All Forum Posts by: Mark Fitzpatrick

Quote from @Dave Foster:

@Mark Fitzpatrick, The 1031 can only be used for the purchase of real estate.  And you cannot exchange into improvements to property you own.  Your idea of purchasing and then refinancing with a heloc is perfectly fine.  But you can't just leave money from your 1031 somewhere to use for the improvements.  Here are your options

1. Have the improvements done before you take title so they can be added to the purchase price.

2. Take money from the 1031 exchange to do the improvements and pay tax on that amount.

3. Use 1031 funds to purchase the property with extra down payment.  And then immediately refinance it to get the funds to improve it.

4. Do what is called a "reverse exchange".  In a reverse the QI take titles to the new property before you do.  We can then hold the property for 180 days while you complete your improvements.  Then you take title to the new property counting both the purchase price and the improvements.

I'll shoot a colleague request to you if you have follow up questions for off line.

 Well said! Thanks

Quote from @Dave Foster:

@Joseph M., Then 1031 exchange can only be used to purchase investment real estate.  You cannot use it for improvements on property you already own. And you cannot use it to purchase a primary residence.

You can however use it to buy an investment property and later convert that into your primary residence to get a prorated amount of the gain tax free.

You can also use it purchase and improve an investment property as long as the improvements are complete prior to you taking title to it.  This is commonly called a reverse exchange or a construction or improvement exchange.  Your QI forms a holding entity and takes title to the new property while you improve it.   Once it's complete you take title and complete your exchange.

Can I put about 30% down on the new investment property using the 1031 exchange then take out a heloc loan of 80% LTV and use that money to make repairs? My accountant said as long as I keep all receipts for proof the money was used for renovations then it would be fine.

I'm also wondering can I put 20% down and put the remaining funds into a new bank account that is separate from my personal accounts. Then use those funds strictly to make renovations keeping all receipts. 

Just got the word back from my mortgage company. I can't even do this unless I paid off my entire mortgage. So I think that puts the nail in the coffin of anything happening with this deal.

Plus after getting everybody's advice I don't think the deal was as good as I though at first.

thank you all!!!

Quote from @Myrtle Mike Thompson:

@Mark Fitzpatrick the attorney she's referring to is likely Scott Umstead. Several local investors use him here in Myrtle Beach. Have you considered holding onto the unit and tapping into the appreciated value with a cash out re-fi or HELOC? I don't think you mentioned how well the unit is performing, which would be a big factor for me. Do you mind sharing what building/resort it's in? I can give you my two cents.

 Current tenant has been there for 3 years. Paying 900 a month the whole time. But she really couldn't pay much more so we had to ask her to move out to capitalize. Definitely have been considering the refi option. Then renting it for a higher amount or we can even do nightly rentals there. We'd have to hire someone to manage a nightly rental for sure. It is in Golf Colony. Nice spot close to the beach and Murrells Inlet and Surfside.

Quote from @Dan Weber:

@Mark Fitzpatrick I agree with all of the other responses, but especially Wayne's. Putting the poor proposed terms aside, based on what you stated your goals are, the idea of seller financing doesn't fit those goals whatsoever. I wouldn't even bother being tempted by it. I would stick to your plan - sell it on the market and move on.

 @Dan Weber yeah it sure didn't fit my plan. It was a monkey wrench that I sure wasn't expecting. Wanted to consider and get some feedback from some other people that see where I'm at and what I'm trying to do. Thanks for the help. Surely leaning to staying the course with selling on the market.

Quote from @Eddie L.:

I would definitely ask for a higher interest rate. Can you buy a new property with the $17,900 you are receiving up front? Have you spoken to your current mortgage company to determine if there is a due on sale clause or if your loan is assumable?

 No I haven't spoken to my mortgage company. the 17,900 would get me close so I prby could buy another place but I would be house pour with such a high mortgage.

Quote from @Logan McKay Zylstra:

Couple things:

1. I would ask for a higher interest rate. Rates are at or above 6% for investment properties.

2. Are you sure that is the market price for the condo? Seeing list vs. sold prices are very different. (Where an agent would help with putting it on the market, creating competition)

3. Most loans have some sort of due on clause sale. Meaning that you will need to pay off the loan when you sell the property. If the downpayment doesn't cover that amount you may need to come out of pocket to cover the remaining balance of your mortgage.

4. While you are in a lower tax bracket it may be advantageous to sell and pay the capital gains this year if you are not utilizing a 1031 exchange. (And given your timeline, I don't believe you have lived there 2 of the last 5 years to avoid that capital gains)

1. Ok solid point
2. Yes I'm sure on the market. A unit with the same floor plan just sold for 175,000
3. The down payment would not cover what I owe on my loan and I don't have the money to cover.
4. ok, no haven't lived there in 5 years

Let me start with my story/information.

I lived in Myrtle Beach where I bought a condo for 79,000 in 2014. I currently owe 45,000 on it. I moved to Charleston Mount Pleasant area in 2017. I make an average salary of 50,000. So my investment strategy is to buy a unit and live in it until I can afford to buy another. Then rent out the unit I was living in. I own the unit I live in now but have not saved enough to buy another unit yet.

The unit in Myrtle Beach I own has appreciated to about 160,000 to 180,000. I came up with the plan to sell that unit then use that money to buy a unit in the Charleston Mount Pleasant area and rent the unit I live in now. My unit in Myrtle is about 1.5 hours away. Having two units closer together would be nice for me to be able to check on them easier. My thought was to sell the unit while the market was high then reinvest it. The townhome range I would be purchasing would be in the 400k range with a 300k mortgage after the down payment I'd get from the sale of my other unit. My wife and I could afford a 300k mortgage comfortably but not easily. 

I gave the tenant a 60 day notice. She had trouble finding a place so I gave her another 30 days. Which is the end of this month April. Her boss called me saying she would buy the unit and keep the tenant in the unit. She explained that she wanted me to do owner financing and would email me the details.

I am still in the beginning phase of my slow build up to owning multiple properties. I've always known it would take me many years with the income I earn to own multiple units. Working hard on raising my income! 

Should I consider this offer that I have received? My feelings - Feels weird to be doing owner financing when I am still a newbie investor. Wondering if I'm getting taken advantage of somehow. Or maybe she is doing it for her own reasons, like she wants to keep the tenant there. I'm scared the market will crash before the balloon payment and she will walk away and make me foreclose on the unit. If the value drops below say 100k and I have to take the unit back I could have lost out on selling high. Say If I sell now and make 100k. But make 30k from selling the unit with the below deal then have to take the unit back I might lose money. Idk I've talked myself in circles. 

Here is the offer I received.

179,000.00 offer price - you would save 6-8 percent not having to give money to the real estate agent.
10 % down is 17,900.00
Interest rate of 4.5%
I would like to do monthly payments at a 10 year amortization schedule, but pay off in 4 years with a balloon payment at end of the 4 years, this would also spread your money a little a longer. That way you would not have the massive capital gains.
I typically use attorney Scott (didn't want to post his name) here in Myrtle Beach, but we can use whoever if you are interested.
I would be responsible for all taxes, insurance etc. It would basically be like you were the mortgage company.

 

I have decided to sell the unit. Felt like the best move for me is to sell the unit. Inventory is really low and demand is high in the area. Then I'll move that money into another investment. Hopefully a multifamily or a unit closer to where I live that can get a higher yield. 

Appreciate everyone's knowledge.

Originally posted by @Myrtle Mike Thompson:

@Mark Fitzpatrick based on what your Realtor stated as the value, I'm assuming this is a 2-bedroom unit. The median rent for a 2-bedroom in that area is $1150. Golf Colony is one of the few HOA neighborhoods around Myrtle Beach that actually permits short-term rentals. Personally I would do a cash out refi or HELOC while your tenant is in place, remodel the kitchen and baths as soon as their lease expires, and then give it a go as an STR. It's close enough to the beach to work. If you're not seeing the numbers you want, you can always go back to LTR. At bare minimum I would raise rents!

Yes it is a 2 bedroom. The HOA does allow STR. Way back when I first bought it I did STR rental with the second bedroom and I stayed very busy with it. Great tip. Thanks for the info on what rents are going for in the area now.