Needing analysis help and some q's about flipping

10 Replies

Hey there, I’m relatively new to BP and this is my first post! I’m interested in doing a flip (or multiple flips) to fund more buy and holds. I currently own 1 rental property, but am hoping to expand to 5+ in the next couple years.

Since I am low on capital of my own, I’m planning on bringing on private investors to fund any flips that I do and I wanted to put some numbers up to get some help with analytics. I want to make sure I’m not missing anything important. I also have some questions about taxes and exit strategies. I'll post my spreadsheet at the bottom. Here are all of the questions I have at the moment.

1) If I complete this flip within a year, is capital gains tax a concern? Or will I just have to pay my regular income tax rate on the profits?

2) The only 2 exit strategies that I am aware of are selling the property for enough to cover my investors, or refinancing the property myself and holding it as a rental. What are some other exit strategies?

3) How does refinancing work in this situation? I would have purchased the property in cash using my investors capital...would I then refinance and be able to use the profits to cover my investors AND my down payment on the mortgage?

Here is my analysis with rough estimates on the rehab costs...

Originally posted by @Taylor White :

Hey there, I’m relatively new to BP and this is my first post! I’m interested in doing a flip (or multiple flips) to fund more buy and holds. I currently own 1 rental property, but am hoping to expand to 5+ in the next couple years.

Since I am low on capital of my own, I’m planning on bringing on private investors to fund any flips that I do and I wanted to put some numbers up to get some help with analytics. I want to make sure I’m not missing anything important. I also have some questions about taxes and exit strategies. I'll post my spreadsheet at the bottom. Here are all of the questions I have at the moment.

1) If I complete this flip within a year, is capital gains tax a concern? Or will I just have to pay my regular income tax rate on the profits?

2) The only 2 exit strategies that I am aware of are selling the property for enough to cover my investors, or refinancing the property myself and holding it as a rental. What are some other exit strategies?

3) How does refinancing work in this situation? I would have purchased the property in cash using my investors capital...would I then refinance and be able to use the profits to cover my investors AND my down payment on the mortgage?

Here is my analysis with rough estimates on the rehab costs...

Hey Taylor

You may be able to do this after 6 months on a conventional loan. You could do it on a portfolio loan up to 75% loan to value as soon as the property is stabilized (construction is complete and a lease in place). If the ARV is 125K, the max loan amount would be $93,750, so make sure your costs and fees (including holding costs) are less than that (so you have profit) and you should be okay.

Stephanie 

Thanks @Stephanie P. !

I'm still trying to familiarize myself with how portfolio loans and refinancing work. I've heard that portfolio loans would normally come from smaller local banks or credit union. Is that right?

This particular property is a cash only deal, so I would need the full amount of purchase price + rehab in hand(approx 85k). So if I got all of that money from my investors and did the rehab, would I then just "buy it from myself" with a conventional loan to pay back my investors? If the most I could get from the bank is $93,750, then I would have just enough to pay back my investors and could then go on using the property as a rental. Is that what you were getting at? Thanks so much for the response!

Originally posted by @Taylor White :

Thanks @Stephanie P.!

I'm still trying to familiarize myself with how portfolio loans and refinancing work. I've heard that portfolio loans would normally come from smaller local banks or credit union. Is that right?

This particular property is a cash only deal, so I would need the full amount of purchase price + rehab in hand(approx 85k). So if I got all of that money from my investors and did the rehab, would I then just "buy it from myself" with a conventional loan to pay back my investors? If the most I could get from the bank is $93,750, then I would have just enough to pay back my investors and could then go on using the property as a rental. Is that what you were getting at? Thanks so much for the response!

Conventional financing is going to have a waiting period or "seasoning" period of at least 6 months before you can use the appraised value. In your case, if you paid cash for the property, you would be able to refinance it using a percentage of the purchase price. If you did delayed financing, you would be able to use a portion of the purchase price plus the rehab costs if they are on the original HUD. I'm not as familiar with conventional or delayed financing as I am with portfolio loans, but that's my understanding. I do know with a portfolio loan, you would be able to use a percentage of the appraised value right away if the lender doesn't have a seasoning requirement. So in answer to your question, yes, you would refinance using the appraised value and pay back your investors and use the property as a rental with a portfolio loan.

Do you have enough equity in your primary residence to obtain a HELOC? Our first flip was suppose to be a buy and hold but the market was so high it was better to rehab and sell. We got a conventional loan and used funds from a HELOC and a no interest CC to fund down payment and reno.

Originally posted by @Taylor White :

Thanks again @Stephanie P.!

That whole situation wouldn't necessarily be the ideal situation, but it's good to know that this could be an option. I'll do more research into portfolio lenders in my area!

 Conventional is definitely the way to go if you can.  Try local credit unions and local banks.  They may do it and keep it in house.

@Zack Leverette

Probably not, but I don’t know very much about helocs. My purchase price was $92k, I financed $87,400 and I’m down to $80k principal left. Does that mean I could only pull out $7400? Or would it be $12k?

That’s also now a rental property. My primary residence is a house that I just bought about 6 months ago.

@Taylor White

Generally speaking most banks will do 90% of the equity you have in the home. We have a credit union close by that will do 100%. You will have some charges for obtaining a HELOC. The biggest being the appraisal charge. Private money my be the best route for you.

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