Selling Condo: Need Investment Advice / Guidance

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Selling Condo: Need Investment Advice / Guidance

Stacy Weng
Fairfax, VA · Member since 2013 · 69 posts · 35 votes

Hi BP!

I wanted to get some thoughts and investment advice on what I should do with the gains from my condo if I were to sell it. First, here's some background on why I'm strongly considering selling my condo...

I bought the condo back in 2004 and lived in it for 10 years before moving out of it. Since then, I've been renting it out, thinking in my naive mind that as long as the rent covered the mortgage & condo fees, that it would be a good investment. This was before I started seriously looking into real estate investing, and before I discovered BP and started learning about all the different investment strategies out there and guidelines that determine if an investment is good or not.

Looking at my condo now, it's pretty obvious that based on the numbers alone, it's a pretty crappy investment and I could be making much better use of my money. I think part of me is somewhat emotionally attached to my condo since I did live in it for 10 years, but trying to disassociate myself from all that! 

The lease with my tenants end at the end of April, so now I'm seriously considering selling the condo after the lease ends. I'm guessing everyone would agree that it's a smart choice to sell the condo? =P

My husband and I have also been trying to start flipping in the DMV area since last summer. However, finding deals in this area has had its share of challenges, from the high real estate prices that require large amounts of capital, to rejected offers due to other competing offers that a lot of times don't make sense financially. I feel like now is also a time for us to re-evaluate our investment strategy, and if it makes sense to continue to try flipping, or maybe consider looking more into buy and holds, or maybe even a combination of both.

What I need some advice on is what should I do with the money from selling the condo, which would be approx 90-100K. Here are some of my options:

  1. Use as additional capital towards flipping.This could possibly allow us to consider some higher priced properties or more extensive renos (which may have less competition?)
  2. Use it towards multiple lower priced buy & holds further out, but still within driving distance if we need to check on it (thinking maybe the Winchester area? any other suggestions in the greater DMV area?)
  3. Use it towards turnkey properties out of state in markets where we'd be able to get a lot more value for the money and hire a property management company (vetting and finding the right property management companies might be difficult from a distance?)
  4. A combination of the above?

Any other suggestions?

Thanks in advance!

Stacy

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
9y

@Todd Krzeminski @Stacy Weng To be clear, you have to have lived in the property for Two of the last five years, which means if you sell, and close,  within Three years of the date you moved out your gain is tax free under the 121 exclusion.  This gives you the freedom to do whatever you want with the money, tax free, as opposed to having to do a 1031 to Defer, not eliminate, the taxes.

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  • Todd Krzeminski
    Rental Property Investor · Northern Virginia · Member since 2015 · 106 posts · 51 votes
    9y

    @Stacy Weng I had a condo in Fair Oaks that I bought in 2003 and I did the same thing. Moved out and rented it for a couple years. I was able to sell it tax free because I lived in the property 3 of the previous 5 years. 

    It doesn't sound like you're in that situation. You'll owe capital gains tax on the profit.  I think the first thing you should do is investigate a 1031 exchange. That would mean you'd need to identify a buy and hold property that you can use those funds towards acquiring. If you go that route, flipping would be out of the question.

    I'm not a tax professional and I've never done a 1031 exchange, so you should check with an accountant and a 1031 specialist. There are very specific rules you need to follow, so research them before you do anything.

    I'm also contemplating investing in the Shenandoah area including Winchester. I've only been investing in the midwest so far and there are definite pros and cons I need to weigh.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    9y

    @Todd Krzeminski @Stacy Weng To be clear, you have to have lived in the property for Two of the last five years, which means if you sell, and close,  within Three years of the date you moved out your gain is tax free under the 121 exclusion.  This gives you the freedom to do whatever you want with the money, tax free, as opposed to having to do a 1031 to Defer, not eliminate, the taxes.

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  • Todd Krzeminski
    Rental Property Investor · Northern Virginia · Member since 2015 · 106 posts · 51 votes
    9y

    @Wayne Brooks I should have clarified that rule. I was just describing my situation which met the minimum requirements.

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  • Mark Creason
    Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
    9y

    @Stacy Weng

    When did you move out of the condo?  If you moved out in 2014, you might be able to still claim the 121 exception.

    Mark

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  • Stacy Weng
    OP
    Fairfax, VA · Member since 2013 · 69 posts · 35 votes
    9y

    @Todd Krzeminski @Wayne Brooks @Mark Creason I actually didn't move out of the condo until early 2015, so about 2 years, which is another reason why I'm considering selling now to avoid the capital gains tax.

    So under that 121 exclusion, I wouldn't need to consider a 1031 exchange at all, correct? 1031 would only apply when there are capital gains involved? 

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  • Todd Krzeminski
    Rental Property Investor · Northern Virginia · Member since 2015 · 106 posts · 51 votes
    9y

    In that case, you should be good. I like the idea of selling now since you can avoid the tax issues.

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    Correct, you could sell and have $500,000 in gain tax free under Section 121 as long as you can say that you have owned and lived in the condo as your primary residence for at least 24 months out of the last 60 months.  You would not need to worry about doing a 1031 Exchange.

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y

    What is your expected sales price and how much do you owe on the mortgage? I ask because many people underestimate the costs of selling, so I'm trying to see if you are actually going to walk away with how much you think you will. If you do post it, post the county it's in too and I can give you a very close estimate.

    As far as flipping...you mention that you are getting beat out as people go higher and the numbers don't make sense. If these properties are in distressed condition, then it is likely other flippers are the bidders....and they are likely bidding it to what is actually appropriate. So then we need to figure out why the numbers don't make sense for you. Are your rehab costs inaccurate perhaps. Is your ARV inaccurate etc.

    You should also be sourcing off market deals. Agents who work with investors will often have wholesalers they do business with, which gives them access to more than just whats on the mls. There is risk though here if you arnt experienced. Typically looking at no inspections and one of the larger wholesalers in the area isn't going to give you back your emd if you try to back out.

    As far as where for buy and holds in the area, I could write a whole book on that. Any price/ratio you can imagine is available in the DC area. But your own personal risk tolerance is going to determine what might or might not work for you. As that ratio increases, so does your risk. The lower the ratio indicates less risk.

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  • Stacy Weng
    OP
    Fairfax, VA · Member since 2013 · 69 posts · 35 votes
    9y

    @Todd Krzeminski @Bill Exeter Thanks for the clarification!

    @Russell Brazil The condo's in Fairfax county, I'm estimating a sale price of around 260 - 270K. I have over 100K in equity in the condo, so after closing costs and real estate agent fees, I'm estimating 90-100K left over. I'm just trying to determine which investment strategies would help me get the most value out of that money afterwards.

    For flipping, I'm hearing from my agent along with other investors that this area's become so competitive that a lot of times investors make deals that don't make sense financially - where either the margin is really low or at an added risk where the rehab ends up failing. That's not going to stop me from continuing to bid on properties, but it's definitely been a slow process so I'm opening myself up to other options and seeing if a diversified strategy would make more sense.

    I've also looked into off market deals, and honestly, the wholesale deals I've come across are not good deals. It seems like most wholesalers already have their preferred buyers list (consisting of experienced investors), so by the time the deals get to the rest of us, they've already been passed around. I guess it's a catch 22, and part of the learning curve in getting started! If you know of any wholesalers in the area, please let me know, I'd love to connect with them!

    What are some local markets you'd recommend for buy and hold? How would investing locally compare to investing in turnkey properties out of state? 

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y

    Lets say a sales price of $260k, and a loan balance of $160k, which Im guessing since you said about $100k in equity. So that would net you between $82,600 and $85,200 at those numbers based on the commission being charged.

    Of course nailing down the sales price is important.....but also nailing down the expected seller subsidy to the buyer is going to affect things a bit as well.

    For the flips....Id probably disagree with their assumptions. While the margins are not what they were a couple years ago people are still making very comfortable livings making hundreds of thousands a year flipping here.  So maybe you make $50k on a flip instead of $75k you saw 4 years ago...people are still happy to be making $50k. You also have to adjust with the market as well. We are seeing the types of renovations say in Petworth now completely change from what was expected a few years ago. So that might mean going from stock cabinetry to custom cabinetry to push the prices higher.  You use to just be able to do a crown molding on the main level, now you have to do a coffered ceilin.  Like all investing, you have to change with the ebs and flows of the market. Id also say most people just dont know how to get the rehab done with in budget.  A rowhouse in Petworth is going to cost $125k in renovations typically, and I walk into some with people who say there is no way its going to be less than $150k, $175k......but they just dont the costs of getting things done or how to get them done at cost.

    That is a fair point about the off market stuff though.  When Im getting off market stuff Im passing it around to the same 10 people or so, and there isnt much reason to go beyond that.

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