I am currently living in my first house and in the middle of doing a rehab on the property to turn into a long term rental. I live near the Jersey shore in ocean county and was thinking about my next move. I was thinking about going in land a little more but was worried about buying a rental in a more rural area. Was wondering everyone’s thoughts about buying where there is less people/jobs, but since I could get a property for less and save on taxes would that balance out the risk? Has anyone found it any harder to keep/find tenants in a more rural area or does it usually balance itself out in the long run?
@Bryan Stocklas You can connect with a local realtor which specialize in that area to see what the rental market is like. Sometimes more rural areas could have good school districts so there would always be rental demand. They should also be able to provide you average days rental listings are on the market for.
Also you can look at population growth year over year for the new target location.
@Lamont Chen thank you I will look into that, and try to gauge the turnover for rentals in my next area. I just didn’t know if the little extra cash flow would be worth the risk for a possible vacant property. Thanks again!
@Bryan Stocklas Ye for sure there are certain areas where cash flow may not be as great but depreciation of the property during tax time and appreciation could help in the long run!
Thank you I will factor that in. Thanks for your response!
You can make real estate investing work anywhere - you have to look deeper into rural vs non-rural.
Is the state and surrounding areas prospering?
Is the area losing jobs?
Not all rural areas are the same so hard to give general advice.
@Basit Siddiqi I live at the Jersey shore between LBI and Seaside which was growing before COVID but since COVID I have seen an influx of people trying to move away from the masses. But the areas I would be looking for my next property is 30-40min west of the shore where you start getting properties that are spread apart more with a little more land but also saving on taxes. I just wasn’t sure if it’s better to trade populations for a little more cash flow. Thanks
Be sure to look into the section 121 gain exclusion on the sale of a primary residence if your property has appreciated and/or will appreciate with the rehab. Losing that tax benefit can be a big deal if you hold the property as a rental for three years without selling it.
I would ask you to pay close attention to @Mike Dymski 's post. The whole point of a live-in rehab is that when you sell your primary residence, through a provision in the tax code (Section 121) you are able to shield up to $250K ($500K if you are married) of any gain you make from the sale of the property from capital gains taxes. I just know the bare basics of this. There are a number of people on this site who have done this multiple times over a series of homes and made significant money out of it. Our community manager @Mindy Jensen is also our most prominent local expert on this subject.
So it may be very profitable for you to sell this rehab when you're done and move on. Your question about buying rentals in less-populated areas is a very good one as well, and you'll need to research it with local experts in the areas you're considering, but selling your live-in rehab and profiting from not paying federal capital gains taxes on the sale is what you really ought to be thinking about first, rather than turning the property into a rental.
@Mike Dymski thank you and I agree with you completely, but in my situation where I have my wife and two kids (one being under a year) and two dogs I have to be very careful about how I take each deal since I do all the work myself while being the sole provider, and trying not to put the family through a lot of stress doing so. I just refinanced to lower my term for this property and was able to reduce my mortgage as well. My hopes are to build my capital while I jump from one property to the next with a usda loan and than refinancing out of it in a years time so I can use it again on the next to take advantage of the $0 down. But my thoughts are since I have decent equity in the property and it will cash flow well each month that it might be worth holding. I figured I can always pull a line of credit for future investments. Am I thinking about this all wrong? Thanks for the response!
Your strategy is great. Some investors accumulate a lot of wealth doing live in flips, particularly when they do a number of them over time and/or in appreciating areas. I did two of them when I was getting started to help build my seed capital. In most cases, the tax implications should not dictate a transaction decision but live in flips can be one exception.
It becomes a math exercise. For example, if we have a $100,000 gain on a live in flip and we convert it to a rental, we lose the section 121 gain exclusion and pay 30% or $30,000 in taxes upon sale (tax rate will vary...I selected near the low end of the range). Or, you simply sell the property, pay no tax on the gain with the section 121 exclusion, and reinvest the proceeds in a similar property (with a higher tax basis). Sales commissions will reduce the benefit of the gain exclusion (in the short term but not long term). Refinance costs add to the costs of not selling the property.
Separately, many primary residences don't make good rentals relative to alternatives (would just have to run the numbers through a rental property calculator and compare alternatives).
There is 3rd option other than holding or selling...hold for just under three years and then sell. You keep the section 121 exclusion and hold the rental for a few years.
Hope this helps. Good luck.
That’s great advice I appreciate you breaking that down for me. I will definitely factor all these into the equation.