House #9: Officially Ours

April 20, 2009 · 5 comments

We closed on the purchase of The Hat Trick House today…

It’s been a long day, so I won’t go into too much detail, but I wanted to lay out the basic rehab plan, schedule, and budget for this project. Here’s a nice bulleted list of the important points for this rehab:

– My brother — who has been doing a lot of the day-to-day project management on all our projects — has volunteered to run this project from beginning to end, including budgeting, hiring contractors, negotiating, scheduling, etc. I’m confident he’ll do a great job, and I consider this setting the stage for when I’m spending a greater percentage of my time focused on other aspects of the business;

– The financial breakdown of this projects is as follows:

  • Purchase Price: $45,000
  • Rehab Budget: $15,000
  • Fixed Costs: $13,000

That puts our all-in costs at about $73,000, including all closing costs on both ends, agent commissions, holding costs, concessions, etc.

At very minimum, we hope to sell the property at $90,000, which would put our profit at $17,000. If you include the commission that my wife made on the purchase of the property ($2500), we should make a minimum of $20,000 in profit on this one. We currently have the one down the street — The Red Garage Houseunder contract for $109,000 (they’re very similar properties with very similar rehabs), so it’s not unreasonable to assume that we may be able to sell this one for more than $90K and make more than $20K in profit.

– Our schedule on this project is 4 weeks. We could likely get it done in half that time if we really wanted to, but considering our end-buyer will likely be FHA, even if we finish in 4 weeks, we’ll have another 8 weeks before we can sell it.

Oh, and no, we still haven’t closed on the purchase of House #8 (The 16-Bid House), despite the fact that we put that one under contract a month before this one…

5 responses to “House #9: Officially Ours”

  1. ezra says:

    Question about your wife. If she gets paid commission on your purchases/sales subject to appx. 31% in taxes, while your capital gains taxes on your flips is subject to 20% in taxes, why pay her?

    I’m assuming my facts are off, but thought I would ask.

  2. J Scott says:

    All of the income we make (both the “flip income” and the income from my wife’s real estate commissions) is taxed as Ordinary Income, NOT capital gains.

    I assume you believe that the real estate income is taxed as capital gains, but it’s not. Because we don’t hold onto properties as investments, we are considered real estate “dealers.” From the IRS point of view, we buy and sell real estate just like we could buy and sell any other commodity. And we’re taxed just like we were buying and selling any other commodity.

    Now, if we were to hold the real estate as an investment (rent it out, for example), the income would be treated as capital gains. But we don’t, so we end up paying the same taxes you do as an employee (plus self-employment tax). Of course, we get deductions and write-offs for the business, as allowed by the IRS.

  3. ezra says:

    Then can’t you do 1031 Starker exchange when flipping to put off taxes?

  4. J Scott says:

    In order to do a 1031 exchange, you have to own the house for at least 2 consecutive years…I never hold my properties that long…

  5. chris says:

    great deal is goal to sell at the 100k range and buy at under 50 with profit at 20k or more and later model houses 95 and up for less repairs? what areas do you key in on ? you both doing a great job chris

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