We just purchased our first SFL investment in Arizona and we are going back and forth on what we should do with it. Our plan was to follow the BRRR Method, but with interest rates right now, the cash flow is very low. Any advice is much appreciated if we should fix and flip or fix and rent. Here are the details:
Real Estate Agent · Mesa, AZ · Member since 2020 · 91 posts · 39 votes
3y
I would fix and rent for now. If interest rates come down and you are able to make a profit then sell it after a few years or so. It is a buyers market and home prices are continually declining. If you would like me to do some comps for you I am happy to. What you would be able to sell it for today will most likely go down 6 months from now.
San Diego · Member since 2021 · 16 posts · 11 votes
3y
In this market wi will be harder to do fix and flips since not many people are buying with interest rates so high. I think if you can cash flow a little bit and keep it during this market would be the best option in my opinion. Good luck!
Real Estate Agent · Mesa, AZ · Member since 2020 · 91 posts · 39 votes
3y
I would fix and rent for now. If interest rates come down and you are able to make a profit then sell it after a few years or so. It is a buyers market and home prices are continually declining. If you would like me to do some comps for you I am happy to. What you would be able to sell it for today will most likely go down 6 months from now.
Rental Property Investor · Philadelphia, PA · Member since 2021 · 13 posts · 5 votes
3y
If your costs and ARV remain where you say they are, you should be able to actually refi all your $156,300 out, as for 75% LTV you would need to be at about $208k appraised value. The payment at 6.75%-7% is a little north of $1,000, and I've lately gotten better rate quotes than that. You would on the other hand have $1,440 left over after management. You could also self manage to make up the difference.
I don't know what your taxes are, but after ballparking other costs, that seems like what would be left over for you to cover. For those other costs, you could subtract $200/mo for repairs & capex (~1% of home value per year), $100 for insurance (not Arizonan, so I'm not sure if this is right, it is for my market), and another $100 for vacancy, which works out to be ~6% which in a high demand area should be reasonable.
It's rather tight, but at the refi I suggested it would also be a "free house" for you. I think you have 3 reasonable options:
1. Take the $35,000 you just refinanced out, put it in a high yield savings account, rent the house now, and just pay the taxes until you can refinance again to a lower rate, or self manage instead. This is a good option if you believe rents will continue to grow in the area, and if your taxes aren't crazy high. I think risk is fairly limited if you are covering say $200/mo in taxes from that $35k. 2. Assuming you don't already have a long term loan, get one for less, for example $120k, leaving the $35k you spent on the deal in it, and rent for about breakeven. This is a good option if you already have a long term loan that you can just keep until rates improve to avoid double closing costs, believe that rents are likely more stagnant, or just are very intent on having some cash flow or at least breakeven. 3. Sell for likely that $210k, leaving you with $60k minus realtor fees (~$10k?), short term taxes (as high as 40%), etc. I think the only merit to this is if taxes in your area are really high meaning hundreds and hundreds in negative cash flow and a long path to profitability either due to this or rent stagnancy.
Since this house is in Arizona, which from all indications is a fairly strong rental growth market, and you could feasibly have the house for nothing into it with a good chunk of cash in the bank to cover the temporary negative cash flow, I would probably just go option 1 assuming the taxes are reasonable. I would think you will get to breakeven in a few years either through rent growth or a refinance.
