Recently, I had a tenant move from a house in a town and decided to repair it for sale. I owned it for a while, but the area was starting to change. Cash flow is different than before due to increased taxes, township rental license fees and inspections.
Sure, I originally signed this deal with the goal of keeping it as a rent, but there are times when I need to change my strategy.
The type and scale of rehabilitation is highly dependent on exit strategies.
Scale of rehabilitation
Repairing a property for sale, whether new or existing for rent, is usually more expensive than repairing just for rent.
Rental focuses on functionality. If things are a little out of date, it may make sense to replace them after they are completely worn out.
When repairing and selling a property, it may make sense to upgrade many features in order to move the property quickly and affordably.
Rehab for sale
But how much fantasy do you get when you’re about to put it up for sale?
For example, do you use two-tone or custom colors in your kitchen or bath, or do you use all the colors that are common in rental properties? Would you like to upgrade some of your appliances and flooring (using tiles and better carpet) instead of using reliable fixtures and flooring? Rental property Is it cheaper or can it handle more wear?
Another big issue is how far to upgrade certain parts of the house (kitchen, bath, basement, and even the garage). 30 years later Real estate agent, I learned that transactions are usually done if you can show the buyer a nice kitchen and bath. That’s a big selling point.
Related: Four painful (but invaluable) lessons learned from wrong rehab
However, another thing to keep in mind is that you don’t want to over-improve the area. It may even make sense to check your competition by going to see some of the other homes for sale or for rent in the area around your property.
Disadvantages of selling
Perhaps the biggest drawback of modifying rehab to sell it is taxes, more specifically short-term capital gains taxes that apply if you sell and settle within a year of buying a home. is. For example, if you can own it for a year and a day, the profit from the sale will be a long-term capital gain, and the tax will be cut by about half.Unfortunately, we all have this silent partner Home flipping Business, and his name is Uncle Sam.
And what if the modified property doesn’t sell after trying a lot of incentives that seem to go wrong? In my area of the northeast, if I don’t sell at Thanksgiving, I’m more likely to sit in the property during the winter, including the cost of heat and snow removal, until the spring market reappears.
This happened to me once, and I was forced to rent it, and risked ruining my really nice house that was refurbished for sale by a new tenant.
Repairing real estate for rent may be a bit cheaper, but it also entails a set of concerns of its own.
For example, it may be difficult to refinance a property upon completion. Banks usually want to see properties that have passed all code inspections and are rented to good tenants with a lease of at least one year.
Some other issues you may encounter may be the loan-to-value they allow or the possibility of high interest rates because it is a rental property, and you also repair. You risk getting a low rating for later value.
Another thing to keep in mind is that we are now also dealing with tenants and management companies.
Many successful real estate investors try to avoid this part of management and maintenance by selling real estate for their rent rather than keeping it as a regular rent. As you can see, more than a year has passed, so the tax at the time of sale is low.
Also, tenants are likely to have more of the owner’s mindset while living in the property and are usually responsible for minor repairs and maintenance. This could be the most effective leasing option strategy and also the way real estate investors move away from the repair business.
But the worst scenario is when you repair a property for sale and it is not sold or rented. You may run into problems because you don’t get any cash flow.
Therefore, timing is very important. Of course, you need to have an exit strategy in mind before you start trading, but you also need to understand the market and be prepared to shift your strategy as needed.
For me, I like the strategy of “selling with a lease option to fix and flip after a year and a day”, but I’m also curious about what other Bigger Pockets people will adopt.
Which do you prefer, fix to flip or fix to rent, and why?
Please leave a comment below!