Flip or Buy Hold Portfolio

21 Replies

This is a would you rather scenario. Its a time sensitive scenario, you can't choose both.

1. Flip, purchase price 110k, needs 40-50k, sell for 199. 

2. Rental Porfolio, 5 houses local same town 300k after taxes and mortgages are paid you profit 1500 if all rents are paid and no repairs are needed. 

Neither. 

That flip is horrible and unprofitable. 

The Rental Portfolio is a 6% return, which probably becomes a realistic 5% return. Pretty ****** return IMO for 5 properties. Too risky.

What do you want the investment to accomplish? 

 Fix and Flips are a lot of work for a few bucks and it creates short-term capital gains.  Fix and Flips are probably the riskiest type of investment if you don't know what you're doing.

Buy and hold gives you a long-term solution that gives you more tax benefits and hopefully appreciation down the road.  As far as the Cap Rate is concerned.  Where are you buying?  A 5-6 Cap is great in some areas but bad in others.

 Do your research.  Never jump in. Learn from others in your area that are accomplished.  I've seen too many people who watch too much TV and lose because they weren't patient.

If you are saying 300k out of pocket for those 5 homes, I'd say use that 300K and look for one large apartment instead of spreading it out over 5 homes. Don't have any economy of scale with 5 individual homes. That's a lot of work.

Originally posted by @Syed H. :

Neither. 

That flip is horrible and unprofitable. 

The Rental Portfolio is a 6% return, which probably becomes a realistic 5% return. Pretty ****** return IMO for 5 properties. Too risky.

 The portfolio is 300 i would buy then cash out refi. Each house is 1000 a month rent. Refinanced the mortgage and property taxes and insurance are 700 a month each. Each house clears 300 a month...

Originally posted by @Joe Villeneuve :
Originally posted by @Francis Branagan:

Originally posted by @Joe Villeneuve:

No

 Why

 The Flip is way too much work for very little profit.

The Rental isn't even poor enough cash flow to be considered a poor investment.

 The portfolio is 300k i would buy then cash out refi. Each house is 1000 a month rent. Refinanced, the mortgage and property taxes and insurance are 700 a month each. Each house clears 300 profit a month. I thought those were decent numbers? If i didnt refinace and left them paid off each would clear around 700 each..

The 300*12 = $3600 before vacancy and maintenance.  If you are vacant 1 month per property, which usually, when I inherit tenants they are bad and leave within a year, you loose $1000.  You how have $2600.  Maintenance will run you about 8% (mine was 4% last year and 10.5% YTD) 12000*8%= 960.  You now are at $1640 a year or $136 a month for CAPX and profit per property.  

Another way to look at, the 50% rule tends to be relatively accurate for houses for me.  If the mortgage is more than 50% of the rent.  I will lose money.  

On the 50% rule, the mortgage only includes principle and interest.  Taxes and insurance are part of the 50%.

Originally posted by @Francis Branagan :

Also on a flip, which ive done in the past, investing 150 to make 50 i thought was pretty good..?

Your not making 50. You have selling costs & buying costs: broker, lawyer, title; etc.

$110k + closing costs and Reno is $160-$170k. $200k minus 2% broker fee is $196k. Plus other closing expenses. $26k-$36k right there. 

Originally posted by @Francis Branagan :

 The portfolio is 300 i would buy then cash out refi. Each house is 1000 a month rent. Refinanced the mortgage and property taxes and insurance are 700 a month each. Each house clears 300 a month...

Have you done this before? It's very simple to make a spreadsheet that sounds great, realistically much harder. 5 single families are much more expensive, time consuming, and a hassle to deal with versus 1-2 properties that have 5 units total. Repairs are higher, taxes are generally higher, insurance is higher; etc etc.

Margin is too tight on the flip for my liking. Unless you already have lots of contingency factored in there.

I agree w some of the comments regarding expenses. You have to factor in at least 5% vacancy rates IMO, maybe 8% is a more realistic number. Also that doesn’t leave any wiggle room to have a property manager take over one day in the future. I made that mistake on my first fourplex and thought I would want to keep self-managing. Now I’m at 19 units and there’s no way :) at least for me w a full time job.

Also, check your mortgage calculations.  At 60k per house, the mortgage should be much less than $700 a month unless taxes and insurance are really high.  I have 1 mortgage for $64k that is $431 a month.  Even with taxes and insurance its only $610.

Guess I’m in the minority here. If you’re cash flowing $300 per property, that’s a great deal. I own 30+ units, and mine cash flow anywhere from $150-400/month per unit.
If people think $300/month cash flow isn’t good, then I doubt they’re an investor.

Originally posted by @Syed H. :
Originally posted by @Francis Branagan:

Also on a flip, which ive done in the past, investing 150 to make 50 i thought was pretty good..?

Your not making 50. You have selling costs & buying costs: broker, lawyer, title; etc.

$110k + closing costs and Reno is $160-$170k. $200k minus 2% broker fee is $196k. Plus other closing expenses. $26k-$36k right there. 

 I have those costs baked into these numbers. What are your typical margins of profit?

Originally posted by @Anna Buffkin :

The 300*12 = $3600 before vacancy and maintenance.  If you are vacant 1 month per property, which usually, when I inherit tenants they are bad and leave within a year, you loose $1000.  You how have $2600.  Maintenance will run you about 8% (mine was 4% last year and 10.5% YTD) 12000*8%= 960.  You now are at $1640 a year or $136 a month for CAPX and profit per property.  

Another way to look at, the 50% rule tends to be relatively accurate for houses for me.  If the mortgage is more than 50% of the rent.  I will lose money.  

With that being said. After refinancing keeping 25% equity in each, 15,000. If each house makes 1640 a year that is 10.9% return on my money without taking into account equity and tax benefits. What are good profit margins to look for with rentals?

I think I am within the 50% rule. Taxes and mortgage are around 3-400 a month, jersey taxes are crazy. Mortgage is only around 300. The current owner says he cash flows 1500 a month some might be better than 300 a month some might be less just giving you guys averages and rounding my numbers up slightly for protection.

  

Originally posted by @Francis Branagan :
Originally posted by @Syed H.:
Originally posted by @Francis Branagan:

Also on a flip, which ive done in the past, investing 150 to make 50 i thought was pretty good..?

Your not making 50. You have selling costs & buying costs: broker, lawyer, title; etc.

$110k + closing costs and Reno is $160-$170k. $200k minus 2% broker fee is $196k. Plus other closing expenses. $26k-$36k right there. 

 I have those costs baked into these numbers. What are your typical margins of profit?

 Margins depend on the size of the deal. On larger deals ($600k purchase + $200k Reno) about unlevered 20-25%. On Smaller deals minimum 30%, unless it's a simple quick flip. This is after ALL expenses.

The problem with small deals, your margin of error is much smaller. I can eat a $10k-$20k unforeseen expense (Contamination, burst pipes; etc etc) when my profit is $100k+. When you are dealing with a $200k house, it is much harder to eat that $10-20k. 

Also most people overestimate what the house sells for and what it costs to repair. Those 2 assumptions is where I see most flippers lose their shirt. 

Breakdown your costs to me and I can quickly you tell you if it's good or bad deal. 

Originally posted by @Dustin Hood :

Guess I’m in the minority here. If you’re cash flowing $300 per property, that’s a great deal. I own 30+ units, and mine cash flow anywhere from $150-400/month per unit.
If people think $300/month cash flow isn’t good, then I doubt they’re an investor.

it's not that simple. If this was a 5 unit building, I would agree. 

But 5 SFR in NJ & at this price point are EXPENSIVE to maintain, manage, and deal with taxes long term.

Also how are you financing these OP? SFR commercial loans are at higher rates. Getting 5 personal mortgages is difficult.