Reposted (with some edits) from a different thread...(I asked a Mod :) )
My main driver in pursuing real estate is building up a portfolio to support passive income down the road, with an eye to appreciation as I need to create the basis of wealth for the passive income. I don't want to be a flipper, but I see the value in buying a somewhat distressed property and rehabbing it and achieving built in equity. If you have read Nickerson's book, something along the lines of his model. Buying and holding for a short period of a few years or less depending on your timelines, making the necessary changes and then rolling up to a bigger investment. I ultimately would like to be in multifamily, but I want to start investing in my own backyard where I know the lay of the land and there are not many small multifamilies around.
I live near downtown Durham, NC and there are a lot of historic properties in this area. NC also recently re-upped their Historic Tax Credits, so with the combination of NC and Fed tax credit, you can get somewhere in the area of 35-40% of restoration costs back as a credit. One caveat is that for an income-producing property, you must hold the property for 5 years or pay recapture tax in the amount of the credit, which reduces by 20% each year (sell after year 3, pay 40% back, etc).
Thus, one of my ideas is to do a combination of the BRRRR method and these Tax Credits.
An example:
Buy House A for ~$45k - invest ~$45k in rehab, rent out, refinance in 6 months to recover all of my investment (assuming at least a $120k appraisal), claim ~$18k in tax credits the following year. Rinse, repeat, perhaps 2-3 times in one year. The credits can be carried backwards on year and forward for twenty so, as an attorney with a good earned income, I can drastically increase my available money for further asset purchase for years to come.
I have thought about the following potential downsides:
(1) Holding for five years limits the exit strategy options. I can't turn around and sell it without eating my tax credits. I can do it, but that would a last resort.
(2) Most of the historic houses that are reasonably priced are in the less than desirable areas. However, these areas are trending upwards/gentrification. People want to be close to downtown and these old houses have a lot of charm. Several of the ones i am considering have houses on the same block that have already been revitalized. One in particular has three houses within a stones-throw in the process of renovations.
(3) Costs of restoration will generally be higher. Part of this can be deflected by full awareness at purchase of what needs to be restored and how expensive this will be. This will also include having the right architectural eyes on the project, making sure things are done in line with the rules to receive the credit.
(4) Not specific to historic houses, but because of the changing area of the area, historic prices are all over the map. Some sell for practically nothing, some for almost $100k but still needing work. I think my biggest concern is getting in for the right amount so that I have that built in equity and can rent at a rate that covers all of my expenses + kicks off cash.
Does anyone see any glaring downsides to this that I am missing? Obviously, these are generalized numbers for the theory. Each individual house I would have to run the numbers on, but the way I see it, the credit is a huge bonus with the right team in place.
