Investment property advice needed, help..... - Posted by Laura

Posted by Scott (tx) on November 13, 2000 at 17:00:39:

Although I certainly don’t profess to be an expert, I am in a very similar situation myself at the moment. I had a residence that I lived in for 10 years, then I relocated in 1997 to another state. At that time, I leased my residence to a tenant, and purchased a home in my new state of residence.
What I have been told the IRS rules are (and I am in the process of verifying) is that over the last 5 years the property had to be your primary residence for at least 2 of those years. So in my case, I do in fact qualify for the capital gains exemption since I lived there until late in 1997.

Hope this helps,
Scott (tx)

Investment property advice needed, help… - Posted by Laura

Posted by Laura on November 13, 2000 at 10:00:11:

My situation: I am moving into a new home I built shortly. My plan is to rent the one I am living in now. Is there a minimum period of time I have to rent the property before I can sell it in order to benefit from rolling over the profits into other investments? The main reason I want to rent it out is to turn it into an investment and then sell and move on to another property and so forth. If I sell it now I will have to pay a capital gains because I have not resided here for 2 years. Any suggestions???

I also have it listed for rent with a property management company and have had no bites. The company is only advertising in the local news reader and with real estate agents. He said I have to pay any additional advertising costs to broaden the market. I already gave him $250 for start up fees. He does not sound like he is doing much to rent the home out. We signed in Oct and have not had one person look at the property from this management company. The home is on the high end in rent because it is one of the better homes in the neighborhood, former model, fenced corner lot, inside is top notch tile and carpet and paint etc. I was considering cancelling his contract and advertising myself and then I can lower the rental price since I will not be paying the management company. Any advice in this area? I am a bit worried as I have never rented a property before and I guess I am having cold feet. But, I hate to pay the government taxes on my profit if I sell, help…

Re: Investment property advice needed, help… - Posted by Jen(NH)

Posted by Jen(NH) on November 14, 2000 at 09:07:18:

I have to agree with JPiper. Also, here is some real world experience with renting to consider…I have some tenants in a 4-unit that I rented to for a year with no problem. For whatever reason they started having problems and I started evicting i.e. “you don’t pay you don’t stay”.

I got the eviction, but they decided to appeal to NH Supreme Court. Now they pay their rent to the court (who is holding it in escrow until a decision is made) and have been doing so for 4 months which means I have not been getting any money from that apartment although I still have to pay for water, mortgage, taxes and insurance. It could be a long time before the Supreme Court makes a decision about whether they want to hear this case or not and if they decide to hear it it could be a year before we get to court. That’s a long time to go without rent. If this was a single family I would be in real trouble espcially if I needed the money to cover an existing mortgage. At least in my situation I have the remaining apartments to cover the expenses on the building.

Just something to consider, being a landlord is not always easy. Sometimes its simpler to just pay the taxes!

Good Luck!

Re: Investment property advice needed, help… - Posted by JPiper

Posted by JPiper on November 14, 2000 at 03:55:48:

Every year I buy properties from people who thought they would rent the house out. Understand that renting property is a business…and not an easy business at that.

I don’t say any of this to discourage you…but simply to inform you that this won’t be as easy as it looks. Knowledge is important…how much to rent for, how to advertise, screening, showing, maintaining, collecting, enforcing. Lots of things to know and learn, and lots of room for error.

Frankly if your goal is only to avoid the tax…that tax may be the cheapest thing you ever paid. You don’t say, but what are we talking about here? If you’ve owned the house for under 2 years, your appreciation surely couldn’t be that much. If you’re up 10% per year on $100K, that’s about $20K profit. Subtract some costs of sale, and maybe you’re talking about $5K in taxes. And that’s on 10% per year appreciation. On 4% appreciation you may be looking at $2K in taxes.

Obviously I don’t know what your gain is, or what your taxes will be. But I can tell you that some of the WORST financial decisions in the history of mankind have been made for tax reasons.

If I were you I’d decide whether it made sense to be a landlord. If I wanted to become a landlord I would spend some time learning how to do it. Otherwise, I would sell, pay the tax, and move on.

By the way, property management for single family homes is notoriously bad. I don’t think that’s a viable solution.


Re: Investment property advice needed, help… - Posted by phil fernandez

Posted by phil fernandez on November 13, 2000 at 10:38:05:

Right off the top of my head, is it 2 out of the last 5 yrs or 3 out of the last 5 that if you lived in your house and then sold you would owe no taxes on the profit. Maybe someone here can quickly verify the time needed. That being the case I would consider living in your current house until you would qualify timewise for the tax exemption and rent out your new house. Once you have attained the required residencs time in your old house than you could sell and pay no taxes. Sounds like your main concern here is to minimize paying gains taxes.

It also sounds like you really don’t want to be a landlord. However if you indeed need the extra time living in your first house, you’ll probably have to rent the new one for awhile. What could throw this plan off would be if you qualified and got a mortgage for your new house as stating to the bank that your new house will become your primary residence. If you stated this to the bank and then don’t live in the house, you are deceiving the bank.

Re: Investment property advice needed, help… - Posted by CHRIS

Posted by CHRIS on November 14, 2000 at 13:43:53:


Why is property management for single family homes is notoriously bad???


Re: Investment property advice needed, help… - Posted by Laura

Posted by Laura on November 13, 2000 at 11:10:06:

Thanks for the reply. I understand the rule to be you must reside in the home for 2 consecutive years, it does not matter out of how many to me as I purchased it in July of 99. Your advice would mean to live here until at least July of 2001, which is not an option. I cannot rent out the new home. Anyway, I really would not mind being a landlord, just have never done it before and am afraid about all the different options in how to do it. Is a lease option the best way to go for me, or should I strictly just lease it until I can sell it later. I do not want to hold it too long and tie up my cash, that is the only reason I do want to sell it fairly soon. I am not too familiar with a lease option, is it to my benefit or to both the buyer and seller? How could I market it to get quick replies? My loan is assumable, I already checked.
Also, since this home is on the high end I would rather sell it sometime within 6mos to a year so I can then move on to more middle of the line properties as investments. Thanks for any more advice you have.

Re: Investment property advice needed, help… - Posted by phil fernandez

Posted by phil fernandez on November 13, 2000 at 15:16:10:

You have many options as to the way to market your first home. To broaden your market place you could lease option the house or owner finance the house through a subject to, wraparound deal. You say that your current mortgage is assumable. Are you sure because most if not all mortgages written since the late 80’s aren’t automatically assumable. Double check on that point.

Even if the loan is not assumable, you can leave your mortgage in place and do a wrap.

A lease option has both advantages for buyer and seller. The seller can command a higher price. You are essentially offering terms to your buyer with a lease option. You will probably be able to also receive more rent than on a straight lease which translates into more monthly cashflow.

The tenant/buyer with a lease option can move into the house faster. He can buy time before excercising his option to clear up credit glitches, raise a downpayment, and have more time on the job to qualify later for a mortgage to cash you out.

Whether doing a lease/option or a straight rental, to me the key is to qualify your tenant through job verification, income and debt ratios, past few landlords he’s rented from and above all do a computerized credit check. Don’t just rent to anyone who doesn’t qualify.

Re: Investment property advice needed, help… - Posted by Mike

Posted by Mike on November 13, 2000 at 11:48:04:

Hi Laura;

I was intrigued by your request and while I cannot help with the capital gains aspect (I live in Canada), I can offer some suggestions with respect to renting your own home out.

From my experience, if the management company hasn’t shown the house, then get rid of them. You should have some sort of escape clause in the agreement you signed with them, but it may cost a bit of money to get out. Secondly, find out what your local market will bear in terms of rent - is the management company setting the rent too high?..a common ploy, much like the realtor who will show a home that is priced too high and then takes you to the home he really wants to sell you.

When you decide to rent and manage the property yourself, think back to the days you were renting and what steps needed to be followed- placing the ad, viewing the property, screening the applicants and checking the references, accepting security deposits and rent cheques, signing rental agreements and completing move in/move out inspections.

When writing the ad - think about your target market - families with children, working singles or young couples, etc… Use phrases in the ad that will appeal to your target group, e.g. Families with children -fenced yard, small pets permitted, close to schools, safe neighbourhood; OR young working couples - low maintenance yard, double garage, extra parking, easy access to freeway, minutes to downtown. I don’t usually put the dollar figure in, that way I get more calls and I can get a feel if the rent I am thinking about is going to be attainable. If the market is really slow, consider inducements such as paying for their move, or half month’s rent free, or pay for hook-ups - cable, power, etc… In my area, these inducements usually run $100 to $150 for rentals bringing in $650 per month. One month in lost rent is extremely difficult to catch up on.

i hope this helps get you started. Good luck, and let me know how you make out.