Posted by randyOH on January 11, 2005 at 16:18:24:
My option contract just says the option fee reduces the price of the property when they exercise the option. It is up to the lender whether the option money can be used as part of the downpayment.
I give them a rent credit equal to 10% of the (on time) rent payments. If the rent is late, no credit.
I did not take a course, but I noticed they have several for sale on this website.
MINIMIZING/ELIMINATING TAXES CONCERNING REHABBERS - Posted by RU$
Posted by RU$ on December 19, 2004 at 23:38:04:
First time investor with dreams of making it BIG with rehabbers. How do I set up a plan to minimize/eliminate tax liability before profiting from my first project and the ones to come. My goal is to buy, fix, and sell as many rehabbers as possible and use all profits to expand bigger and bigger. I have good credit, good capital, make good money in a full-time, non real estate related profession, and have devised a team to handle all aspects of this rehabbing business except for the the initial setup and structure that I need. I am being taxed to death as it is in my current profession and desperately need some “creative” concepts so I can keep my future rehabbing profit!
Do Lease/Options - Posted by randyOH
Posted by randyOH on December 23, 2004 at 18:45:15:
Example:
Buy junker for $20,000. Spend $30,000 fixing. You could list with realtor and sell for $80,000. Your profit would be taxed as ordinary income. Let’s say your closing costs are 10% or $8,000. If you are in the 40% combined state and federal tax bracket, your tax hit would be $8,800 [(80,000 - 8,000 - 50,000) x .4] You might also have to pay self-employment tax of at least 2.9%, which I will ignore. So you end up with $63,200 (80,000 - 8,000 - 8,800) to reinvest back into your business.
A lease/option would go something like this:
Rent to a tenant/buyer on a two-year L/O for $850 per month with an option price of $85,000. You get an upfront option fee of $3,000.
Go to a bank and do a cash-out refi for 80% of appraised value (85,000 x .8 = 68,000). Now you have $71,000 (68,000+3,000) in your pocket tax-free to invest back into your business.
You rent the place for two years with probably $200 per month net cash flow and minimal landlord problems. This would probably be mostly tax free.
If your tenant buys the property, your profit would be taxed as a capital gain at 15% federal plus your state tax. No self-employment tax. And, to avoid any tax, you could do a 1031 exchange. Also, your closing costs would be much less because you are not paying the 6% commission.
If your tenant does not buy, then you keep the $3,000 option fee and rent it out to another tenant probably at a higher rent and higher option price.
So, with the L/O, you increase your overall return for three reasons: 1) lower taxes, 2) higher selling price and 3) no realtor commissions.
MINIMIZING/ELIMINATING TAXES CONCERNING REHABBERS - Posted by chet
Posted by chet on December 21, 2004 at 23:30:48:
Several places online there are discussion on the pros and cons of various corporate structures.
For me, the key factor was what was my CPA and Attorney comfortable with?
e.g. Some people are concerned w/ being catagorized a dealer, my CPA said no problem for what I do.
You can be as creative or as simple as you want w/ tax planning.
Re: Do Lease/Options - Posted by FBN
Posted by FBN on December 28, 2004 at 18:31:44:
I have thought of doing this myself but have been fearful of the tenant/buyer not buying and messing up the house or even worse causing major damage. Then I have to put more money into it to get it ready for the next buyer. How do you handle these issues? I assume you are running background checks on your tenant buyers.
Re: Do Lease/Options - Posted by clint
Posted by clint on December 28, 2004 at 12:27:54:
Now, that is some great advice, I too will use this method, as I just purchased a similar situation. 12500 for house and 10K in fixup, worth 65K.
Wanted to hold on and use the equity, excellent post.
Re: Do Lease/Options - Posted by randyOH
Posted by randyOH on January 01, 2005 at 11:47:19:
Yes, most tenants do not exercise their option. So, you just keep their option money and fix the place back up. I have not had any serious damage done yet.
Turnover is a major problem but no more so than regular rentals. In general, I feel that L/Os are more profitable than either flipping or regular rentals.
So far, I have not done any extensive background checks. I usually just contact their prior landlords and verify their employment. If I am not able to do this, I will run a credit check.
Re: Do Lease/Options - Posted by FBN
Posted by FBN on January 11, 2005 at 15:06:04:
Thanks for the advice. It makes good sense to me. Do you count the $3,000 towards their downpayment if they exercise the option? Do you give them any rent credits towards the downpayment. Can you recommend a course to learn all the ins and outs of lease options?