Real Estate Investor Question Rehab and Sell or Rehab and Keep
Below is a MRR and PLR article in category Finance -> subcategory Real Estate.
Real Estate Investor Dilemma: Rehab and Sell or Rehab and Keep?
When deciding what to do with a property after rehabbing it, investors face a critical question: should you sell the property and cash out immediately, or hold onto it for potential long-term gains? Let's explore both options to see which might be more beneficial.
Immediate Cash or Long-Term Gains?
If you're in need of quick cash, selling a freshly rehabbed property might seem like the best option. However, keep in mind that a significant portion of your profits will be taxed in the next fiscal year.
On the other hand, holding onto the property can yield greater financial benefits over time. You'll enjoy steady cash flow, tax advantages, and the potential for future appreciation. Refinancing the property after rehab can also provide immediate funds by transitioning from hard money loans (at 70% loan-to-value) to long-term financing (at 85?"90% loan-to-value).
Being a Landlord: The Trade-Off
Keeping a property means you'll have to manage it as a landlord, which can be challenging. However, if done correctly, it can be highly rewarding.
Comparing Scenarios: Bill vs. Fred
Imagine two investors, Bill and Fred, operating in an area with a 5% appreciation rate.
- Bill sells his rehabbed properties, earning $15-18,000 per house. By selling 10 houses annually, Bill makes $150,000 to $180,000 a year. However, he must continuously rehab properties to maintain his income, with taxes reducing his actual earnings.
- Fred, on the other hand, holds onto his properties, refinancing to extract around $10,000 per house. By annually rehabbing 10 houses, Fred makes approximately $100,000 in tax-free cash. Moreover, Fred controls $1,000,000 in real estate, benefiting from appreciation.
Long-Term Financial Gain
If Fred's properties increase in value due to appreciation, his portfolio grows significantly:
- Year 1: $1,050,000
- Year 2: $1,102,500
- Year 3: $1,157,620
- Year 4: $1,215,500
- Year 5: $1,276,270
After five years, Fred’s portfolio could provide an additional $276,000, not accounting for potential tax benefits from ownership.
Future Prospects
In some regions, properties could appreciate even faster, potentially doubling in value over five years. This doesn’t include tax savings, which can add substantial real income. Holding a set number of properties, like 30, could lead to a point where you’re set for life.
Conclusion
For those who want to minimize years spent actively rehabbing, holding properties can be a sensible strategy, especially if you haven't invested much personal capital. Even Bill, who initially seeks quick cash, might eventually see the benefits of holding onto some properties.
In the ever-changing world of real estate, every investor must decide their own path. What will you choose?
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