You have several options available after purchasing a property and renovating it into habitable condition, two of them are: Selling On Installment,
Selling Outright and Conversions. This article is going to describe each
strategy in details.
SELLING ON INSTALLMENT
Instead of renting or optioning your property to a tenant, you can sell it on installment. This method is more appropriate and
profitable if you have underlying low-interest assumable financing already built in. Let's say, for example, you purchase
a property with an existing 8 percent first loan which you assume, and the seller takes back a second mortgage at 9
percent. You could resell the property and allow your buyer to assume all this built-in financing. But why not make a profit
on the built-in financing and sell on installment?
If you sell the property outright, you're totally cashed out of the property. Now you have to find a place to invest the
proceeds realized from the outright sale. On the other hand, you can earn a substantial profit by wrapping the existing
financing with a new loan for 20 or 30 years.
SELLING OUTRIGHT
Selling outright, or being totally cashed out of the property, essentially has only one advantage and several glaring disadvantages. The one advantage is you immediately realize the
profit after the sale, which means you'll have plenty of ready cash available. But, this is only an advantage if you have a
good place to reinvest the proceeds. If you plan on adhering to the "plant a seed and watch it
grow" theory, you must envision your real estate investments as tiny seedlings that you plant and nurture throughout a
sprawling orchard. While you feed and water the existing seedlings, you continue to plant new ones. In reality, your
seedlings are the individual properties you invest in throughout the city (the orchard), and you nurture them through
renovation (giving new life); in turn, these seedlings grow to be giant redwoods. And, while your seedlings are growing up to be giant redwoods, in return for all the loving care you've
given them, they pay you back with generous amounts of appreciation, not to mention tax-deferred and tax-free income.
Now consider the disadvantages of being cashed out of the property through an outright sale. The most undesirable
aspect of such a sale is that now you have to find another investment for the proceeds from the sale. Good realty
investments are not only hard to find but are very time-consuming. You could put the money in savings, but who wants to earn a
meager 5 percent? Realistically, you have to seek out a new real estate money-maker, which can earn more than a thin 5 percent. The other glaring disadvantage of being cashed out is that,
under certain conditions, you have to pay income taxes on the gain from the sale. You can defer payment of income taxes if
within a year of the sale, you buy another property of equal or greater value.
Let's face it, an outright sale without reinvesting in another property eliminates property accumulation and makes ready
cash available for frivolous spending. New cars, boats, and vacations are nice, but hardly a wise investment for someone
who wants to be financially independent by the age of 40. These are good reasons for not selling the property, and
these reasons apply most of the time. But sometimes they do not, and those are the times when you should sell the property.
For example, you might sell because you need the cash to better your investment position. You find a property you want;
it's a real bargain, the price is right, the terms are great, but you don't have the down payment. For any number of reasons,
you're against taking out a loan or taking a partner with cash. Under these circumstances, you might consider selling one of
your properties to raise the necessary down payment, especially if it improves your financial condition.
For example, assume that you can sell one of your properties in which you have a large equity position. The property
you want is a 20-unit apartment building, and the owner requires $30,000 down. You decided that selling your property
and buying the apartment building will substantially increase your cash flow and leverage. You then have definitely improved your financial condition.
CONVERSIONS
Conversions can be as complicated as developing 20,000 farm acres into a thriving regional shopping center, or they can be
as simple as converting an unwanted fixer-upper into a desirable rental home. Other profitable conversions are apartments
to office space, a large ranch home on a busy boulevard into a family dentistry center, apartments to condos, a six-month
rollover, and assumable financing into a profitable wraparound loan at higher yield. Also, turning an
under-rented building into a higher-rent-paying building could be considered a form of conversion.
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