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thunked

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Reply with quote  #1 

Here is my situation;

 

25 years old

own a vacant lot, estimated value $450,000, owe $250,000

I pay $1,000 / month interest, and $400 / month principal. It is approx 40% of my take home after taxes.

I do not own a home yet, and want to buy one eventually

 

With the current market of bare land in Bonsall, would I be better of selling and investing the $200,000 (minus real estate fees & capital gains) in a CD type investment, or holding onto it long term. I view this property as invest only, not a place to live or emotional attachment.

 

Thanks guys

hessj

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Reply with quote  #2 

My view is probably way off than everyone else due to better investing portfolios and greater knowledge on this forum.  I just closed escrow on my raw land 3 weeks ago.  It took 3 falling out escrows and a large price reduction to be done with it.  I am not sure what this market is going to do but I will say that I will not wait 5-8 years to be able to sell at the same price. The property is located in California City which everyone knows it is in a horrible location (my view, middle of no where).  My Grandfather gave it to me and it is located on the main blvd.  But no way was I going to be stuck with it and I did own it outright so I sold and stuck the money in ING Direct to this market pans out.  Either stalled market or down I’ll buy an investment home/rental once this market does what it’s going to do.  For ur location, I would consider keeping it, but thats just me man.  Good luck either way

CA_renter

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Reply with quote  #3 

Thunked,

 

If you don't think there is any way you'd want to live on this lot, I'd suggest selling it ASAP.  Raw land tends to be the most volatile in the RE cycle (nobody wants it at the bottom, so it loses the most money in a downturn).

 

You could make a fair return on your $200K, and add to it over the next few years.  It will make a nice down-payment on a nice house in the future.

 

Good luck!

RonaldStarr

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Reply with quote  #4 

Thunked--CA----------------

 

Sounds like you want to sell, as it eats up a lot of your income. 

 

I live in No. CA, thus don’t know the location, so cannot assess the potential either for increased value in the future.  Nor for the potential to sell it. 

 

In general, holding vacant land is not a good approach unless there is extremely high appreciation in vacant land taking place, in my view.

 

You do have some other options here, however, it seems to me.

 

This is an investment property for you.  Thus, if you sold to somebody else and carried back a loan for some of the financing, you would be doing what is known as an “installment sale.”  You would only pay your capital gains tax as you get in payments on the loan.  Each loan payment to you would be allocated to three parts: interest—which is taxable at ordinary income rates, return of capital—the money you put in to purchase it and  is not taxable, and gain—which is taxable at the capital gains rate, probably either 10 or 15% for you.  This last is assuming you have held it for one year or more, something you don’t indicate.  You might get a buyer who would pay you 8-10% interest, perhaps more.  You also get to collect interest on the portion of the sale price which represents the taxes you will have to pay but have not yet sent the money in to Uncle Sam and Cousin Schwartzenegger.

 

Here is my favorite idea. 

 

You can also do a 1031 tax-free or tax-deferred exchange into other investment property.  For it to be totally tax-free, you have to put all of the sales proceeds into the purchase of the new property, you have to have at least as much debt on the new property as you gave up from the old property, and you must buy property with at least as great a price as the net selling price of the old property.

 

The advantage to you is that all of your money goes into the new property.  If you make a good choice or good choices, you can buy a property or properties that produce positive cash flow for you.  The property/properties could also appreciate in the future and you could take advantage of the tax benefits of owning investment property, reducing your income tax bills—federal and CA state—each year.   

 

I favor this because it seems to me that investing in real estate is far better than putting your money into savings accounts.

 

Since you have been investing $1500 a month, you obviously have more income than you need to live upon.  If you continue to invest some or all of that amount each month by buying other income-generating properties, you could build up a very high net worth over the next 15-20 years, so you can then do anything you want with your time.  Of course, you probably would not be buying a property every month.  You would save up your earnings and buy another property as you accumulated enough to buy it.

 

For instance, I buy “rent houses” in OK state.  It is possible to buy some houses there for  less than $75K.  Typically these properties will produce at least break even and possibly even positive cash flow.  If your credit is good, you might be able to put down just 10-20% plus closing costs to buy a property.  This might be $7,500 to $15,000 down plus maybe $3,000 closing costs for a property. 

 

For your exchange, let’s assume you buy just $60K houses.  You would have about $180K to invest.  To get a totally tax-free exchange, you would need to buy at least $440K worth of properties, thus having  at least $260K in debt.  These properties would probably rent for about $475-550 a month each.  You could buy 8 houses for $480K plus about $25K in closing costs.  These properties would likely appreciate about 3-5% a year or about $14,400 to $24K a year.  That is about $1220 to $2000 a month in non-taxed wealth creation through appreciation.  You would have a cash flow which would be approximately break even, assuming a 7.5% 30-year fixed rate loan, and a 5% vacancy and uncollected rent allowance.  With a break-even cash flow, you would also get depreciation on the properties that would knock off about $1200 a month from your income, thus reducing your taxable income by about that amount.  You can figure out your tax savings by seeing what taxes you would pay should you get that much less monthly income, or about $14,500 less taxable income in a year.

 

The appreciation is not spendable now.  However, it accumulates non-taxed and eventually you can withdraw it through non-taxed refinancing.  Or by selling.  You can also increase your wealth by exchanging up into larger properties, which will provide you with more Cash flow, Appreciation, and Tax benefits, making your CAT fat.. 

 

If you buy properties at below market value, you might actually get 9 or 10 houses for your money, increasing your income by perhaps 10-30%, giving you a positive cash flow of about $290-575 a month.  This income would be sheltered by your depreciation, so would not be taxable to you.  Of course, that will increase your taxable income, reducing your apparent tax savings. 

 

If you buy still cheaper houses than my $60K examples, you will have some positive cash flow.  If you buy carefully, getting a better ratio of monthly rents to purchase price than the 1% I assumed here, you will get some positive cash flow.

 

Now, this approach to investing will work in other places than OK.  Anywhere that properties are low cost and there is reasonably good rents.  The main issue is the ratio of the gross scheduled rents to the purchase price.  In general, this means the Midwest and the SunBelt states.  I recommend the SunBelt states because of increasing populations.  Also because it will not be so cold were you to go there in the winter. 

 

If you were to buy an apartment complex, your cash flow would likely be a little better than with the single family houses.  The management expenses would be a little lower and you would probably get a little bit better ratio of rents to property value.  From my experience, single family houses have an advantage of less turnover of renters, thus less vacancy loss and lower maintenance expenses than the multiple-unit properties seem to get.

 

Understand that the houses I have mentioned would not necessarily be in crummy neighborhoods.  They could well be in quite decent areas.  They might not be brand new, but they might still be in  pretty good condition.  They might be brick three bedroom, one and a half or two bedrooms homes built in the 1960s through the 1990s.

 

SUMMARY:  I recommend that you do the 1031 exchange of your lot sales proceeds into one or more other breakeven or positive cash flow investment properties in a low-cost state.  Here are …

 

Some sample properties for sale today and rents.

 

*******Altus Times, Jackson County, Sunday July 16, 2006.  City has an air force base, apparently a good rental market.  County has declining population.

 

3 BEDROOM 2 Living areas, 1 Dining Room, 2 Baths, 2 Carports. Sets on corner with 5 lots $55,000. Snyder Cell 1-580-512-2408 Home 1-580-569-2402

 

3BEDROOM 1 1/2 bath. Carport. Fenced yard. $25,000 cash. 507 E. 2nd. Duke. 580-471-8585 [this property is “effective age” of 1966, 1296 sq ft, bought in 1994 for $35K, now assessed at $38K]

 

HOME FOR SALE 400 mars; 4 bedroom, 1 1/2 bath, 1 car garage, central heat and air. $37,000. 477-1605  [this property is 1125 sq ft, built 1975, with a 300 sq ft garage, and central heat and air conditioning]

 

LARGE 3 BEDROOM 2 bath. 2 small 1 bedroom apt. . 1 bedroom apt. $40,000. 477-0614

 

RENTALS:

 

 1- 2br. Ch/a $400mo. Close to hospital 3 br 1 1/2 bath $600mo. Call 477-1272 leave message

 

CLEAN 2BD, CH/A, fenced, washder/dryer hookups, 1 car garage 1107 Elder $325 mo. $250 deposit 482-2000.

 

********The Daily Ardmorite, Carter County, Sunday July 16, 2006.  Growing population.  Growing job base. On I-35 in South Central OK.

 

Falconhead 3Bdrm/2Bath, overlooking lake & golf course, screened back porch, strg bl. $69,000. 940-391-0946

 

Won t last long!2/1 C/H/A, newly remodeled, large yard, great neighborhood, less than rent! 1009 A SE $42,000. 580-504-2973  [“…less than rent…“ means your monthly ownership costs are less than a renter would pay for the property] [built 1964, 630 sq ft, bought for $26,500 in August of 2005]

 

Houses for Rent Lease Unfurn

 

Kelley Properties1Br Duplex $275mo/$2003Br Duplex $350mo/$2003Br House $400mo/$250 1 year lease, Ref s req d.(580)465-0780

 

2 Bdrm/1 BathStove, W/D hook-ups, gar., fenced yd. No pets. $500 mo. + $300 dep.1013 C NW  [property built 1950, 1184 sq ft, bought for $23K on Oct 8, 2003]

 

226 6th NWLarge 2/3 Bdrm, new paint & carpet, W/D hookup, lg. dining room. $515mo + dep. (580)226-0665  [property built 1950, 1008 sq ft, assessed for $14K]

 

2Bdrm/1Bath$400mo/$150dep. home; 1 Bdrm Dplx $280/$100. Ref s req d. 226-9689

 

2 Bedroom 411 AshArdmore, $425mo/$250dp Ref s req d (580)657-6258

[property built 1955, 700 sq ft, bought for $31K in June, 2005]

 

1 Bdrm Lone Grove Stove, fridge. No pets, $350/$200 (580)657-4228

 

2 Br. For Rent CH/A W/D 7831 Myall Rd. in L.G., no pets, $475mo/$200dep., 580-657-8556 / 657-3572  [this is probably the property built in 1998, 832 sq ft, assessed value $36K]

 

2 Large BedroomUtility Room, stove $475mo + dep. 223-2641

 

Lake Murray VillageBrick 3Br 2Ba 2 FP $950 mo $500 dp 580-226-8159

 

2 Bdrm Brick Garagein L.G. No pets. $600 mo. (580)657-3900 / 618-1296

 

Plainview Sch 3/2 Brick 2502 Tanglewood $825mo $750/Cr ck req d 220-7202

 [1985, 1716 sq ft, bought for $79K in Sept 2004, assessed value $91K]

 

2Bd 1 Bath/KitchenetteBeautiful view from higher ground 3mi S. of Dickson Sch. $700/$200 226-3328

 

2Bedroom/1BathNewly remodeled $450mo + dep. (580)504-6240

 

Lone Grove 3bd/2bain the country. CH&A, appl. & water furn. Nice & quiet. $575 mo. + dep. & refs. Call 580-657-2601 or 940-782-8537

 

taddyangle

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Reply with quote  #5 

If you go the exchange route, make sure you start your home work now.  Trying to buy $450k of $60k SF homes will be a challenge to meet the 1031 deadlines if you delay.

 

You could also consider a private annuity trust (PAT).  You can defer taxes this way, so you only pay when you withdraw the funds.  I would only recommed this if you are down on RE investing, need to defer taxes, and do not have a retirement account/pension in place.


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thunked

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Posts: 12
Reply with quote  #6 

Wow.. a lot of information. Let me digest it, and get back to you guys...

 

thanks

AlexL

Senior Member
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Posts: 298
Reply with quote  #7 

Bonsal land market is slow. You would compare Bonsal market to other "niche" markets like Falbrook (92082) and Valley Center (92028). It take at least 4 to 12 months to sell a lot there if you want to get full market price for it.

 

As far as "full market price" goes, with the land you really have to be careful when you determine the fair price for the residential land. There are 1900 vacant residential lot listings in San Diego MLS right now, over 50% of them have been sitting on the market for at least 6 months, for the most part due to overpricing the listings.

 

When you price the land, you really have to price it backwards: you have to start for the end product. If the majority of homes in the area are 2,500 sq.ft. SFR's, than this is what will probably be the target end product of the buyer. Find out what the comps are for 2500 sq.ft. homes of newer construction, let's say they are $800,000 with finished landscape, pool, and size of lot similar to yours.

 

First off, Deduct at least 10-15% off the finished value, I call it a "head-ache discount", which most of the sellers of land never account for: what I mean by it is that no land buyer is going to go into a headache of building a home from scratch unless this person can save at least 10-15% off the retail value. If there is no savings, then this person would just buy an existing house and be done with it. So, knock off $80,000 = $720,000.

 

Estimate the cost of construction of the house based on realisting costs of construction (finished) = $120-160 per sq.ft. (2,500 sq.ft. x (avg) $140 = $350,000. (Most land sellers in San Diego assume that the land buyer will be a large contractor who can build it for $60 per sq.ft. and doesn't expect to make any profit on the project. Wrong!)

Soft costs (engineering, architectural, permits, grading, utility hookups, school fees, etc.etc.) = $50,000

Landscaping = $50,000

Swimming pool (if it's normal for the area and is included in your comps above) = $60,000

Financing costs, holding costs = Let's say $25,000.

 

So based on thsi VERY ROUGH estimate, here what your math would look like:

 

Targe Finished Value = $800,000

Less: HeadAche Discount = (80,000)

Less: Construction Costs = (350,000)

Less: Soft Costs = (50,000)

Less: Landscaping = (50,000)

Less: Swimming Pool = (60,000)

Less: Financing Costs = (25,000)

Net Value of Land = 185,000

 

I'm not saying that your particular land is worth only 185,000, this is just a very rough example probably with many holes, but very close to reality of how it should be priced. Normally in the MLS a listing like this would be sitting on the market at $600,000 with a comment: "Million Dollar Homes hearby", which translated from Relatoreze means: "buy this if you want to be the most overpriced house in the neighborhood".

 

I really believe that in this market if you want to fully realize the value of your land, you have to build a spect home and sell it. There are not too many buyers of land right now, and the land is loosing value in a slower market much faster than the house. JMHO

 

 

 

 

 

dansimo

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Reply with quote  #8 
I think I love Ron Starr!

Seriously, the time you take to lay it all out in your posts is extremely admirable and appreciated...and one of the main reasons that makes this board so productive.

Thanks!


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