Real Estate Investor · Orlando, FL · Member since 2013 · 35 posts · 0 votes
Hi all, curious to see what you think I should do with this deal:
Price: $49,000
Renovations Est: $44,000
ARV: ~$145,000
Projected Rent: $1,000/mo
What would you do with this property? Fix and hold or fix and sell? Is there a way to evaluate what would be more beneficial?
As a note: I got started in RE investing three months ago and currently have three single family properties. I am always looking to add more to my portfolio, but I have also had an interest in getting into flipping. I'm leaning towards flipping this home in order to have quite a bit of cash for my next purchase, but don't want to pass up a super cash-flow positive property at the same time.
Rental Property Investor · DFW, TX · Member since 2013 · 953 posts · 910 votes
13y
I am biased because I am a buy and hold investor and haven't done a flip but lets look at the numbers with two rules used on this website: 70% for flips, 50% rule for buy and hold.
70%Flip
ARV-145,000 x 0.70 = 101,500
Subtract repairs- 101,500 - 44,000 = 57,500 which is max offer
57,500 - 49,000 = 8500 So that is the buffer between what the 70% rule says you will make a profit. Best case scenario you make 52,000 in the flip. Not a bad deal but this doesn't factor in financing which can change the profit.
50% rule
Half of the income goes to expenses, the other half you have to pay the mortgage: 1000/month = 12000/year
=6000/year toward expenses
=6000/year for Net Operating Income
If you buy this house cash, Cap Rate = NOI/Purchase price
6000/49000 = 12.2% = Pretty damn good
However-
Assuming you get a loan and put 20% down, that's financing of 39,200. Even at 7% interest for 20 years (pretty bad loan terms with today's interest rates) the payment would only be about $300.
Equity dividend rate (cash on cash) = Before tax cash flow/down payment
*The 50% rule usually estimates high so when its all said and done these percentages should actually be higher.
Summary:
Either way you go you will make money so it comes down to what you are more comfortable with, what the market says, and what you can get financing for. You say you have single family properties already so you know the rental side; maybe stick with that and build your portfolio. Or take the money from the flip and reinvest. Like I said I am biased because I am a buy and hold kinda guy but with single family homes you run the risk of long vacancy periods. Another idea, lease with option to buy. That's the great thing about real estate, so many ways to make $$
Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
13y
Trevor Martin I would vote for flip it. I am a firm believer in hold and rent, but your cash investment vs rate of cash return is not very good, take the profit and use it to buy 2 more rental units with financing.(leverage)
New York City, NY · Member since 2012 · 60 posts · 14 votes
13y
Both ways flip or rent would make you money.Renting depends on how fast you can get a tenant and having a good property manager.If this is not possible flipping will be better.
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
13y
Trevor Martin
I like buy and hold a lot, still own first rental that I bought many years ago. One of the tenants there has been living there since 1984, with not a day of vacancy in that unit.
But I also like flip, but I don't like paying the 50% tax on flips.
One item that I would question is the $44k rehab. That seems like an awful lot in relation to the purchase price and the ARV. How confident are you in these numbers?
I just completed a rehab spent about $25k on a $150k house, sold full price within a couple weeks. Another that I'm currently working on budget for $25k on a $180K house. That includes all new kitchen cabinets, flooring, granite countertops, stainless appliances. new paint, and detrashing with three 30 yard dumpters.
Its fairly easy to estimate hard costs like materials and labor, but what often gets overlooked is soft/holding costs like utilities, insurance, taxes, permits, grass cutting, costs of funding, transportation, survey, selling costs, commissions, advertising, time delays and contingencies.
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
13y
Originally posted by Ned Carey:
I don't see a property that costs $93K and only rents for $1,000 as a "super cash-flow positive property" I would flip it.
And the $93k is your investment, not the value. It will be worth $145k. $145k netting $6000 a year isn't great. Flip and position yourself for two or more good cash flowing units.
Investor · Houston, TX · Member since 2013 · 4 posts · 0 votes
13y
My first post on BP... wooo hooo...
Buy and hold is my personal strategy, and for this house, if the numbers are right, I say flip it.
Peter Moslar's analysis left out the cost of the rehab, which makes this deal painful. I have a $90k investment (my first) that rents for just under $1100. It's a money loser (aka education). If it were worth $145k, it would have been gone years ago, and I'd have two GOOD deals in it's place.
Let's assume it's going to cost you $100k to get into this place (say you're all cash for this one.) If you sell it for $145k, and assume you sell through a full service agent, you're going to clear $36k. Take 30k as 20% down on the next $150k.
And if you can manage that renovation cost down, you'll do even better.
IF you hold it, it will make money for you for a long time after your break even, assuming a 40k mortgage. HOWEVER, your break even on the money down (assume 9k) closing costs (assume $2k) and the renovation ($44k) is LONG. $1,000 income
- 300 mortgage
- 100 taxes (assuming)
- 100 insurance (assuming)
= $500 cash flow
110 months to break even on your cash. That's over 9 years, IF everything is perfect.
Confirm the "sell fast" comps and rehab costs. Be sure. And flip it.
Real Estate Investor · Orlando, FL · Member since 2013 · 35 posts · 0 votes
13y
Thank you Ned Carey Bryan Hennen Brad Friesen Peter Moser Jerry W. Ryan Moses David Krulac Jon Klaus Alexander Stafford, all of your input is very appreciated.
I think I'm going to go with a flip and use that cash to purchase a couple buy-and-holds that cash flow a little better.. or maybe even another flip! While flipping is something I'm new to, it's good to diversify and get out of your comfort zone.
Real Estate Investor · Charlotte, NC · Member since 2011 · 252 posts · 56 votes
13y
1031? How about a slow flip and and trade up? Pros you make some rental income and save a bit on taxes but cons could be the renters, market cooling etc. I say flip it quick and get into another flip or a rental.
Real Estate Investor · Orlando, FL · Member since 2013 · 35 posts · 0 votes
13y
Jim M. This is another big plus. I've had my eye on an apartment building over the past month or so, so I could sell this flip tax-free and use that $145k as a down payment if the seller will come down to my terms
Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
13y
Part of the equation is how are you planning to finance the purchase and rehab?
With that much rehab you aren't walking in and getting a 4% 30yr loan.
You need cash, private money or a commercial loan.
I'd assume the end game on a rental would be a refinance to pay off the expensive loan or cash out.
If it is a cash out you'll probably need to wait awhile.
Also keep in mind the payment will be higher then people are saying since it will be on like $90-100k not <$40k.
For okay cash flow I'd flip it and use the profits to buy better cash flow on a place that needs less work.
Pittsburgh, PA · Member since 2012 · 140 posts · 37 votes
13y
How about fixing then a cash out refi (if the newly refi'ed mortgage still provides cash flow). You generally have a 6 month seasoning period, but that's not bad compared to the 12 months for a 1031. Im a big fan of "if i work hard enough to find a good deal, why give it away"?
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
13y
@Ian M. Jim M.
There is no requirement that the relinquished property must be held for a minimum of 1 year to qualify for a Section 1031 exchange. In fact there is no period specified in the IRC.