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$25,000+ in Non-Taxable Profit!

by Chris Benedict, Philadelphia, PA   

I am not a big fan of so-called creative financing only because it requires so much work and a lot of risk. However, creative financing can work, though I have never done a "no money down" deal.

I bought my first house just after my 25th birthday. It was a real fixer-upper. The home was a 115-year-old farmhouse just minutes outside of Philadelphia. It had been on the market for over a year, originally for $105,000. By the time I found it, it had been reduced to $95,000.

I knew in good condition the house would be worth at least $120,000 and the assessment was for $132,000.

I offered $80,000 with 3% back towards closing costs. I put just $4,800 down, the seller's 3% was $2,400. All in all, the seller paid for 33% of my closing costs. I was left with a low-interest loan for just $77,600.

Now ideally, I should have fixed the place up quicker, but I was out of work (due to layoffs in construction), and my fiance urging me to go back to school to finish my degree. So I rented rooms out to friends for cheap, and lived there for two years while repainting, putting in new bathrooms, carpeting, etc.

I took a second loan on the property for $20,000, of which $5,000 went into the house, $3,150 went into another property purchase, $4,000 went to pay for my education, and the rest went to my brother for his labor to help fix the house.

I never once had a contractor in the home other than to put in a new furnace and hot water heater.

Just this past July, I sold the house for $128,500. I gave the buyer 3% to close, and $7,000 for a new roof (it was 30 years old) for a net selling price of $117,645. I got a reduced commission because I deal with the same Realtor, so I only paid 5% commission.

I saw $111,762 at the end. From that came $74,500 (first mortgage) and $20,000 (second mortgage) for about $17,000 profit.

But wait, don't forget! I used $3,150 of the second mortgage on a property I am now selling, plus I used $4,000 towards my education, plus I got my escrows back! All in all I netted over $25,000 in non-taxable income (because I lived in the property for over two years), plus about $12,000 over two years in rental income.

P.S. Only after I bought the house did I realize I had been given two deeds. The side yard was really a separate lot. Due to zoning conditions, I can't build on the lot, which technically makes it worthless right?

Wrong! It's assessed at $45,000, which I'll never see. So when I sold the house, I kept the lot. After I get married, I will donate the lot to a church for fair market value (a little more than $20,000), and I will be able to use it as a tax write off over several years! I did all this while completing 65 credits of education to get my B.A. Not too bad for a first property!

 
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