The Real Estate Investment Dilemma: Which Properties To Hold And Which Ones To Keep?

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  • August 10, 2010

Real Estate Investing Dilemma

If you intend on being serious about your real estate investing business, this question will undoubtedly come up time and time again.

Should you bother keeping a property after it has been rehabbed or should you sell it and grab as much profit as you can from your now much more valuable real estate investment holding?Well, the first questions that you must ask yourself is do you need or want the cash from your shrewd real estate investing prowess now, or can you afford to wait?

You can likely generate the most SHORT TERM cash by selling a freshly rehabbed house. But, you will give much of it away in taxes come next April.

If you keep it, you stand to make more! You will also enjoy some great benefits while you own it such as cash flow, a tax break, and MORE cash with the future appreciation. You can still pull some nice cash a few months after buying it when you refinance (post rehab) the property from your hard money (at 70% loan to value) to long term financing (at 85% or 90% loan to value).

The short answer is a real estate investor is going to make considerably more money by hanging onto a property after it’s rehabbed. There is a downside to it. You have to be a landlord, and you have to decide if you want to do that. I don’t think it’s too bad as long the landlording is done correctly.

Let me illustrate the difference in overall money between rehab and sell, and rehab and rent investing with this example;

Let’s say appreciation rates are 5% in your town and the average price of a freshly rehabbed property in the neighborhoods real estate investors buy in is $100,000. Let’s also say there are two real estate investors, Andy and Robert.

Andy sells his properties after rehabbing and makes $15-18,000 per house. Atta boy Andy!

Robert keeps his rehab projects and cash-out refinances, pulling out around $10,000 per house within 3-6 months of ownership. (Robert trades his 70% loan-to-value (LTV) ratio hard money loan for long term, 30-year mortgages at a lower interest rate with an 85-90% loan to value ratio.

He pockets the difference between what it costs to pay off the hard money and the new mortgage less closing costs. This works out to about $10,000 per property.)

Andy (rehab and sell) makes a great living. Ten houses per year is $150,000-$180,000 per year…nice jingle! The downside is that Andy has to keep rehabbing to keep making that living year-after-year and pays taxes on all that money as regular income (ouch!). So his $150,000 per year is in reality somewhat less.

Robert (the rehabber) also makes a great living. Ten houses per year makes him $100,000 or so in tax free, spendable cash. But, Robert controls a million dollars in real estate and it’s hopefully going up in value year after year. Even if it does not his purchase basis point makes him comfortable.

Also, Robert pays no taxes on that money he gets from the cash-out refinances. It’s part of a mortgage, so must be paid back, therefore is not income! I love that part!

Let’s look at what Robert’s doing more closely.

Let’s say Robert bought 10 houses valued at $100,000 each, owes $90,000 on each one (after the 90% cash out refinance), so he controls $1,000,000 in property. If he keeps them 5 years (assuming a low appreciation rate…which is pretty conservative):

Purchase year – 10 houses x $100,000 = $1,000,000 Year 1 – Same 10 houses X $105,000 = $1,050,000 Year 2 – Same 10 houses X $110,250 = $1,102,500 Year 3 – Same 10 houses X $115,762 = $1,157,620 Year 4 – Same 10 houses X $121,550 = $1,215,500 Year 5 – Same 10 houses X $127,627 = $1,276,270
Essentially, Robert makes an extra $50,000 per year for keeping 10 properties. After owning them 5 years, if he sells, he puts $276,000 in his pocket.

Let’s say you want to “top out” at owning 30 houses. Well, in just a couple of years your buying will slow down to a trickle and you’ll start selling and cashing out of properties. I mean, how many ten-house years to you need to string together before you are set for life? – What if you hold these houses 10 years? The numbers get pretty exciting.

If you’re like me and you don’t want to do this for too many years, then holding properties for a few years makes a lot of sense, especially if you don’t have much personal money invested in them.
So what of poor old Andy?

Chances are, Andy will satisfy his need for short term cash, then start holding property.

What do you think?

About Barry Cunningham

Remember us? was one of the co-hosts of the long-running, truly goundbreaking, and arguably the #1 online radio show about real estate investing. Real Estate Radio USA was on the air 5 times per week before podcasting became cool. But now, we're back as a full multi-media operation and we're aggressively buying houses again! We're back baby!

One Comment

  • Teia VanHorn says:

    I hope the capital gains taxes don’t increase too much because it will take a larger chunk of the profits out for the investors. In Birmingham, AL Robert’s investment plan works out much better because of the rent possibilities. Here you can buy a house for 20-25 thousand and rent it for $650 a month!! Other expenses you should account for are 20% of rent profits should be set aside for fixing back up the property when your renter moves out and 10% for a rental management company.

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