Do these numbers work for a rental or flip?

Question

Do these numbers work as a SFH rental at $950 per month or should I flip?  I've talked about a rental for some time, but I need to make sure the figures are correct.  Any insight would be awesome.

Monthly             Total (Description)

$253                                   $50,000   Purchase

$377              Insurance and taxes

$ 80               $10,000   Repairs & Closing (Interest for using HELOC for down payment and repairs)

$ ?                $    ?         Maint. & Vacancy  - What is a good number here?

$710             Monthly Expense

If I flipped the property I would need to dump in $27,000 for holding, repairs, and closing.  The profit would be about $13,000.

What is the better of the options?

Brian Fazekas · Answer

This property is less than a mile away and has four bedrooms and 1.5 baths.  It could be a nice place if I spent the capital to fix it up.  However, I don't want to fix it up to the extent of being a flip, because the rent won't justify the costs.

The flip analysis includes six months of holding costs, 6% commission, and 3% closing fees and selling at $100,000.  If it sold less than six months, I make more profit.  I also have a cushion of $3,000 of extras that could pop up.

Steve Vaughan · Answer

I'm leaning more toward the buy and hold or wholesaling/assigning it. Depending on where you are financially and what your goals are.  Like @Bill Jacobsen mentions, are sales commissions included in your $13k number?  If they are, does $13k change your life more than a long-term break even rental with some tax advantages?  Do you want to be a landlord?  Is this a bread and butter 3/2 in a blue-collar neighborhood?  Will the property after fix-ups still be a bear to maintain and keep up?  Is it in your back yard, easy to get to?  I would rather break even on a rental that fits for amenities and location than do the work of a fix and flop and be left with nothing (but lessons!).  Sometimes property types and location determine exit strategy more than others and of course view all deals as to how they fit into your overall financial plan.  Please keep us posted on what you decide to do!

Bill Jacobsen · Answer

First, as a buy and hold:  Purchase price of $50,000 + $10,000 repairs and closing or $60,000 to make rent ready.  Monthly rent of $950 less $377 tax and Ins less $125(my estimate of maintenance and capital reserve) less $135(my estimate of management cost) less $48(5% vacancy) = 265 in monthly ROI.  $265X12 = $3,180.  Divide that by $60,000 gives you a cap rate of 5.3%.  I don't know your cost of money but I like my cap rate to be 3 percentage points above my cost of money.  That means that unless my cost of money is less than 2.3% I would not buy as a buy and hold.

It sounds like as a flip your cost would be $50,000 + 27,000 or $77,000.  Adding $13,000 for profit gives you a selling price of $90,000.  I don't know if this includes all costs of selling including commissions.  I budget 20% for profit so I would demand .2X$77,000 or $14,400 in profit.  This property would not qualify for me as a buy and hold or as a flip.

Good Luck.

Bill

Scott Nipp · Answer

Well...  You also have missed holding anything back for CapEx and property management.  I think most people generally use 5% as a guide for maintenance, vacancy, and CapEx each and then another 8-10% for property management.  These additional expenses are going to pretty much wipe out any monthly cashflow that you might have achieved.

Monthly expenses      $710

Maintenance                $48

Vacancy                       $48

CapEx                          $48

Prop Management       $76

New Monthly Exp       $930

So personally, I would think that this doesn't make a good rental option with the other numbers that you have provided.  Now, the rub here is how much of that $10k is closing costs and how much is rehab?  The reason I say this is that you might be able to reduce the closing costs with a creative financing option like "Sub To" or owner finance if this is possible.  The other thing is concerning how much rehab you are doing and is this absolutely necessary to command the $950 rent or does this maybe put you at a level above the other rents in the area?

Unfortunately, even if you can eliminate the closing costs and rehab budget, AND you self manage and choose not to factor this in (not recommended), this is about the only way I see you getting this to a decent cashflow of close to $200/mo.  Of course the likelihood of being able to completely eliminate the rehab and closing costs is probably close to zero, and that puts your cashflow with self management and not factoring that cost in (again, not recommended) only about $100/mo so this really doesn't strike me as a good rental property option.

I would take the $13k and call it a day.  The only other possible option on this for me would be to owner finance it out to a buyer if you can make those numbers work, but that might be just as tight or worse than the rental option.