Real Estate Investor, Flipper, PM, vacation rental, Wholesaler · Athens, GA · Member since 2013 · 260 posts · 210 votes
Existing rental property rehab, buy-and-hold guy wanting to get into flipping. I'm an BP podcast graduate. I keep hearing the advice to focus on finding the good deals and then the money will come.
Question 1: Please verify that the deal is as good as this rookie thinks.
Question 2: Please advise how to best finance this deal. HML? etc? I'm willing to put all of my other properties on the market tomorrow to try to liberate cash, although I'd rather not sell unless necessary.
Question 3: Is it better to Wholesale this deal?
Bank REO foreclosed at loan value of $229k in April 2013. Just dramatically dropped their asking price. 4 bedroom/4.5 bath 3300+ sqft. Great bones. Recent addition. LOCATION: Local population approx 175k in university town. Top public school system in Georgia. Close to my home address and I am familiar with the RE in this area.
My planned offer price with favorable verbal feedback from the bank is $100k. Gets it off their books before 2014. Itemized repairs $18k. Doubled for factor of safety $35k. Conservative ARV $250+k. Very Quick-Sale Price Point of $195k. (Most in county sell $300+k)
Primary Exit Strategy is price low $195k to liquidate within 90 days max (Spring 2014) with nice margin. Alternative ES is to get one of my other multifam properties sold with strong equity in parallel to pay off financing. I don't like debt but don't want to miss this deal if it's as good as I think.
Entered holding costs, sales costs, double budget, low ARV etc in BP calculator and still beating the 70% rule. Time is of the essence. Meeting my subs and realtor on site tomorrow to firm up repair and ARV projections. Ready to pull trigger if real and can line up the funds, including construction.
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
12y
Hi Jack, I have copied a brief article that I wrote on holding periods, so hope this helps:
Holding Guidelines for 1031 Exchange Properties
While the Department of the Treasury Regulations and numerous rulings make it very clear that you must have the intent to hold your 1031 Exchange property for rental, investment or use in your trade or business, they fail to define exactly how long or over what period of time you need to hold your relinquished properties or replacement properties in order to qualify for a 1031 Exchange pursuant to Section 1031 of the Internal Revenue Code or Section 1.1031 of the Treasury Regulations.
Property Purchased Just Prior to 1031 Exchange
The Internal Revenue Service has routinely taken the position if you purchased your relinquished property just prior to your 1031 Exchange transaction that you have actually purchased and are holding the property for sale (inventory) rather than holding it for rental or investment. Furthermore, the Internal Revenue Service has also taken the position that if the replacement property is sold immediately after your 1031 Exchange transaction is completed then it was not held for a sufficient period of time to qualify for 1031 Exchange treatment.
Little Definitive Authority on Holding Period
While there is no actual holding rules or regulations and very little definitive authority on a holding period, in one private letter ruling the Internal Revenue Service has stated that a minimum holding period of two (2) years would be sufficient to meet the Qualified Use Test, and a number of court decisions have also taken the same position (although they have been somewhat more liberal than the Department of the Treasury and the Internal Revenue Service).
Intent to Hold is Important Factor
The period of time that you hold title to the property, although important, is not the only factor the Internal Revenue Service will use to determine whether you had the intent to hold the property for investment and therefore qualify for 1031 Exchange treatment. The real issue is whether you can prove that you had the intent to hold the property for rental, investment or use in your business.
The easiest way to demonstrate your intent to hold a property for investment or use in your business is to do just that. You should actually hold the property for rental, investment or for use in your trade or business for a sufficient period of time. The longer you hold the property for investment purposes the stronger your case will be if the Internal Revenue Service questions the sufficiency of your intent.
Advisors Recommend Holding the Property for 12 Months or More
Tax advisors frequently recommend that you hold the subject property for at least one (1) year to prove your intent to hold the property for investment. Holding the property for at least one year means that you will straddle two income tax periods and give you two income tax returns listing rental income, expenses and depreciation, all of which help to provide you with a solid argument that you did have the intent to hold the property for rental, investment or use in your trade or business.
In addition, the United States Congress at one time considered a minimum holding requirement of 12 months for both relinquished and replacement properties. While the requirement was never enacted by Congress, it does provide a good indication of what sort of holding period Congress would consider sufficient to meet 1031 Exchange requirements.
Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes
12y
it sounds like a great deal. How solid is the ARV? If the ARV is really 250k why would you be offering so much less than asking price? In my area I would get it under contract as fast as possible. WHat kind of bank isn't? National or local? Hard to judge much off of a verbal response.
How much money do you have in your other houses. Could you do HELOC using the equity in your other homes?
I would offer 100k and see what happens. How much work does it need? Worst case, Can you put it under an investment loan (ie 20% down), rent it out for one year and than sell it? If you did it this way you "should" be able to flip the profits into a 1031 instead of just having to pay tax on it. If you do a 1031 it cannot be a flip it has to be a long term investment, or that my understanding.
One caution, I have been working on a deal with the bank for months. Sometimes they are eager to move things off their ledger and other times.
Real Estate Investor · Lansdowne, PA · Member since 2013 · 1k+ posts · 656 votes
12y
This sounds like a super deal, Jack. Doesn't matter if you rent it out after rehab or sell it, lease/op or outright. You know investors make their money when they purchase. I agree with Elizabeth C. on the HELOC utilization for financing. Second would be an equity partner(maybe someone on your team could go half with you) and lastly a HML. End of year plus end of quarter bank reo is definitely in your favor. They'd gladly take that $100K as long as you can close by 12/31 at the latest. However, don't forget to have your team(contractor's walk thru etc) to help you and still run them numbers again....
How much money do you have in your other houses. Could you do HELOC using the equity in your other homes?
I would offer 100k and see what happens. How much work does it need? Worst case, Can you put it under an investment loan (ie 20% down), rent it out for one year and than sell it? If you did it this way you "should" be able to flip the profits into a 1031 instead of just having to pay tax on it. If you do a 1031 it cannot be a flip it has to be a long term investment, or that my understanding.
One caution, I have been working on a deal with the bank for months. Sometimes they are eager to move things off their ledger and other times.
@Elizabeth C,
It still would not be eligible for a 1031 exchange. Held for investment. If that is something that happens it can very easily be turned down.
Real Estate Investor, Flipper, PM, vacation rental, Wholesaler · Athens, GA · Member since 2013 · 260 posts · 210 votes
12y
@ or anybody else versed in 1031...
As a buy-and-hold guy, I'm new to 1031. Howerver, I had been ASSUMING(and we know what that means) that I could use a like-kind exchange on the sale of my existing props as well as for proceeds from flips. Is that not the case? This is a very impoortant factor in my decision since I'm already in a somewhat high income bracket> If I held this SFR, the rental CAP rates would not touch my other multi-family positions. What ARE the basic operating parameters and assumptions that I can follow?
How does a 1031 factor in to the sale of my other properties that I have already held for 3-5 years? The only exception is Eaglewood, for which I completed the cash purchase last week and have already added substantial equity by renovation and moving in new tenants at a premium rental contract of $1550/month
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
12y
Hi Jack, I have copied a brief article that I wrote on holding periods, so hope this helps:
Holding Guidelines for 1031 Exchange Properties
While the Department of the Treasury Regulations and numerous rulings make it very clear that you must have the intent to hold your 1031 Exchange property for rental, investment or use in your trade or business, they fail to define exactly how long or over what period of time you need to hold your relinquished properties or replacement properties in order to qualify for a 1031 Exchange pursuant to Section 1031 of the Internal Revenue Code or Section 1.1031 of the Treasury Regulations.
Property Purchased Just Prior to 1031 Exchange
The Internal Revenue Service has routinely taken the position if you purchased your relinquished property just prior to your 1031 Exchange transaction that you have actually purchased and are holding the property for sale (inventory) rather than holding it for rental or investment. Furthermore, the Internal Revenue Service has also taken the position that if the replacement property is sold immediately after your 1031 Exchange transaction is completed then it was not held for a sufficient period of time to qualify for 1031 Exchange treatment.
Little Definitive Authority on Holding Period
While there is no actual holding rules or regulations and very little definitive authority on a holding period, in one private letter ruling the Internal Revenue Service has stated that a minimum holding period of two (2) years would be sufficient to meet the Qualified Use Test, and a number of court decisions have also taken the same position (although they have been somewhat more liberal than the Department of the Treasury and the Internal Revenue Service).
Intent to Hold is Important Factor
The period of time that you hold title to the property, although important, is not the only factor the Internal Revenue Service will use to determine whether you had the intent to hold the property for investment and therefore qualify for 1031 Exchange treatment. The real issue is whether you can prove that you had the intent to hold the property for rental, investment or use in your business.
The easiest way to demonstrate your intent to hold a property for investment or use in your business is to do just that. You should actually hold the property for rental, investment or for use in your trade or business for a sufficient period of time. The longer you hold the property for investment purposes the stronger your case will be if the Internal Revenue Service questions the sufficiency of your intent.
Advisors Recommend Holding the Property for 12 Months or More
Tax advisors frequently recommend that you hold the subject property for at least one (1) year to prove your intent to hold the property for investment. Holding the property for at least one year means that you will straddle two income tax periods and give you two income tax returns listing rental income, expenses and depreciation, all of which help to provide you with a solid argument that you did have the intent to hold the property for rental, investment or use in your trade or business.
In addition, the United States Congress at one time considered a minimum holding requirement of 12 months for both relinquished and replacement properties. While the requirement was never enacted by Congress, it does provide a good indication of what sort of holding period Congress would consider sufficient to meet 1031 Exchange requirements.
Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
@ or anybody else versed in 1031...
As a buy-and-hold guy, I'm new to 1031. Howerver, I had been ASSUMING(and we know what that means) that I could use a like-kind exchange on the sale of my existing props as well as for proceeds from flips. Is that not the case? This is a very impoortant factor in my decision since I'm already in a somewhat high income bracket> If I held this SFR, the rental CAP rates would not touch my other multi-family positions. What ARE the basic operating parameters and assumptions that I can follow?
How does a 1031 factor in to the sale of my other properties that I have already held for 3-5 years? The only exception is Eaglewood, for which I completed the cash purchase last week and have already added substantial equity by renovation and moving in new tenants at a premium rental contract of $1550/month
To add to what @Bill Exeter said Flips are NOT eligible for 1031 exchanges as they are considered inventory; however, your buy and hold properties do qualify.
@Jack Tucker
How much money do you have in your other houses. Could you do HELOC using the equity in your other homes?
I would offer 100k and see what happens. How much work does it need? Worst case, Can you put it under an investment loan (ie 20% down), rent it out for one year and than sell it? If you did it this way you "should" be able to flip the profits into a 1031 instead of just having to pay tax on it. If you do a 1031 it cannot be a flip it has to be a long term investment, or that my understanding.
One caution, I have been working on a deal with the bank for months. Sometimes they are eager to move things off their ledger and other times.
@Elizabeth C,
It still would not be eligible for a 1031 exchange. Held for investment. If that is something that happens it can very easily be turned down.
Real Estate Investor, Flipper, PM, vacation rental, Wholesaler · Athens, GA · Member since 2013 · 260 posts · 210 votes
12y
1031 follow-up:
If I sell one of my long-held properties and I liberate substantial capital gains, can I execute a 1031 to pay off the debt on my other, existing rental properties? This seems to be a like-kind "consolidation". Legal? I hate debt and love killing it.
@Jack Tucker
How much money do you have in your other houses. Could you do HELOC using the equity in your other homes?
I would offer 100k and see what happens. How much work does it need? Worst case, Can you put it under an investment loan (ie 20% down), rent it out for one year and than sell it? If you did it this way you "should" be able to flip the profits into a 1031 instead of just having to pay tax on it. If you do a 1031 it cannot be a flip it has to be a long term investment, or that my understanding.
One caution, I have been working on a deal with the bank for months. Sometimes they are eager to move things off their ledger and other times.
@Elizabeth C,
It still would not be eligible for a 1031 exchange. Held for investment. If that is something that happens it can very easily be turned down.
No, you cannot. That is a clear and blatant flip. You only tried to avoid paying tax on the flip by renting the property.
Read what @Bill Exeter said again. SUGGESTED that you hold for at least 12 months. You can sell the other rentals that you've held; however, to buy, rehab, (hold for a year) and then sell is a clear and blatant disregard of the rules. MANY people have had their 1031 exchanges disallowed 2-3 years later when funds are locked into properties because they were too careless.
Real Estate Investor, Flipper, PM, vacation rental, Wholesaler · Athens, GA · Member since 2013 · 260 posts · 210 votes
12y
This discussion turned into a 1031 topic... I still am unsatisfied that one expert "recommends" 12 months while another says this is a blatant violation... Oh well. I guess the grey area promotes blogs and forums with differring opinions. And you know what they say about opinions.
Back to the original question... I'd hate to miss this opportunity based on the member feedback. I've posted this in the marketplace to either wholesale or find a cash partner. What kind of HML might take on this project?
This discussion turned into a 1031 topic... I still am unsatisfied that one expert "recommends" 12 months while another says this is a blatant violation... Oh well. I guess the grey area promotes blogs and forums with differring opinions. And you know what they say about opinions.
Back to the original question... I'd hate to miss this opportunity based on the member feedback. I've posted this in the marketplace to either wholesale or find a cash partner. What kind of HML might take on this project?
A flip is inventory and is NOT allowable for a 1031.
"The Internal Revenue Service has routinely taken the position if you purchased your relinquished property just prior to your 1031 Exchange transaction that you have actually purchased and are holding the property for sale (inventory) rather than holding it for rental or investment. Furthermore, the Internal Revenue Service has also taken the position that if the replacement property is sold immediately after your 1031 Exchange transaction is completed then it was not held for a sufficient period of time to qualify for 1031 Exchange treatment."
Just because it has been suggested to be held for 12 months or more does not mean that is what you have to do. Even if you hold that flip for two years it is still inventory unless you stop and decide to convert to a rental. But if you have it for rent/sale you could end up in a situation where your rental profit becomes subject to Social Security and mediacre tax.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
12y
As far as your other properties I do not see an issue if you choose to convert them into other properties as long as the process is followed correctly.
