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Would You Partner or Take $300k Real Estate?

Home Real Estate Investing Would You Partner or Take $300k Real Estate?

  • Avatar Tim 
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    Status: Accountant
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    Joined: 09/18/2018

    Lot is 11k sqft
    Tax appraisal market of $300k (mostly land)
    100% owned.
    Gentification has driven property values up the last 5 years.
    Nearby, townhouses are under construction. Phase I at $370k-$380k.
    https://urbanliving.com//developments (use 77009, Fulto Yards)
    In about 3 years or less our property will be sold.
    No experience with private real estate or construction.
    The units are only about 20 ft wide with 2ft clearance.
    Not willing to build 5 or 6 spec townhomes alone.
    Would you attempt to partner with a developer/builder and what terms?
    Would you simply sell it and be done?
    I can easily see multi family rental being viable as well.
    The “edge” is this street is next to light rail for easy commute to downtown and to med center.
    Hate to take cash if developing produces $2mm with a partner.

    #213895 Reply
    Avatar DCdoc 
    Participant
    Status: Physician
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    Joined: 06/14/2016

    What’s your cost basis?

    #213905 Reply
    Avatar Tim 
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    Status: Accountant
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    Joined: 09/18/2018

    Inherited recently. Probably about $250k or so. Letting MIL and BIL use it free. She’s pushing mid 90’s with us picking up property taxes and bills. Currently family obligation until MIL needs 24hr care or whatever.
    Deed in wife’s name.

    I was thinking using it as contribution to LLC with developer covering the construction cash up to an amount. Equal would be 50/50. Skin in the game. Split profits after that.

    #213912 Reply
    Avatar DCdoc 
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    I assume with the step up basis you can walk away with that money tax free right now? I would just do that, unless you want to be actively involved in real estate building which clearly carries some potential additional gain, but also downside risk especially if this is your first endeavor. But I’m personally risk adverse so take that with a grain of salt.

    #213919 Reply
    Liked by EndoRobert
    Avatar Tim 
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    Status: Accountant
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    That’s the problem. I know one guy that’s good at this but this is too small to be of profit interest. Maybe as a favor. If I pitched it as a trial run, he might bankroll and have me do the work, It would be a nice skill to have. Contractor’s both general and subs can screw you up royally. I don’t mind working with “house money” but that’s not good business either. What could go wrong? I still smell a ton of profit in there,

    #213922 Reply
    Avatar DCdoc 
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    Status: Physician
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    I assumed you would be paying to contract it all out yourself. You have the skill set to work on this? And the interest? That would change things significantly from what I wrote prior

    #213923 Reply
    Avatar Tim 
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    Status: Accountant
    Posts: 2818
    Joined: 09/18/2018

    It’s easy running a project with a checklist.
    “Tell Mac to give me a quote on site prep including all permits”
    “We should be able to build these 6 units for about $65-$70 a square foot and get about $180.
    By the way, call John at ABC Architects. Get him the plots and tell him we need the plans in 30 days.”

    Of course he has built subdivisions and shopping centers. No I don’t even know what permits are needed. That’s the huge risk. Someone that knows construction costs and good and bad suppliers is probably worth it.
    Going it alone is not worth it. Skin in the game and experience helps. I might do a second or third.
    Five or 6 spec construction alone is too risky.
    All I need is a bad foundation due to substandard concrete and I am toast. Not alone. That last core sample test would be critical.

    #213925 Reply
    Avatar StateOfMyHead 
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    Status: Advanced Practice Provider
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    Joined: 01/01/2019

    There is much that can change in three years and if BIL refers to brother-in-law before I spent too much time I’d consider whether or not you will be able to send him on his merry way when MIL moves on. If you can actually get him out at that point I would talk to a developer, possibly one of the firms already building in that area.  Maybe they would cut you in on a deal that wouldn’t require much additional risk or effort but would add a few extra dollars in your pocket if you are willing to wait for the construction and sales.

    #213926 Reply
    Avatar Tim 
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    Status: Accountant
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    BIL is no problem, he lives in the garage apt to take care of his mom. I could rent out the front for awhile, it’s not what you would consider grade B, more like C/D. No central AC or heat nor finishing. Not worth rehab. Built in 30’s or 40’s. A builder would buy the lot as a tear down.

    #213927 Reply
    Liked by StateOfMyHead
    Avatar Tangler 
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    Status: Physician
    Posts: 345
    Joined: 08/23/2018

    I would sell it and use the money to invest in something else or look for something else. I would probably put it in index funds and focus on other aspects of my life.

    I guess the question I would ask myself: If you sold another property or received the funds as inheritance would you buy this exact place with the plan to take on this exact challenge. If the answer is no, then I would just sell it and take the cash.

    I would like to get a few rentals but I feel as a doc that I am at a significant informational disadvantage to people who have done this for years and years. There might be some serious stupid tax = tuition that would need to be paid and I wonder if it is worth it for me?

     

    #213978 Reply
    Liked by StateOfMyHead
    Avatar Larry Ragman 
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    Status: Other Professional
    Posts: 540
    Joined: 08/30/2018

    Congratulations, you have an opportunity here assuming your wife is not sentimental about to the property. Not to minimize your concerns or the business risks, which are real enough, but the investment math is straightforward. How much are the new construction units selling for X how many units on the property – construction costs for the units – closing costs. Easy enough to find out the total construction costs; just ask three reputable general contractors for a bid.

    Now of course you will have the potential make more money if you take on a partner for the construction because you can share in the margin the builder will otherwise take as profit. However, unless you have a reason to trust your potential partner, I would go it alone if the math works. But I like to control directly, so that’s just me. Either way, the profit potential for the improved property is far greater than the land as a tear down. Well, assuming you have the time and inclination. (If not, just sell it obviously.)

    Last thought: I would structure this is a business transaction rather than an investment. Talk your wife into dropping the property into an LLC, get an EIN, separate business account; have business get the commercial construction loan, etc. Two issues: insulate your personal assets; leverage the real estate business tax rules over investments. In particular, if a business a nominal loss on the sale can be written off against your other income, but not if an investment. Goes without saying to look for all the write offs (start-up, 179, etc), but of course the real value is in the transaction not the tax benefits.

    I’d do this just for the fun of figuring it all out. Good luck!

    #214028 Reply
    Liked by Tim
    jfoxcpacfp jfoxcpacfp 
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    Status: Financial Advisor, Accountant, Small Business Owner
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    Last thought: I would structure this is a business transaction rather than an investment. Talk your wife into dropping the property into an LLC, get an EIN, separate business account; have business get the commercial construction loan, etc. Two issues: insulate your personal assets; leverage the real estate business tax rules over investments. In particular, if a business a nominal loss on the sale can be written off against your other income, but not if an investment. Goes without saying to look for all the write offs (start-up, 179, etc), but of course the real value is in the transaction not the tax benefits.

    Click to expand…

    I agree with your post to this point. This sounds like pure investment to me, not a business. And any profits would be subject to FICA taxes. Investment profits get preferential CG treatment as long as they hold for 1yr + 1day (shouldn’t be a problem). As for write-offs, they would add to the basis of the investment. What am I missing?

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #214033 Reply
    Liked by Tim
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 2818
    Joined: 09/18/2018

    You lost me here.
    “And any profits would be subject to FICA taxes. “
    Thanks.

    #214040 Reply
    Avatar Dont_know_mind 
    Participant
    Status: Physician
    Posts: 903
    Joined: 11/21/2017

    I would not do any subdivision or building-this really can complicate the taxation issues. Pick up a developer toolkit from accountants who deal in this area.

    I would want to make it clear that my Holding was as a investment only, that I could in no way be construed as in the business of developing it – or no plans submitted to council, no subdivision or building extra units.

    Development could generate income tax rates.
    I would want to sell it for the max price to a developer.
    If developers are not interested due to the block size, look at buying neighbours or talk to them about negotiating a line sale together that could be mutually beneficial.

    I wouldn’t look st the potential markup after development as something I could do easily. Subdivision and building are out of my wheelhouse. I only deal in buying and selling to developers.

    If the market gets hot enough, smaller developers much start showing an interest

    Is there much chance of it being zoned medium or high density residential in the future ?

    #214044 Reply
    Avatar Larry Ragman 
    Participant
    Status: Other Professional
    Posts: 540
    Joined: 08/30/2018
    Last thought: I would structure this is a business transaction rather than an investment. Talk your wife into dropping the property into an LLC, get an EIN, separate business account; have business get the commercial construction loan, etc. Two issues: insulate your personal assets; leverage the real estate business tax rules over investments. In particular, if a business a nominal loss on the sale can be written off against your other income, but not if an investment. Goes without saying to look for all the write offs (start-up, 179, etc), but of course the real value is in the transaction not the tax benefits. 

    Click to expand…

    I agree with your post to this point. This sounds like pure investment to me, not a business. And any profits would be subject to FICA taxes. Investment profits get preferential CG treatment as long as they hold for 1yr + 1day (shouldn’t be a problem). As for write-offs, they would add to the basis of the investment. What am I missing?

    Click to expand…

    Johanna and Tim, I confused landlords with developers. When I suggested treating the activity as a business, I was not talking about a Schedule C business. Rather, I was talking about landlord tax categories. One can either own property as an investor, landlord, or nonprofit. The category is driven by motivation and behavior. If one works at being a landlord “regularly, systematically, and continuously” then one’s land lording can be categorized as a business.

    Many tax advantages to owning as a business. This issue is independent of legal structure. A business can be sole proprietorship, partnership, LLC, etc. But Johanna, I don’t think FICA is due on either rents or capital gains even if operating the property as a business.

    That said, where I think Johanna is right and I was wrong, is that the project we are discussing is not a rental; rather it is a property development. Unless Tim is going into the developer business, Johanna is probably right that this particular development project should be treated as an investment. Sorry about crossing wires.

    #214047 Reply

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