What to do, help please?

Question

Hi All,

I am looking for some advice. My wife and I just closed on a (new for us, built in 92) home in Raleigh NC. We have lived in our current home in Raleigh since 1999 and have ~$70k equity built up. I am thinking of renting the property, however I'm wondering if it would be better to cash out and use the money for a couple of flips. I am at the point that i'm kinda stuck and looking for some direction.

Thank you,

Tony

Adam Schneider · Answer

Tony,

It's a great question you ask. Much of it depends on your personal short and long term goals. These are some of the strategies you might want to consider:

1. Buy/Hold, as you mentioned

2. Sell as a 1031 exchange and use the new property as a buy/hold

3. HELOC, as Dawn mentioned

You didn't provide enough information, though. Is the highest and best use of the property you lived in as a Buy/Hold or as a retail sale? Part of this is a math problem. If, for instance, the subject property sells for $200K and rents for $1000/month, then most investors would say to sell, buy 2 $100K homes, and rent them each out for $1000/month. If, on the other hand, your property sells for $100K but rents for $1500/month, than the answer might be to rent and HELOC to purchase another property...

Just food for thought.

Adam

Bill Exeter · Answer

Hi Tony,

You qualify for the 121 Exclusion (Section 121 of the Internal Revenue Code) since you have owned and lived in your current house as your primary residence for at least 24 months out of the last 60 months (2 out of the last 5 years).  The exclusion allows you to exclude up to $500,000 in taxable gain as a married couple from the sale of your home.

It sounds like you could sell today and exclude all of your taxable gain.  You could rent and still qualify for the tax free exclusion as long as you end up selling and closing on it before the end of your 36 month (3 year) window, or you can continue to rent it out and then when you sell in the future you would then qualify for a 1031 Exchange.

You can not sell and structure a 1031 Exchange today because it is your primary residence. Only rental, investment or business use properties qualify for 1031 Exchange treatment at this point, but if you sell today you should take advantage of the 121 Exclusion since that is tax free (vs. tax deferred like a 1031 Exchange).

Lina Sitto · Answer

Congrats on the new house.

If you decide to sell the house and use money for a couple of flips, which was how you put it, these are my thoughts:

Use some of the money and do one flip (assuming it's your first flip), and if all goes well, repeat. Definitely don't put all the money in purchasing and rehabbing two at once. This is just my two cents. I haven't done an actual flip yet but I have closed one very lucrative wholesale deal ;). I would start with one and go from there. Good luck!

Christian Hansen · Answer

Tony,

Hi, I'm also in your area. Both Dawn Brenengen and Adam Schneider make great points and are very knowledgeable about our area. I would add that you probably need to do some introspection and figure out what kind of investor you want to be. Landlord (hands-on or hands/off), a Flipper or maybe a $ partner with someone who is an experienced flipper, and there are many more permutations.

Having cash on hand is a useful tool and can be used in many ways but it has to be in a way that doesn't keep you awake at night. Otherwise you'll burn out or make a hasty and potentially costly decision, either will take the fun out of it.

Keep gathering information up to a certain point, you don't want to get caught in -analysis paralysis. It is always going to feel a little bit scary when you take the first step you just don't want to do it blindly. That thrill should be what brings you back for more!

Good luck

Melissa Gittens · Answer

Great advice @Adam Schneider

Steve Vaughan · Answer

You'll lose the tax-free status of your gain if rented out for more than 36 months.  Something to consider!

Dawn Brenengen · Answer

@Tony Munns  You could do both.  Coastal federal will do a high LTV HELOC.  I'm sure there are some other credit unions that might too.

Billy Smith · Answer

I would rent out your house   buy a HUD home that requires you to live it .

Take the positive   cash flow from the  first house  work on the HUD then after your time is up rent that out .

Move on or stay put work another deal build up cash.

Tony Munns · Answer

i plan to consult with a CPA about my tax options. However, I'm leaning toward renting my old house and using the equity to do a flip. I think I can get $1000-1100 for rent each month. My ultimate goal is to have multiple rental properties in the future. The first step is always the hardest. I'm so happy that I found such a good resource here at BP.

Adam Schneider · Answer

Tony,

The drama is building! What did you decide to do?

What to do, help please?

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