All Forum Posts by: Steve K.

@Walter Correia

Yes, read up on 1031 exchange rules. I believe you have to identify the substitute property within 45 days, then close on it within 180 days....otherwise you are taxable upon the sale of your property(ies).

@Ned,

there is a continuum of strategies.....boiling down to how much debt/leverage you're comfortable with. On one end of the continuum, I know a widow who put her life savings into a $250k duplex in Denver and has zero leverage. She is a valid REI and is thrilled at her cash flow (no mortgage payment) on the one property. She is also happy that Denver's been appreciating at about 10%/year for several years. Her one property is cash flowing and appreciating.

Others, could have bought 4 similar properties, each with 25% down payment (75% LTV). If in an appreciating market, they'd arguably have 4x the appreciation as the widow. They'd be growing wealth more quickly with the leverage.

If you read about the BRRRR strategy (I'm a big fan), the same $250k could have bought 4 fixxer uppers, then cash out refi, then buy 4 more (per year?) and own the appreciation on 16 properties in 4 years (or faster)....with higher leverage, or even 100% leveraged in the ideal BRRRRR.

To prepay your mortgage with your rental cash flow, is to accept the slower path to wealth. If acquiring a new rental could be 10% or 20% ROE on your cash, consider doing that, instead of earning 4 or 5% yield on your money (by prepaying the 4% to 5% APR loan).

Only you can decide how much risk/reward you see in the leverage, and what's right for you.

@Nathan Johnson , I was doing major rehab flips (part-time).....about 1 per year, but large projects. Then an acquaintance told me (18 months ago) about BRRRR rental strategy. How he took $80k and (via BRRRR and some creative financing in part) acquired 30 rentals in 5 years in Denver. He now has $8M in property, ($5M in loans, but $3M in equity). Granted, his timing was right and Denver appreciation worked in his favor, but the acquire and rehab a "flip" type property for about 70-75% of ARV, then cash out refi for 75% of ARV, means he has none of his original cash tied up.

I am now a reluctant land lord.....I use a PM, or otherwise I couldn't do it part-time with my other career. I close on doors #5 and 6 in 10 days. I like the fix/hold strategy a bunch. In Denver, I want to own/control the real estate that's appreciating very well, and I cash flow, and the tenant pays off the mortgage over 30 years. Plus, my "flip" type profit of around 30% is all I have invested in the property.....and by holding, it's not taxable today (but deferred until I sell).

Fix/flip is taxed immediately as ordinary income. Holding is more tax efficient, if it works for you.

appreciate the insights on your strategy @Matt M. ....thanks

Correct, @Eric Caudill , if you're buying +rehab is $500k on a $550k ARV....you're buying at 91% of ARV....you would need a 91% LTV loan to get all your money back. You need to buy and rehab that home for 80% of ARV and take an 80% LTV loan to get all your $$$ back (give or take some other soft costs). That $550k ARV is only a "full BRRRR candidate if you buy for $415k and put another $25k in....then you're at 80%

@Andriy Boychuk , in Denver, there's a "$99 sewer scope" business

@Jan Wanot , your last question: "YES"...at closing, the title company receives the $620,000 purchase price from the buyer, pays off the $411,000 loan, subtracts the $52,700 closing costs (is this complete? realtor commission, sellers' closing costs, accrued interest on the loan?) and gives you a check for the remainder, which is now the return of your down payment and any "flip" profit.

You have a reasonable deal. Your hard costs of $370k and $89k are 74% of ARV....thus could be an attractive deal. If there were no "soft costs", you'd start out looking at a $161,000 gross profit. All of those transaction costs, holding costs, loan fees/interest, realtor's commission reduces this down to $78k-ish.

I'd agree with others....it's enough to think in terms of "before tax profits"....don't confuse your calculation with taxes due on "Jan's" profits.

@Ray Agosto , begin a conversation with banks in your area. There are "acquire and construction loans" that will let you borrow about 70% loan to value on the purchase of land and the construction. The fact that you own the land, could count as part of your 30% down payment. Eventually, the loan gets approved based on the strength of your architectural plans, your list of specifications, your contract with the builder, etc..... that will be appraised for it's after completion value. You'll have an easier time of approval if you have construction experience. Otherwise, the builder/contractor will be relied upon more?

There is a similar type of loan that can be converted into the final mortgage, ideally without a 2nd loan closing . Look for something referred to as "construction to permanent financing" loan.

@Matt M. , indeed a good quick flip at 83% of ARV.

Mind my asking: your gross $35k profit shrinks by buying/selling transaction costs and then you pay full ordinary income tax.....you're selling the type of property a fix/hold investor wants to hold? Are you a rental investor? or do you believe Denver appreciation is over?
Thanks

No, @Eric Caudill , to BRRRR the $550k ARV house, you have to ideally acquire and rehab it for about 75% of the ARV. Acquire and remodel for $412,500. Then, when the bank gives you a $412,500 loan (75% LTV), you have 100% of your capital back...to be able to repeat. At this point, the new appraisal , less the loan, means you have $137,500 equity in the property (25%)....which is your "buy at a discount and make a "flip" type profit remodeling. Your $137,500 flip profit is the new 25% "down/equity" in the property....your original capital/equity is returned to you.

If you purchase+rehab this house for $475k in your example, because that's the higher 86% of ARV, you won't be able to fully extract your upfront capital. (i.e. a 75% LTV is the $412,500 loan.....you'd get $62,500 cash out at closing. )

You'd need to look for an 80% LTV cash out refi to get more.

You'd have a BRRRR-like investment, but likely half your original investment is still tied up....not quite as sexy.