Sell a Property Turnkey or Sell a Note and Hold Property?

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This is confusing for sure.IF your sell the property with Seller Financing, where you become the Mortgagee, you are actually selling the property. It seems like that concept is not well established or is missed altogether."In #2 I would be "creating a note" at $42k (30% LTV) and my Operating Expenses would drop slightly for insurance and prop management (which I didn't mention in the details) so my CAP % should go up to 13% with cash flow increasing and purchase price dropping?"It's not clear why the property is being sold at such a discount. 30% LTV with a $42k mortgage means the value of the property is around $140,000 since $42k is 30% of that number. So, the property is being sold at a $100k discount?? Why? I am guessing the above is simply not worded or articulated correctly. At the time of sale, if you sell for $42k, that sets the value of the Subject Property at $42k. There is mention of a $10k down payment, so the Sale Price = $42k and the Loan Amount = $32k which is actually a 76% LTV not 30%. Get rid of all the "Cap Rate" references when talking about the note. If you Sell the property and provide Seller Finance, you have NO Cap Rate, you are no longer in possession of the real property and therefore you do not capitalize it. If you Sell the property, the Borrower who is also the Buyer is the entity who capitalizes the property. A Mortgagee does not have insurance expenses, those are required of the Buyer/Borrower. A Mortgagee does not have property management expenses as the property is NOT the Mortgagee's to manage. You will have yield, but is not clear what that yield will be since the cost basis of the asset is not defined in the post. It is safe to assume, I suppose, you paid less than $42k since that is the SF sale price. So your yield and total return will be at 8% or better depending on the details. In regards to the tax accounting, do not count your chickens until they hatch. The transaction and Seller must qualify as an investor and not as a dealer. If you are designated a dealer, then the interest income will be treated as ordinary income. If Seller is designated an investor, the gain is capital. You should see your CPA about this as it not a straight forward idea as expressed above.In general, holding a portfolio of properties where you are liable for the repayment is most of all residential loan transactions. It is only in commercial transactions where you really see non-recourse loans. (not personally responsible) That said, the primary residence underwriting will look to offset the costs of holding those mortgage obligations by using 75% of the property's rental income. In addition, reserves will be looked for, for each property. Those same reserves do not have to be set aside in underwriting. In other words, the reserves you hold for those properties also help qualify as your personal reserves in the underwriting of the loan. Without getting in to too much detail, most likely the you are fine if you are a fair ways into your loan underwriting, provided the assets given in the interview can be proven. I would not over think it.

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@Steve Babiak where has the quick tip been on this edit feature! Lol Thanks Steve.

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Well, BP actually already has that feature - it's just a little hard to find. But if you look to the upper right side of the post, then go to just to the left of the post's time stamp, and there you will find the "Edit" or "Update" link to revise the post. The "Edit" link only lasts for a small number of minutes after which it changes into the "Update" link.

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@William Hochstedler We were selling it at $48k because that was the initial business model to sell turnkey properties to investors for a quick turnaround. The house is worth $60k, but any investor will want equity when they purchase.The market is mostly FHA and from what I understand FHA requires a home purchase to season for at least 3 months before they will finance a buyer?I think I will look into getting a blanket loan for multiple houses... 8% isn't something I want to pay, but I know other large funds that have that strategy. (Though I believe they are also selling shares on the back end)@Dion DePaoli Sorry it's confusing... The tune always sounds clear in one's own head.Yea I can see the confusion already lol There is no seller financing involved in either deal. I'm looking to Cashout through creating a Note on the property.BP needs to add an "Edit Post" feature... @Joshua Dorkin Dion, the 30% was intended to be 70%. I cleared that up in my post later lol I'm not selling a house for $100k off. I'm not that nice of a guy!There isn't a $10k downpayment. The $10k is the profit we would have if we cashed out through the note and we would have a total balance of $42k to pay off through the loan.lol I gave you a VOTE for the explanation of how the seller financing would work. I appreciate you taking the time to respond in depth, but yea, it's definitely not what's happening here Sorry about my lack of illustrating this transaction correctly...

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Why would you sell it at $48K if it's worth $60K?It sounds like you are looking for the cash for your primary residence. Is that true?Leveraging cash out of investments for personal use is dangerous business--it bit me pretty hard in 2007 and I won't do it again. Also, you can probably get $10K at 8% elsewhere without sucking it out of the house. I'd think that your answer should come from your lender on your primary regarding where your down comes from. My guess is that the cleanest option is selling viz first time home buyer & source of funds.Wm

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Bah! It shows in the reply window like it's in a table format, but it definitely didn't come out that way...Here are my numbers in Google Spreadsheet. You'll get to see the semi chaos lol The forecasting sheet is under construction!Jennings Home and Property FORECASTING@Robert Leonard undefined

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Haha sorry about that... Yea it's supposed to be 70% LTV I was being rushed out of the house by the wife and have been dealing with too many numbers today.X out the "selling a note" we have established that I will be creating one.There's a nugget! I wasn't aware of the mortgage being a non-taxable event. Is it considered a non-taxable event on however many houses you acquire and do a cashout refi?I could google it or find it on BP I'm sure, but if it's not too much trouble... How do I calculate the taxable pay day amount?Here is my breakdown for your number viewing pleasure!(I'd be surprised if it all made sense to somebody other than myself lol)Rent Rate$750.00Actual Reh$13,965.72Sell CAP10.50%Private Money10.00%Compound/Simple Int.SimpleGross Assessed Value$57,500.00After Repair Value$60,000.00JHP Money in Deal$0.00Purchase Price$11,037.72Wholesale/Money Fee$4,000.00Rehab Budget$18,000.00Actual Rehab$13,965.72CASH BACK$4,034.28Rent Rate/mo$750.00Gross Scheduled Inc.$9,000.00OPERATING EXPENSESMonthly%YearlyVacancy Rate8.00%$60.008%$720.00Taxes$99.5813%$1,195.00Insurance$40.005%$480.00Maintenance7.00%$52.507%$630.00Management10.00%$75.0010%$900.00Electric$0.000%$0.00Gas$0.000%$0.00Water$0.000%$0.00Sewer$0.000%$0.00Garbage$0.000%$0.00JHP HOLDING COSTSMonthly%YearlyPrivate Money$275.3137%$3,303.77SWBC Insurance$16.952%$203.40Alarm$25.003%$300.00Electric$23.453%$281.40Water$30.004%$360.00Sewer$4.921%$59.00Garbage$0.000%$0.00HOLDING COSTS/moRehab Vacancy Time3Total Expenses80%$602.71VACANCY COST$1,808.14NOI w/ Tenant$147.29REI Buyer EXP/mo44%$327.08REI Buyer NOI/mo$422.92REI Buyer CAP Offer %10.50%REI CAP Sell $$48,333.33REI Equity % Sell $15%$51,000.00Total Expenses$30,811.58Marketing to Sell Prop$500.00Closing Costs$850.00CASHOUT REFI CAP %13.38%CASHOUT REFI $$11,188TURNKEY NET PROFIT$16,172EQUITY % NET PROFIT$18,838RETAIL NET PROFIT$29,188

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@Gilbert Ross Jr I agree. The need for cash is really what matters, but how much does somebody actually need?I'm thinking I'd be content with a few thousand. Then to know I have reliable cashflow coming in and equity sitting on top of it would be nice.Taking a bit less on the front end so that I have a sound foundation for the long term is really starting to make me wonder...@Shawn Holsapple Everyone keeps saying need capital gains, but it's still like $10k lol That is pretty significant! Then to have the cashflow on top of it... I mean it's making more and more sense to me to create the note.I guess I should look into a private bank around town to fund them instead of a private lender first right? 8% is high right now...I can't do anything until I close on our first primary residence though! I'm a little nervous because I have 6 houses under JHP, but I'm the personal guarantor. Not sure if that will be overlooked or not when we try to qualify for this first time home buyer loan.Back to the private banking... Do I need to look into a credit union or something?

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@Taylor Jennings sorry man, but your terminology in each mention of scenario #2 is confusing as all hell? Selling a note ... creating a note ... 70% LTV ... 30% LTV ... ?I'm good with the numbers on analyzing deals and I cannot figure out your numbers? You are using all of the terms in an unorthodox way that does not allow me to analyze your numbers.Putting your terms (cap rate, equity, LTV, etc.) aside, but just using a $16k one time fully taxable pay day (flip) vs a $10k non-taxable event of taking out a mortgage with $138/mo of positive cash flow is a near "no brainer" as I see it. My only concern is whether or not that 48k property is likely to appreciate or is in an area declining in value? That's just below the 50k threshold of what's easily financeable for the benefit of plan B (to sell at retail if necessary).

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If the property is in a solid B or B+ neighborhood and you are into the deal good AND don't need the immediate capital gains, then go for the cash flow!