Sell or Hold ???

Question

Here is my situation: I own a home in another state that my sister is currently living in, but she is looking into buying a home of her own. I am totally new to the real estate investing world, so new that I haven't even created an LLC yet (that is on my todo list for this week) or made my first deal.

I'm wondering if I should hold on to the house and rent it out, or just go ahead and sell, and take the proceeds to help fund a future deal.

Here are the particulars

1. ARV - $94K (zillow estimate "taken with a grain of salt")

2. Mortgage Balance - $58K

3. Assumable VA mortgage at 5.25%

4. Monthly payment - $590 PITI

So here are my dilemmas: If I hold it, I'm wondering if it is possible to transfer ownership to the LLC I will be creating, and if so what kind of legal obstacles I may incurr. Do I want the hassle of living 2 states away and having to deal with a rental property being this new to the game? Or is the wise move to just sell it and use the proceeds to fund a future deal?

Thanks

Andy L.

Andy Lambert · Answer

@Jonathan Marcus

@Greg Meech

Michael Seeker

Tags weren't working...but I got them to work this time.

Please see my comments above.

Thanks

Rolanda Eldridge · Answer

Since you're starting out, long distance can be difficult especially without PM.  I would sell and focus on nearby areas.  I managed one early on out of state but it was a new property with HOA, so easier to handle.  However, I would not do the same deal today...

Walt Payne · Answer

Long distance renting is a real PITA, but one factor to consider is interest rates. They are bound to go up, none of us knows when, but they will rise. At that point you have a serious advantage with an assumable mortgage, which will allow you to get top dollar at that point. Which doesn't mean that will get you anything great if RE prices are down. But another variable to consider.

Ed L. · Answer

I'd sell it and re invest the profits locally... My furthest rental is 20 miles from home and it's a pain in the neck managing it myself..  Heck Ideally I'd just like to buy a city block and be done with it all...

Sounds like you have a good bit of equity depending on how much work is needed to get to arv...

Greg Meech · Answer

If you claimed that house as your primary residence 2 of the last 5 years, IE is was your primary home more than 3 to 5 years ago your profit for selling it is completely tax free. Don't pass that up, it can be big if you have equity which sounds like you do. Sell it and take the tax free funds and reinvest in another local rental property. SELL before its too late.

>>>>>>I was thinking that it would be best to be transfer to an LLC to separate myself from the REI business, plus it would provide my startup business with a potential asset. If I sell the property the asset would then be liquid cash for the business, assuming ownership is transferred>>>>>

Seperate yourself - Good idea but kinda vague. Not sure what you mean seperate.

Sell for liquid cash - regardless when you sell it, the liquid cash can be given to the business anyway. No advantage in having and LLC for that.

You said business - The IRS doesn't consider rental properties a business. If it's another business just start a DBA to start with. Or an LLC, but the property doesn't have to be in the LLC of your business. Matter of fact you likely won't want to put your property in the name of your business. Not sure transfering to an LLC will give you the results you listed because I don't know what busienss you intent.

Michael Seeker · Answer

@Andy Lambert - An assumable loan typically requires the new borrower to qualify for the loan.  The problem with using an LLC is that you're not going to have any assets or credit history in the company and will have to personally guarantee any loans when starting out anyway.  So transferring the property to an LLC won't really change anything for you.

Also you did not answer whether or not you know what the market rent for the house is - that is a major piece of the puzzle.

Andy Lambert · Answer

@Jonathan Marcus

Property is in small town OH and the appreciation for the area is pretty slow. I was thinking that since the mortgage is a veterans assumable loan that I would not have to be concerned with the due on sale clause...am I wrong about that?  Could you explain a little more about the land trust...I am unfamiliar with that.

@Greg Meech

I'm in VA, and the property is in OH. It used to be my primary residence, but I have not lived there for awhile...I sometimes stay when I go home to visit. I was thinking that it would be best to be transfer to an LLC to separate myself from the REI business, plus it would provide my startup business with a potential asset. If I sell the property the asset would then be liquid cash for the business, assuming ownership is transferred.

Thanks

Andy L.

Michael Seeker · Answer

I agree with @Greg Meech that more details are needed.  But given the info you've provided, assuming pricing is similar in your area I think your best bet would be to sell and find a rental closer to home.  Starting out as a landlord is no walk in the park - doing so remotely will be even more of a challenge.

As for the LLC question - there are discussions on this forum that go into detail about that, but the basics are that yes, you can do it.  But this likely will trigger the due on sale clause (not sure what VA loan docs say, but would bet that this would trigger it).  This doesn't mean the bank will call the loan, but it does mean they will have the option to do so at any time.  If you want to keep the house, you're probably better off getting a nice liability policy than trying to go through the effort of setting up an LLC and transferring title.

Do you know what the market rent for this house is?

Greg Meech · Answer

More details will get you better answers. What state are you in? What state is the property in? Has this home been your primary residence 2 of the last 5 years? Big reason if so! Yes you can transfer it into an LLC, no bid deal. Well maybe based on questions above. But why do you want to transfer it into and LLC?

Lets start there.

Jonathan Marcus · Answer

First find out what the appreciation rate is where this property is located. If it is in a great area and appreciation is positive, you should seriously consider holding on to it. Build up more equity and create cash flow. You can always hire a property manager to help manage the property being you're 2 states away.

Instead of transferring it to an LLC consider instead putting the property into a Land Trust for asset protection without violating the DOS (due on sale) clause on your mortgage.