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

Bob E. · Answer

@Ricardo Olea Congratulations on finding a great deal. If you don't currently own your own home you could consider using your payday to do a house hack. If you already have a place to live consider an investment property in a market where you are comfortable.One thing that a lot of people don't know- if you have a loan on a property and would like to cashflow a little better you can put extra money against your loan while keeping the term the same. This will lower your payment and does not require a refinance, it is called a "Recast". So maybe you buy the place in Palmdale and, with the next big win, do a recast to pump up your cashflow.Personally we invest in Midwest Cashflow properties that we buy rehab, rent, sell. We are comfortable in that market and happy with the results but to each their own. I know everyone loves appreciation in CA but we look at how much our PORTFOLIO appreciates.

Dan H. · Answer

Your statement on ROI for CA is very incorrect. In virtually every duration (5 years, 10 years, 20 years, and 30 years) So Cal and San Fran areas have been near the top ROI in the nation. My oldest buy n hold is from 1992. I put $40K down/closing ($167K cost) and refinanced it in 1998 taking out all of the initial investment so that it currently has $0 capital into it. It is worth north of $500K today. I do not really know how to calculate a return when all initial investment has been pulled but doing simple calculation shows that my $40K is worth ~$520K today. So in 24 years it has increased in value ~$350K not taking into account positive cash flow (this unit is a SFR and only cash flows ~$500/month after maintenance and cap expense (I use $300/month cap expense for this unit)). Note also this unit was purchased near a market high (1990 was probably market high) and initially fell in value to ~$147K (1996). So you do not have to time the market and buy at the right time. This is my worst performing investment property that I have held at least 3 years.My best performing REI property (duplex) was purchased in 2012 for $303K (this was purchased near market low and therefore purchased at the right time) that I placed 25% down. I took out all of initial investment last year. It is worth north of $600K today so has returned a little less than $100K per year since it was purchased not including its positive cash flow of ~$1300/month after subtracting for maintenance and cap expense (I am using $600/month for cap expense ($300 per unit/month (units are detached))).Statistics show So Cal and San Fran area have been near the highest return in the nation. You can look it up. Calling CA REI a poor ROI is not only wrong but it is the opposite of the facts (it is near the top in ROI).

Account Closed · Answer

True dat, but then you're not going to be selling your flyover crap to Californians.

Dave Foster · Answer

@Ricardo Olea, Unfortunately you'll have to take the 1031 off the table until you're selling a buy and hold property. Going the wholesale route has been a great move for you. But to go forward with a 1031 on the sale of this property it must have been your intent to hold it for productive use. Having the partners with that normal business plan, actually turning it so fast and treating it as a flip disqualify it for a 1031 exchange. So happily pay some taxes and think of it as one step closer to being able to buy and hold and defer taxes using the 1031.

Tom Ott · Answer

Sounds like you have plenty of options to get moving. Turnkeys are a really good way to earn some cash flow, while not having to do much of the heavily lifting. Have you only been looking in CA? Sometimes the housing there can be very expensive and your ROI can be very low. Other markets around the United States might offer you a greater return for your investment. Please let me know if you have any questions.