Real Estate Investor Question: Rehab and Sell, or Rehab and Keep?

By: Bruce W. Ford

Here's another awesome question I received from my discussion board. The question; Why bother keeping property after it's rehabbed? Why not sell it after the rehab and GET PAID!

Of course, the first questions that you must answer is how emergent is your need for quick cash? You can likely generate the most SHORT TERM cash by selling a freshly rehabbed house. But, you will give much of it away in taxes come next April.

If you keep it, you stand to make more! You will also enjoy some great benefits while you own it such as cash flow, a tax break, and MORE cash with the future appreciation. You can still pull some nice cash a few months after buying it when you refinance (post rehab) the property from your hard money (at 70% loan to value) to long term financing (at 85% or 90% loan to value).

The short answer is an investor is going to make considerably more money by hanging onto a property after it's rehabbed. There is a downside to it. You have to be a landlord, and you have to decide if you want to do that. I don't think it's too bad as long the landlording is done correctly.

Let me illustrate the difference in overall money between rehab and sell, and rehab and rent investing with this example;

Let's say appreciation rates are 5% in your town and the average price of a freshly rehabbed property in the neighborhoods investors buy in is $100,000. Let's also say there is Bill and Fred.

Bill sells his properties after rehabbing and makes $15-18,000 per house. Good boy Bill!

Fred keeps his rehab projects and cash-out refinances, pulling out around $10,000 per house within 3-6 months of ownership. (Fred trades his 70% loan-to-value (LTV) ratio hard money for long term, 30-year mortgages at a lower interest rate with an 85-90% loan to value ratio. He pockets the difference between what it costs to pay off the hard money and the new mortgage less closing costs. This works out to about $10,000 per property.)

Bill (rehab and sell) makes a great living. Ten houses per year is $150,000-$180,000 per year...nice jingle! The downside is that Bill has to keep rehabbing to keep making that living year-after-year and pays taxes on all that money as regular income (ouch!). So his $150,000 per year is in reality somewhat less.

Fred (the rehabber) also makes a great living. Ten houses per year makes him $100,000 or so in tax free, spendable cash. But, Fred controls a million dollars in real estate and it's going up in value year after year. Also, Fred pays no taxes on that money he gets from the cash-out refinances. It's part of a mortgage, so must be paid back, therefore is not income! I love that part!

Let's look at what Fred's doing more closely.

Let's say Fred bought 10 houses valued at $100,000 each, owes $90,000 on each one (after the 90% cash out refinance), so he controls $1,000,000 in property. If he keeps them 5 years (assuming a low appreciation rate...which is pretty conservative):

Purchase year - 10 houses x $100,000 = $1,000,000 Year 1 - Same 10 houses X $105,000 = $1,050,000 Year 2 - Same 10 houses X $110,250 = $1,102,500 Year 3 - Same 10 houses X $115,762 = $1,157,620 Year 4 - Same 10 houses X $121,550 = $1,215,500 Year 5 - Same 10 houses X $127,627 = $1,276,270

Essentially, Fred makes an extra $50,000 per year for keeping 10 properties. After owning them 5 years, if he sells, he puts $276,000 in his pocket.

Remember

- Some parts of the country will appreciate much faster than 5%. Heck some places properties will double in value in 5 years. - No tax benefits of keeping the property is included here. That equates to thousands of dollars in real income. - This is ONE ten-house year. Let's say you want to "top out" at owning 30 houses. Well, in just a couple of years your buying will slow down to a trickle and you'll start selling and cashing out of properties. I mean, how many ten-house years to you need to string together before you are set for life? - What if you hold these houses 10 years? The numbers get pretty exciting.

If you're like me and you don't want to do this for too many years, then holding properties for a few years makes a lot of sense, especially if you don't have much personal money invested in them.

So what of poor old Bill? Chances are, Bill will satisfy his need for short term cash, then start holding property. What do you think?



About the Author

Bruce W. Ford is the editor of Rehab-Real-Estate.com. Get his important Special Report entitled "12 Things Real Estate Investment Gurus Won't Tell You" at Rehab-Real-Estate.com.

A Consumers Guide to Buying And Selling With Lease-Options # 1

By: William J Archambault Jr

This is the first of two articles on purchasing and selling single family homes with lease-options. We're going to examine buying on a lease-option, selling on a lease-option, and in article # 2 how to successfully buy and sell on a lease option.

Lease-options have spurred the imagination of would be buyers lacking the cash, and/or credit and more importantly lacking the knowledge that almost everyone can own their own home and/or investment properties. Also, promoted to those would be investors who lack the people skills or time necessary to be a landlord, but still want most of the benefits of real estate ownership without the responicabiltys!

Lease-options are real estate tools used by the good and the evil among us. Most lease-options are an agreement between good and evil people. We all know far to many real estate people who believe you only get rich by taking the suckers money, most people who attempt to buy on lease options are simply donating money to these sellers.

In my book "One House At A Time /Finding And Buying Single Family Rentals" I spend a lot of time on the option scam as presented to real estate investors. I say scam because in my experience these lease-options seldom result in a new home owner. But, I've only been in lending and real estate for 35 years, may be when I get more experience I'll change my mind. Even when good people try to help each other lease-options seldom turn out that way. They can work but they must be done right from the beginning, I included instructions in the book.

Before I offend you any more I need to define my terms.

"Guru," a Hindu spiritual leader or any unusual teacher. There are "Gurus" in all fields of life, but thanks to TV infomercials most of us think of real estate investment instructors. Not all "Gurus" are bad, thanks to my classes and writing I'm a real estate Guru.

"Option," the purchased right to purchase property. A type of sales agreement that obligates the seller to the buyer, but not the buyer to the seller. When use properly a great and powerful real estate tool. In the book I strongly advocate the use of short term option's in lieu of sales agreements whenever possible.

"Lease," a rental agreement for any property real or personnel. Most often used with reference to rental agreements for more than one interval, i.e.,: a one year lease calling for 12 monthly payments. The most common real estate contract.

"Lease-Option," a combination of the right to purchase, with a rental agreement. Like a mule it can be a powerful tool. Like a mule it's flawed lacking the sleek beauty and speed of a horse or the friendly cuteness of a surefooted donkey. All to often lease-options involve getting screwed by a jack ass.

"Scam," anything that purports to do one thing while obviously doing something else. Scams are normally immoral, but often not illegal. Scammers can often provide antidotal evidence that their program works, leaving out that it probably won't work as presented for you.

"Sucker," those dreamers who think they're going to get something for nothing. Those people who buy the programs about buying on lease-options. The victims of those people who bought the programs on selling on "lease-options."

Traditionally lease-options were offered by sellers who needed to entice a tenet to rent their property at a premium price, with or without an up-front payment to the seller. More recently lease-options are used by sellers who have to wait out a prepayment penalty. Sellers believe that a tenet with an option to purchase will take better care of a property they may someday own.

To protect yourself from being a scammer or being scammed you need to determine what's in the deal for the other guy, and what you hope to gain.

Landlords/sellers:

1. A better tenet is a good reason to offer a lease-option. When the lease is what, we call "triple net," where the tenet takes care of the property and pays for everything you're almost out of the landlord business.

2. Sub-prime and/or adjustable rate mortgages often have "prepayment penalties," a lease-option with a good buyer, having made a sufficient up front payment can be a good way to wait out the penalty. See #1.

3. You need money now and are willing to trade equity for the cash. You need more monthly income than the market rent will provide.

4. The down side:

a; You're committed to sell the house at a fixed price.

b; During the term of the option you'll not normally be able to refinance or sell the property.

Tenets/buyers:

1. You'd like to buy the house, but for some reason you can't commit at this time. IE: You haven't sold your old house yet, your new job is tentative, in the near future you'll qualify for a much better loan.

2. You want to tie up the house you're renting, so you can buy it later for whatever reason.

3. You're going to, with the owners permission, substantially improve a house ( like, repairing an older home, landscaping a new home) and you want to protect your investment.

5. The down side:

a; If the option requires a substantial up front payment, or monthly premium you're likely to lose it.

b; If you don't qualify for a mortgage today you're not likely to a year, or two, or three from now, either!

c; Your lender may not recognize your equity. Don't mistake this with losing your equity, but the lender may not use the current market value of the house or your credits toward equity, when determining the loan to value.

d; You're committed to this house at a set price. If for any reason you don't buy this house, you lose your money!

e; If you're ever late with a payment you will probably lose all your money!

Many, if not most, Gurus who advocate selling on lease options teach Landlords/sellers:

1. Take a large up-front option payment, and a large monthly premium.

2. Included a provision canceling the lease-option if the payment is received in as little as ten days late!

3. Demand payments in person.

4. Make yourself hard to find!

5. Evict!

6. Resell!

7. In a good year you can sell the property twice with substantial non refundable up front payments! In a great year three times!

I've tried to sum up several chapters in one short article lease-options are a tool, akin to a handgun! At one time lease-options can be a great benefit, fun, even sexy. Lease-options can be great protection, for a tenet. Finally lease-options in the wrong hands can do great evil!

Three final notes for would be tenets/buyers:

1. Never turn down a free or low cost option.

2. Never, never, never let an option expire without getting the property appraised. What you have thought was outrageously expensive might be a real bargain near the end of the option.

3. If you do want to use a lease-option watch for "A Consumers Guide to Buying And Selling With a Lease-Options # 2." There are things you must do at the start of a lease-option if the lender is to recognize your equity an the time of purchase.

Copyright 2005 William J Archambault Jr
About the Author

The author: William J Archambault Jr has been in lending and real estate since 1969. He writes about up to date RE with the wisdom of our Grandfathers. He's a mortgage broker in Las Vegas, NV He's the author of: "One House At A Time/Finding And Buying Single Family Rentals" a book for real estate investors available at http://www.reii.org e-mail author@reii.org