Author Topic: House shopping questions  (Read 4512 times)

Scooter

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House shopping questions
« on: October 31, 2014, 11:39:38 PM »
So, after reading quite a bit on MMM, Bigger Pockets, and listening to various podcasts my mind has been twirling on how real estate may help my family get to FI sooner. I am hatching a plan and would like some feedback.

I have lived in my current home for 17 months. We recently sat down with a realtor and determined a very conservative price to sell the house quickly which would give me $88,750 to put into another home. Using the flipping formula of 70% of after repair value and subtracting the estimated cost of repairs, the house we are considering is just outside of this criteria. It would meet a 75% criteria though. Our down payment will be 74K, I am estimating 6K in closing costs and I think I may be on the hook for 11K in capital gains (could be less, but I am going with the worst case scenario) on the profits from the current house. So we will have to come out of pocket in the neighborhood of 3k.

The house only needs cosmetic repairs upfront but will require a major kitchen redesign in the future to make better use of wasted space and add another bedroom.

My thinking is that since we will have quite a bit of equity in the house upfront, will be using normal financing (not hard money) and we will be getting the house for such a good price that we can do a slow flip on the new house over the next year or two and turn a profit like we did on our current house. I am not counting at all on appreciation, but prices are going up currently.

We do not have all of the cash on hand to do the bigger renovations, but we can save up for those over the next year or two and pay for smaller projects with my paychecks and still max out our TSP (similar to a 401k for govt. employees if you don't know what that is.)

I will have to put in an offer that is contingent upon selling this place first and will not put my house on the market until I know the deal is secure. Also, the real estate agent has agreed to give me a 5% fee on selling my home if we do both transactions through him. I accounted for that in the numbers above.

I would love to hear thoughts and criticisms to make the plan better, more efficient, or to know if I should scrap it. One more thing to consider is that we may decide to stay in the new house for more than a few years. It is in a great neighborhood and will be a great place to raise our kids.


Scooter

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Re: House shopping questions
« Reply #1 on: November 01, 2014, 09:09:29 AM »
Bump and additional info. The house is also 10 minutes closer to work.

Setters-r-Better

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Re: House shopping questions
« Reply #2 on: November 01, 2014, 10:00:34 AM »
I don't understand why you are selling the house you live in?  Where will you live after that and how much would it cost?

Scooter

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Re: House shopping questions
« Reply #3 on: November 01, 2014, 10:52:00 AM »
I will live in the house that I described in the post. Sorry if that wasn't clear. I am selling the house I live in, in order to make money on the new house, sort of like flipping, but longer term.

Setters-r-Better

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Re: House shopping questions
« Reply #4 on: November 01, 2014, 03:50:26 PM »
Has the value of your current house gone up a lot?

Scooter

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Re: House shopping questions
« Reply #5 on: November 01, 2014, 05:38:09 PM »
Has the value of your current house gone up a lot?

Yes, we bought it for 260 and it will sell quickly (we are told) for 350.

SunshineGirl

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Re: House shopping questions
« Reply #6 on: November 02, 2014, 08:08:34 AM »
Shouldn't you just hold onto the house you're in for a few more months so you don't have to pay the cap gains? You just have to live in it two years, and it seems like you're almost there...or at least push off the closing date.

« Last Edit: November 03, 2014, 09:45:00 AM by SunshineGirl »

arebelspy

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Re: House shopping questions
« Reply #7 on: November 02, 2014, 08:54:53 AM »
Shouldn't you just hold onto the house you're in for a few more months so you don't have to pay the cap gains? You just have to live in it two years, and it seems like your'e almost there...or at least push off the closing date.

This is a good idea; live there two years and 250k in gains (500k if married) of the capital gains is exempt from taxes.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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Scooter

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Re: House shopping questions
« Reply #8 on: November 02, 2014, 03:03:37 PM »
Thanks guys. I'm tracking on the capital gains piece. I can still make some good profit on this house even with the cap gains hit and the aggressively low selling price. The next house seems to be a good opportunity to make some money too though. More than the 11k I would get taxed. I guess I was operating under the "nobody ever went broke taking a profit" mindset. I appreciate the input everyone.

Scooter

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Re: House shopping questions
« Reply #9 on: November 02, 2014, 03:20:18 PM »
Here are my projected numbers on the next house. I was conservative with the after repair value (ARV,) and the repair costs. I would be locked into it for two years though, because I couldn't take the tax hit and still make a profit. On the plus side, I would be living in a great house and paying down two years worth of mortgage. At the end of two years, I am estimating that I could sell it and walk with 140K in pocket to put down on another house. The plan would be to continue to slow flip houses until we have enough to buy our final house in cash. It would mean FIRE for me as soon as I have a paid for house. Also, I have no guarantee that the seller would go for my terms, but if they do, it seems like a "go" for me at this point. I don't have any other ways to increase my income due to my full time job.

ARV = 525
Purchase Price = 370
Repairs = 65
Realtor fees = 31.5

escolegrove

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Re: House shopping questions
« Reply #10 on: November 02, 2014, 07:00:08 PM »
I think its a great strategy because it fits your goals and plans. The key we have found is to create a business plan and stick to it. Our go to early retirement in 15 years with a military retirement is rentals. We don't follow the 1%, 2% or 50% rule. Our first house we bought was a foreclosure and we gutted it. Instead of selling it we rented it.

Food For Thought- Have you thought about waiting till spring to sell your house. I know in our areas you get more money. You only have 7 months left till you would be able to sell for no capital gains. Since it is already Nov. what about offer a late Feb closing? So the seller could move after the holidays. The only down side is if they wanted a quick closing and that is how you were getting a deal. You can than do alot of work on the house before you move in and than have a empty house to show. Just thinking of a way you could buy your house and keep your capital gains too :)


Another Reader

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Re: House shopping questions
« Reply #11 on: November 02, 2014, 07:24:39 PM »
Unless the house you want to buy is unique, or the price overwhelmingly attractive, I would wait until you hit the two years before doing anything.  My motto is houses are like buses.  If you miss one, another will be along in a few minutes.  The greatest deal ever isn't.  Another one will turn up when you are in a better position to buy.

arebelspy

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Re: House shopping questions
« Reply #12 on: November 02, 2014, 09:24:41 PM »
The next house seems to be a good opportunity to make some money too though. More than the 11k I would get taxed. I guess I was operating under the "nobody ever went broke taking a profit" mindset.

You aren't necessarily taking a profit - you're stepping into a project that may or may not work out well.  Taking 11k off your margins on a flip is huge.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

jnc

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Re: House shopping questions
« Reply #13 on: November 03, 2014, 05:57:33 AM »
Unless the house you want to buy is unique, or the price overwhelmingly attractive, I would wait until you hit the two years before doing anything.  My motto is houses are like buses.  If you miss one, another will be along in a few minutes.  The greatest deal ever isn't.  Another one will turn up when you are in a better position to buy.

+ 1


thedayisbrave

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Re: House shopping questions
« Reply #14 on: November 03, 2014, 06:28:41 AM »
+1 for wait until 2 years has elapsed.


GoCubsGo

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Re: House shopping questions
« Reply #15 on: November 03, 2014, 08:39:44 AM »
I would potentially differ a little bit in my opinion.  While it's true sometimes houses are like buses, it could also be true that the OP's housing market is trending up and 75% ARV houses are disappearing (not to return in their required timeline).  I've seen that over the last 3 years in my market as a TON of cash investors ended up fighting over mediocre deals and pushed prices up.  Foreclosures started getting priced almost at market prices and now there are a lot of people with cash sitting around with nothing to buy (that isn't risky or dumb).  Hedge funds started buying foreclosures as holdings and now I think we are in a bit of a bubble.

My question to you is how many similar type deals have you seen come up in the past 12 months? This question is key.  If there have been multiple deals, then you may want to hold off as you will likely get more action on your current home in the spring AND you can drop the tax consequence.  Only buy this next house if you've been actively following your local market and know exactly how many deals would have met your criteria (and have been going through those houses to assess).  I'd buy it if it matches all your criteria, it's a rare deal, and you feel real comfortable with the $11k tax bite. 

Scooter

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Re: House shopping questions
« Reply #16 on: November 03, 2014, 07:43:58 PM »
The last value that I saw like this was the house I bought. I put in 4 offers before I got this house. There is not much evidence of flipping in my town because it's pretty affluent and most home owners do not seem in great need of getting rid of their properties; even if they have sat on the market. My current house was probably only accepted at this price because the former owner's adult children just wanted to be rid of it.

I have to say that I respect all of the opinions shared on this site. It really gives me a lot of intelligent perspectives that I wouldn't have thought about on my own. Thanks again to everyone.

I would potentially differ a little bit in my opinion.  While it's true sometimes houses are like buses, it could also be true that the OP's housing market is trending up and 75% ARV houses are disappearing (not to return in their required timeline).  I've seen that over the last 3 years in my market as a TON of cash investors ended up fighting over mediocre deals and pushed prices up.  Foreclosures started getting priced almost at market prices and now there are a lot of people with cash sitting around with nothing to buy (that isn't risky or dumb).  Hedge funds started buying foreclosures as holdings and now I think we are in a bit of a bubble.

My question to you is how many similar type deals have you seen come up in the past 12 months? This question is key.  If there have been multiple deals, then you may want to hold off as you will likely get more action on your current home in the spring AND you can drop the tax consequence.  Only buy this next house if you've been actively following your local market and know exactly how many deals would have met your criteria (and have been going through those houses to assess).  I'd buy it if it matches all your criteria, it's a rare deal, and you feel real comfortable with the $11k tax bite.