With the buy-sell market going through all sorts of gyrations because of the sub-prime melt-down, there seem to be very few choices left for real estate entrepreneurs who have been making a living buying, fixing, and selling houses. They can buy them and sell them by holding “paper”, but this has severe income tax consequences. When property is bought for the purpose of resale, any installment payments are considered to be cash, and tax is due.
The way that most dealers deal with this problem is to immediately sell off Notes taken back on a sale to someone in the business of buying them at discount. This way, they get cash with which to buy more houses, but they also make a lot less money per transaction. The remedy is to do a lot more transactions. Bottem Line: They work much harder for their profit.
Houses that have been held for investment or for rent can be sold on installment sales and the tax bill will be stretched out over the length of the installment period. These same houses can be traded for other real estate tax free without the need to go to the bank. The ideal trade target would be someone with a larger house who needs to move down, or one that needs some fix-up to make it livable. This then can be rented for more money.
Another likely house trading prospect would be someone with too many houses to manage who would be willing to trade several of them for a free and clear house. I’ve been on both sides of this kind of trade a few times. When I’ve had plenty of income, I’ve traded a free and clear property for the equity in several leveraged properties. By doing this, I sacrificed cash flow from the free and clear rental for more tax shelter and potential profit from apprecation on the leveraged properties. When I needed cash, I reversed the process.
Of course, in order to make exchanges or installment sales so as to pay the least taxes on profit, a house has to be held at least a year as an investment or rental. With a mortgage to pay, investment use isn’t an option; the house must be rented. That’s the only remaining way that I can see that people can hang in there awaiting for the next buying binge to form. If you’ve got plenty of cash flow, you can hire managers to do all the heavy lifting, but if you need cash flow, you’re gong to have to manage your houses yourself.
That’s the bad news. The good news is that learning landlording skills you acquire will open up the entire field of creative financing, finding investors who will provide private funding over the long terms, and ultimately, becoming wealthy through property ownership.
