Everyone is telling me to sell when I think I should hold

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Everyone is telling me to sell when I think I should hold

Adam Klugh
Investor · Sarasota, FL · Member since 2016 · 45 posts · 19 votes

I am finishing up a flip in Jackson MI that will produce a nice return. My total cost of both purchase and renovation is 125k. A friend of mine who is a real estate agent in the area for 20+ years told me he thinks it will sell TOMORROW if I list it for 195k.

My apprehension about selling right now is that the Jackson market has just begun to pick up. Jackson, MI prices tend to lag behind most other urban cities and recently homes have been flying off the market at higher and higher prices. My thought is that If I rent the place for a year, I could sell for a lot more next spring/summer. Not to mention, that I don't want to pay short term capital gains taxes on that money if I sell this year. 

On the flip side (pun intended), I have a great team in place and another deal under contract. My initial plan was to use hard money lending for the first time to finance the renovation but after exploring all the fees that the lender charges I'm considering selling the place I just renovated to pay for this next one I have under contract.

So what do I do, give my money to the government in taxes or to the hard money lender in fees?

Here's the Zillow listing of the property... just because I'm so proud of the work of my team

http://www.zillow.com/homes/315-s-Wisner-jackson-mi_rb/ 

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Bill Devola
Wholesaler · Bogota, NJ · Member since 2016 · 128 posts · 64 votes
10y

You're going to have a hard time soliciting quality answers on your situation because, although you've given a nice broad outline, there are many other details that should influence your decision.

1.  How hard is it to rent out and manage your would be flip?

2.  Is the rental break even cash flow, or better? 

3.  How much in taxes will save by getting out of short term cap gains status?

4.  How much are you going to pay in interest on your next flip (I usually calculate 10% of repairs+renovations for cost of hard money.  Ballpark figure.)?

You could break all these numbers out and do a true apples to apples, but you'll never be able to quantify how much you think the property will increase in value over the year you hold it, or the trouble it is for you to manage the rental.  

Many times when you do these numbers, its a crapshoot either way, and your decision is going to be based on your gut.  No clear cut right or wrong.  Thats not to say 2 years from now there won't be a decision that clearly would have been better than the other.   But hindsight, as they say, is 20/20. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    one rule of thumb is take profit while you can no one can predict the future.. many investors get burned badly with the OH its going to be worth more next year..

    I suspect you can sell and find another deal that will be ready for next spring.

    and unless you bough this with the intention of a buy and hold its inventory so it does not matter how long you hold it.. ( if your being straight up with the tax man LOL)

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  • Bill Devola
    Wholesaler · Bogota, NJ · Member since 2016 · 128 posts · 64 votes
    10y

    You're going to have a hard time soliciting quality answers on your situation because, although you've given a nice broad outline, there are many other details that should influence your decision.

    1.  How hard is it to rent out and manage your would be flip?

    2.  Is the rental break even cash flow, or better? 

    3.  How much in taxes will save by getting out of short term cap gains status?

    4.  How much are you going to pay in interest on your next flip (I usually calculate 10% of repairs+renovations for cost of hard money.  Ballpark figure.)?

    You could break all these numbers out and do a true apples to apples, but you'll never be able to quantify how much you think the property will increase in value over the year you hold it, or the trouble it is for you to manage the rental.  

    Many times when you do these numbers, its a crapshoot either way, and your decision is going to be based on your gut.  No clear cut right or wrong.  Thats not to say 2 years from now there won't be a decision that clearly would have been better than the other.   But hindsight, as they say, is 20/20. 

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    10y

    Every time I ask a realtor if I should sell, they say yes!   My barber thinks I should get a haircut every time I ask about that as well.

    Do what is best for you.  A generic price appreciation expectation isn't something I'd hang my hat on, but if you want a long-term hold and this would fit and grow your wealth and reduce your tax burden, hold it!

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Adam Klugh   our family RE attorney who mentored me at a child and then a young real estate sales men and lot developer had two thoughts that I always went by

    1. no one can critizie you for making a profit... ( so if you can sell now and make a profit that's what its about)

    2. deals are like street cars one on every corner.

    at least for those in the industy

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  • Adam Klugh
    OP
    Investor · Sarasota, FL · Member since 2016 · 45 posts · 19 votes
    10y

    The other deals I've done have been buy and hold and I already have a good property manager (He thinks I should sell too). I just put the place up for 1600/month and so far have already had some showings and a couple of applications. I don't see the renting as a hassle since it would just be adding another rental. Honestly I'm not 100% sure what the tax impacts would be since I've held and cash flowed every other deal thus far. This is just the first time I've had a team that could do such quality work so quickly that I have a 60-80K potential profit. I've just always heard that if you sell a place within that first year that the tax hit is BAD. especially for someone like me who has a good job that already puts me in a high tax bracket.

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  • Bill Devola
    Wholesaler · Bogota, NJ · Member since 2016 · 128 posts · 64 votes
    10y
    Originally posted by @Steve Vaughan:

    Every time I ask a realtor if I should sell, they say yes!   My barber thinks I should get a haircut every time I ask about that as well.

    LOL.  Upvote for the comedic and succinct demonstration.  When getting advice or facts, always consider the source! 

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  • Adam Klugh
    OP
    Investor · Sarasota, FL · Member since 2016 · 45 posts · 19 votes
    10y

    @Steve Vaughan as I was typing that I knew the reaction of most readers would be similar to yours. In this case, I thought the opinion was a little less biased since he isn't the listing agent and had nothing to gain from me selling.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y

    A couple things to consider:

    - If you rent for a year to (hopefully) sell for more, have you factored in the additional rehab costs after the house has been lived in for a year?

    - What if the market tanks in the next year -- are you comfortable holding long-term?

    - If you originally intended to flip the property, you technically are going to be required to pay ordinary income taxes on the property, even if you rented it for a year.  Not to mention, an intention of holding for one year and then reselling wouldn't get around that requirement either.  Intent is more important than action.

    Personally, if your goal is to hold long-term, then hold long-term.  If your goal is to flip, then flip.  Don't try to combine the two models just to avoid paying some taxes or in attempt to time the market.

    Btw, the most interesting consideration here is that you're trying to save on taxes, but by holding for a year, you're IRR is likely going to be much, much less than it would be by selling now. Are you willing to trade return for profit in your situation?

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  • Adam Klugh
    OP
    Investor · Sarasota, FL · Member since 2016 · 45 posts · 19 votes
    10y

    @J Scott can you explain what you mean when you say my internal rate of return would be less? I am relatively new to the finance side of this, and while I have heard that term, I've never applied it to my situation before? 

    2) when I bought this property it was initially intended to be a cash flow property. Every property I ever bought before this (the other two that I own) were buy and hold. I did not expect the real estate market in my area to take off running the way it has when I bought the place last October. 

    3) assuming I'm willing to accept the risk of the market tanking in the next couple years, wouldn't it be prudent to cash flow the property over the next year IF the market continues to appreciate and I can avoid paying quite so much in taxes? I know that 'intent' is the important word everyone keeps throwing around but it seems to me like the real factor is convincing the IRS agent who is auditing me that my 'intent' was to buy and hold even though I sold the property for a 70k profit months after I bought it. Seems to me it would be not convincing if I held on to it more than a year. 

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y
    Originally posted by @Adam Klugh:

    @J Scott can you explain what you mean when you say my internal rate of return would be less? I am relatively new to the finance side of this, and while I have heard that term, I've never applied it to my situation before? 

    2) when I bought this property it was initially intended to be a cash flow property. Every property I ever bought before this (the other two that I own) were buy and hold. I did not expect the real estate market in my area to take off running the way it has when I bought the place last October. 

    3) assuming I'm willing to accept the risk of the market tanking in the next couple years, wouldn't it be prudent to cash flow the property over the next year IF the market continues to appreciate and I can avoid paying quite so much in taxes? I know that 'intent' is the important word everyone keeps throwing around but it seems to me like the real factor is convincing the IRS agent who is auditing me that my 'intent' was to buy and hold even though I sold the property for a 70k profit months after I bought it. Seems to me it would be not convincing if I held on to it more than a year. 

    https://www.biggerpockets.com/renewsblog/2010/09/0...

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