Should I sell to have capital to flip or?

Question

Hi everyone,

My name is Nick. I'm new to this website but can see that the networking and information on this site can be very beneficial to all. I'm a 25 year old male from Rochester, Minnesota that is going to get into rehabbing, wholesaling, and other parts of real estate.

Just over a year ago I purchased a HUD home here for 140K. I went with conventional lending and put 32k as my down payment. I've invested 18k in flooring, roof, trim, appliances, paint, drywall, and other things to get the home in good condition. My current loan amount is 108K and after adding in my cost in repairs I'm essentially 126K in. Just going off of recent comparable homes sales my house will pull anywhere from $225K to $250K in todays market. If I was to sell now that would make my capital to be in between $95K to $120K after the sale. I also don't want to pay any capital gains tax on the property either.

Since I want to get into rehabbing homes and maybe even possibly wholesaling. I feel like having those funds would allow me to do so. I recently reached out to my Lender (Wells Fargo) and was looking into a cash out refinance to get money to be able to have a down payment on another property or buy it for cash and potentially do a flip. Wells Fargo wasn't willing to give me enough to do so. Also, I recently started a new job and have less than a years history there so I feel like lending would be an issue if I was to go to another bank.

I'm looking to see if their are any options out there that I may not know about and what someone who's experienced in this field would do in my situation.

I know this area like the back of my hand and am willing to put in the legwork in order to find these homes that are in rough condition (40 to 80K) and get in contact with the owners and try to work something out where I can purchase and flip it or wholesale it.

Any and all responses are greatly appreciated.

Thank you

Dan Vleck · Answer

Well, if you can't pull out enough money with refi, and you don't want to pay capital gains tax, you will need to live there 2 years before sale. Look it up. A HELOC would be another option, but maybe not the amount of funds you're looking for.

Good luck

Nick Reynolds · Answer

@Marc Jolicoeur  @Dan Vleck Thanks for taking time to respond. Greatly appreciated.

You are only able to buy a HUD home every two years from what I read not too long ago. I reached out to a local bank and they said the would be willing to do a HELOC up to 90K. I've done some reading and think this would be the best route for me. I don't want to sell my house that I'm in now because I'm getting positive cashflow with two roommates. Going this route I realize i'll be putting my main residence at risk. In a market like the one I am i feel as tho that risk is reduced. I'll look into getting the loan process started this week. My plan is to find a motivated seller with a house here in my town in the 30-40K range and do a fix-n-flip. Or another option would be to find a house in the 120-160K range well below market value needing repairs and use the HELOC funds for the down payment and the repair cost.

Marc Jolicoeur · Answer

@Nick Reynolds You should be able to get a refi from a mortgage broker.    Let me know if you need a name.

If you take this path make sure to plan for an appraisal to come in lower than you expect as appraisers like to come in low for a refi loan.  Be conservative in your estimates.   So if the comps are $225K to $250K make sure you count on the lower number.  If you got the appraisal at $225K then you could get a new loan at 75% LTV which would put you at $168K.  Pay off your $108K loan balance and you would have about $55K in capital to use for investments.

If you do a refi make sure you can afford the higher payment and also remember that interest rates are higher now than when you took out the other loan.

The alternative would be a retail sale at the two year mark to avoid taxes.  Wait until the spring selling season might also get you a bit more than selling in the fall.

If you don't mind living in a construction zone, you could do the refi, and take the money to put a downpayment on another HUD fixer upper. Move into it and do a live-in-flip.  In the mean time, rent out your house for positive cashflow.    Rinse and repeat a dozen times and love that cashflow income.

Allan Rosso · Answer

@Nick Reynolds I believe that if you've already had the house over a year, you would be charged long term capital gains tax, which is less than the short term capital gains tax you are charged when you have it under a year. If you don't want to wait the full two years to move forward in your business, it may be a sacrifice you could consider making. There's always ways to lower the taxable profit amount as well, which you do by finding all the claimable business expenses you've had.

Should I sell to have capital to flip or?

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