanges are only for exchanging like-kind investment properties, so you could not sell your current residence and exchange it for a fixer upper. It also sounds (forgive me if I'm wrong) like the fixer upper you'd be looking for in AL would be as a home as well, for when you move back from OH after your assignment. From what I understand of your situation a 1031 is a no-go on every front: your current prop is your primary residence, you're not looking to purchase a new prop for a while (1031s exchange properties concurrently, you can't sell one and then buy the new one a year later), and your new prop would also be a residence.

However, the bonus of your current prop being your primary residence is that you'll likely pay no taxes on the sale since you've lived there for more than two years. Under Sec 121 you can exclude up to $250k (or $500k if you're married) of capital gain from the sale of a primary residence, so your expected profit should be well under that limit.

With regard to what to do with that capital, the only wrong answer is nothing. That's a decent chunk of change, so you should definitely put it to work. How is sort of a matter of what your priorities are. Are you just looking for a set-it-and-forget it investment or are you willing to do a bit more leg work for potentially higher returns? One of the simplest answers is to put in an indexed ETF with low fees. The Vanguard SP 500 index ETF (VOO, i believe) is a decent choice - it has solid historical returns and low fees. That's a set-it-and-forget it option - you won't turn a huge profit, but you're unlikely to lose money unless the market crashes. Of course, everyone has opinions about equity vs debt vs alt investments, so you'll likely get many thoughts here. Your primary limiting factor, of course, is time. You want to be able to take this money out again in 18 months to spend on a new property, so certain investments just won't work for you, you need to keep this cash fairly liquid.

Another potential option, if the numbers work for you, would be not to sell your current property and convert it to a rental instead. If you rented it out and could, if called upon, demonstrate your intent to keep it as a long-term investment, you could, potentially, use a 1031 exchange to sell it and buy a new investment property down the road. There's no specific timeline for how long an investment prop needs to be held for it to be 1031 eligible, but most people feel comfortable at a year or more. The primary issue is being able to show your intention to hold it. Of course, if you convert it to a rental and the cash flow is good, there may be no reason to exchange it anyway. However, this option would require that you not need to sell the current property in order to buy your new AL lake-side residence in 18 months, so this may not be feasible. Just a thought.

Best of luck!

Clayton

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Oliver Carlin

Investor · Virginia Beach, VA · Member since 2017 · 2 posts · 0 votes

9y

Hi Matt. It looks like most of your questions have been answer but I wanted to touch on the find the fixer upers while you are out of state question.

Your easiest option here would be to make contact with some wholesalers in AL where you want to invest. You can typically find them by googling wholesalers in your area or look for signs that say "We Buy Houses" and call the number.

After that you could also send out direct mail to lists of home owners with equity in their house. You could use listsource website to get this.

You could also buy leads from the fasthomeoffer website for your area.

to do the mailing you could use the click2mail website or the yellowletters website.

There are other options as well but that should get you started. Let me know if you have any questions about it though.

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Matt Smith

OP

Powell, OH · Member since 2016 · 11 posts · 4 votes

9y

Robert, thank you for the reply. As mentioned, we did come up and look at neighborhoods last weekend and have selected two as possible areas to live (Powell and Dublin). We really like both areas. The homes are very nice, tons to do, great schools, etc... We have looked on a few home rental sites at houses but not sure if all houses that are available will be listed on those sites. If you have connections and would be able to get me set up with someone to view houses in a couple months, that would be great. Actually, I guess it would be good if I could connect with someone, give them my information (what we're looking for, budget, etc...), maybe they could contact me as properties come available.

Thanks,

Matt

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Matt Smith

OP

Powell, OH · Member since 2016 · 11 posts · 4 votes

9y

Originally posted by @Clayton Mobley:

It also sounds (forgive me if I'm wrong) like the fixer upper you'd be looking for in AL would be as a home as well, for when you move back from OH after your assignment. From what I understand of your situation a 1031 is a no-go on every front: your current prop is your primary residence, you're not looking to purchase a new prop for a while (1031s exchange properties concurrently, you can't sell one and then buy the new one a year later), and your new prop would also be a residence.

Thanks alot for your reply Clayton. You posted a ton of good information. You are correct that I am selling my current residence and that the plan is to buy another residence when coming back to AL. So, as you mention, the 1031 will not apply.

With regard to what to do with that capital, the only wrong answer is nothing. That's a decent chunk of change, so you should definitely put it to work. How is sort of a matter of what your priorities are. Are you just looking for a set-it-and-forget it investment or are you willing to do a bit more leg work for potentially higher returns? One of the simplest answers is to put in an indexed ETF with low fees. The Vanguard SP 500 index ETF (VOO, i believe) is a decent choice - it has solid historical returns and low fees.

I agree with you. Sounds like the ETF option is a good one. I just don't want to leave the money in the bank for 18 months and not make anything with it. I'll look into this and see what is available.

Another potential option, if the numbers work for you, would be not to sell your current property and convert it to a rental instead. If you rented it out and could, if called upon, demonstrate your intent to keep it as a long-term investment, you could, potentially, use a 1031 exchange to sell it and buy a new investment property down the road.

I would love to keep my current house and rent it out for the 2 years that I'm gone. However, my company offers me a guaranteed buyout of my house if it's not sold and they pay all closing costs, etc.. In addition, if I sell my house, they will pay the closing costs of my new house when I return. They will not do this if I keep my current house. I'm not sure of exactly all the pros/ cons of this but it seems like I shouldn't pass this benefit up. I'll look into the policy further and see if it might make more sense in the long run to just rent my house out.

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Matt Smith

OP

Powell, OH · Member since 2016 · 11 posts · 4 votes

9y

Originally posted by @Oliver Carlin:

Hi Matt. It looks like most of your questions have been answer but I wanted to touch on the find the fixer upers while you are out of state question.

Your easiest option here would be to make contact with some wholesalers in AL where you want to invest. You can typically find them by googling wholesalers in your area or look for signs that say "We Buy Houses" and call the number.

After that you could also send out direct mail to lists of home owners with equity in their house. You could use listsource website to get this.

You could also buy leads from the fasthomeoffer website for your area.

to do the mailing you could use the click2mail website or the yellowletters website.

There are other options as well but that should get you started. Let me know if you have any questions about it though.

Thanks for the reply Oliver. You've listed several potential ideas for my house (fixer upper) hunt when I return. I'm not familiar with any of these processes but I'll start to take a look at them. I'll have over a year to get familiar with them before I'm ready to start looking. If I start looking and have questions, I might hit you up for some advice. Thanks again.

Matt

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