What to do with money from first deal???

Question

Ok, so first I want to say I'm not counting my chickens until they hatch, however, as this deal gets closer to closing I am left wondering what I should do with the money.

50K profit on my first wholesale deal that I joint ventured with a wholesaling company. We went 50/50 they covered all the paperwork I tracked down the deal. A duplex and triplex located in my back yard of Sunny San Diego.

My first thought is to pay down some of my personal debts that have higher interest rates and roll over the rest to a 0% introductory credit card and keep paying it down.

Second thought was to throw a big portion of it straight back into marketing for more of these properties.

The third option is to use a 1031 Exchange and buy a turn key property in Palmdale, CA. My friend is an agent up there and is giving me first pick before it hits the market beginning of next week.  The owner just wants out of the property and is willing to take 30K less than market value. Ran a quick analysis and with a 50K down payment and a conventional loan I could rent out the property and make enough to cover all expenses associated with it. Wouldn't be cash flowing insane amount of money, however, that's something to put me where i eventually want to be, a buy and hold investor.

My biggest worry is taxes. I know the smart move would be 1031 exchange to avoid capital gain taxes. I would just appreciate some feedback from seasoned investors or newbies who wish they did something different or knew something they should have done with their first deal profits. I honestly cannot wait for feedback! And thanks in advance BP family.

Best,

Ricardo

Ricardo Olea · Answer

Thank you all for your responses!

This is exactly what I was trying to get, the different perspectives and experiences!

I guess a 1031 exchange is out of the picture but at least I know more about the requirements to qualify for one in the future.

I plan to pay some debt down and reinvest the remainder in continuing to grow my wholesaling ability and make a big footprint in my area.

Love this site!!!

Alan Majors · Answer

About that marketing option...

Are you going to have time and resources to follow through on all the leads generated?  In an older podcast the guys talked to an investor that could not follow through on all the leads generated from a campaign.  That seems like wasted capital.

In my situation, turn-key if all the numbers and the property look good.  Cash flow from the property is then the base to continue building your business.

Pratik P. · Answer

This is what I would do...I would try to take that cash, pay the tax (I assume it counts as income tax), and use the rest to start a wholesaling business. Hire people to do the grunt work like mailings, marketing, taking calls, calculating MAO values for motivated leads. If you scale it well, you'll be the go-to person for many flippers in your area. You will be the deal bringer!....But that's just what I would do :]

John Thedford · Answer

It is earned income. As Dave said, 1031 is not possible. Now--what to do with it? Reinvest it. Continue to grow your capitol until you can get some buy and hold units.

Tom Sutherland · Answer

Dumb question. You wholesaled a property which is basically being a middleman. Wouldn't that be earned income? Isn't wholesaling like being a realtor? Except no MLS listings etc etc.. You found a property not on the Mls  you then found a buyer. They paid you a finders fee how is that a Capitol gain and not earned income?

Tom

Dave Foster · Answer

@Ricardo Olea,   Simply having partners doesn't preclude you from going your own way with a 1031.   But @Jim Carney is right, you're going to have to take the 1031 off the table on this deal.  You can only do a 1031 on property that it has been your intent to hold for productive use.  Your use of partners who have that short term business practice, your actual short hold and expressed intent to resell as a wholesale deal  make your intent on this one pretty clear.

So this time you need to smile and pay the tax on your profit and wait for a buy and hold property for your 1031.  They're neither complicated or expensive but they do have some requirements that preclude it in this case.

Jim Carney · Answer

1031 sounds like it would not work in this situation. Your Cap Gain Tax on $50K would be at least $7,500, possible more. The fee for a 1031 is somewhere under $1K. So yes you would save some money.

Problem as I see it is that you mentioned a partner in the deal being sold.

The tax entity that owns the property being sold must be the same entity that buys the replacement property and I doubt that you plan to keep your partner. If I'm wrong then yes a 1031 will work.

There are other alternatives to make it work but would involve some legal expertise and additional costs which might not make it profitable.

Andrew Michael · Answer

How confident are you in your ability to find more profitable wholesales such as this one?  I ask because this seems to be a significant source of income at the moment so I would think you would want to keep that going at all costs.

How much do you know about 1031 exchanges?  I am not a 1031 expert but I have introduced that option to potential sellers in the past.  It has been my experience that these are fairly sophisticated transactions that can be very costly and time consuming.  Without knowing the numbers in the examples above, would the costs of the exchange justify that strategy just so you can limit tax exposure?  Also I would love for a 1031 expert to chime in because I  am not convinced a wholesale deal qualifies you for a 1031 exchange anyway.  Did you actually close and "own" the property or was it just assigned to the buyer?

Personally I would keep using the wholesaling money to pay down high interest debts.  If you can continue to wholesale at these margins then don't stop.

What to do with money from first deal???

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