We recently purchased our first investment property with Sherman Bridge. Paid 165K and did 35K of rehab (inc. new AC and roof). ARV is 265K. Rental income would be approx 1850 per month. We are under the impression if we sell outright we would owe IRS approx 20K in short term capital gains. We've owned the property only 3 months. Investor Loan source has a legal program where they allow the investor to owner finance (wrap) a property. The numbers appear to indicate that this would be an excellent cash flow exit strategy. Has anyone used this program or done anything like this? We appreciate all input.
Owner financing out of a rehab project is a phenomenal strategy. You won't get hit with the full tax effect since you're not recognizing the entire gain at once. And you've essentially in the seat of a landlord but having no responsibility for the upkeep of the property since the buyers are responsible for that. And of course you don't want them to default, but if they do, you're still in a great position.
You don't need a company to do this for you. Post the house for sale - Craigslist, Facebook groups, bandit signs, FSBO sites - close at a title company, use a note servicing company, and you're all set.
That said, Sherman Bridge is a short term lender, so you have to pay them back soon. If you don't sell the property, what is your plan to pay them off?
Thank you for the quick response! We do have to refinance out of the short term rehab loan, but cannot go into a conventional low interest rate product because of our jobs and we need to protect ourselves from due on sale, so are thinking about going with a legal wrap loan product from Investor Loan Source. The loan comes with 6 points and 8 percent interest and a 20 year term, so we would have to put the rate above that maybe 10 percent for 25 years. We are a little concerned the payment might end up being too high.
Yes, that is crazy. There is no "legal" program. It sound like they are loaning you the money with crazy points and THEY are allowing you to wrap their mortgage. You end up paying just about the same tax, just spread out over time.
If you are making money on the flip, pay the taxes and walk away with some cash in your pocket. Who cares that you pay 20k in taxes if you walk with 60k minus the 20k tax. That is 40k in your pocket. You are done with the deal.
Paying tax, while not the most fun thing to do, is not so bad. You make money, you gotta pay some tax.
I believe at 3 months ownership that would be taxed at regular income, not short term Capital gains, which I believe kicks in on day 366.
@MIke Hewitt what was your intention in purchasing the property? If it was to fix up and sell then the profits are ordinary income. Investment income does not come into play. That would apply if your intention was to hold the property as an investment, e.g., a rental. If you bought it intending to hold and rent it but then received a offer to buy it you could not refuse then the profit would be capital gains. Long term if held over a year, short term if held a year or less. But for fix and flips, the profit is all ordinary income.
Also, I believe there are special rules for an installment sale in this situation. Normally and installment sale would allow the profits to be spread out as the installments are made. But I seem to recall that in a case like there, where you're selling inventory rather than an investment, that the profits must be recognized when you sell, even with an installment sale.
You really want to consult with your accountant.
And realize that there is nothing illegal about selling a house with a wrap, regardless of the loan terms. It is a contractual issue (civil issue) if you violate the due on sale clause in your underlying loan. Its not illegal, you won't get arrested. The lender may foreclose, but you won't go to jail. All this lender is offering is a loan that doesn't include the due on sale clause, allowing you to wrap it without violating the loan terms.
6 points would be $12k in “gone forever” money, then you still have to pay the tax anyway at some point. Doesn’t sound like a good idea.
@Jon Holdman excellent synopsis.
however i think this person is missing the intent part if the intent was to flip then there you go its inventory and ordinary income.
I would think for a safe harbor he would need to keep it a year get it on his schedule C then sell it on terms.
its funny how companies dream up these programs.. Legal wrap that is a good one.. take out the alienation clause and there you go.. one simple sentence removed from the debt instrument and you have a whole knew lending program
for long term buy and hold 6 and 8 is not bad really.. if you can't get conventional.. its on the lower end of what i know or see.. as long as the 6 is it.. and they don't add on another 3 to 5k in junk fees.
what many don't get when they shop loans is they focus on points when in fact many lenders make more money on the junk fees as the points.. small balance loans will have 8 to 10% when you add in points and junk fee's thats what i see on all the huds i look at during the week.. might be 1.5 or 2 points but then 3 to 4k non recurring lender set up and junk fees
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