Should I stay or Should I go..... Come On and Let Me Know

13 Replies

I have a high quality problem and am interested in some feedback from the BP community.

We bought an REO several months ago and just go the former owner out this week. The house is full of junk (typical FC) but other then needing 3-4k in paint and carpet it is ver sound (roof might be older but looks good for at least a few more years).

So here is our situation:

Bought the house for 12.5k, 

Rehab 4k Max

Mechanicals good (other then older roof) Water heater is newer, furnace is decant vintage, actually has central air.

Rents are $1,000 a month

Resale price estimate list for 60k sell for 55k less closing costs.

So do we put this in rental mode with a PM and cash flow it or sell it and go see if we can find 2 more in it's place.

What rules and guidelines does everyone use to evaluate deals like this?  Either way it is a home run but my partner and I had a long discussion about trying to come up with some kind of soft rule for deals like this, do we keep it if it meets the 4% rule, 3% rule, if gross rents would buy the house in x years its a keeper, if not sell?  Other ideas?

Thanks for your input.

I think do you want to hold the asset long term is the key regardless of cash flow. It could be in a dumpy area. The 55k might be topping out the assets value today and in the future.

Conversely a higher quality asset in a very desirable area might throw off low cash flow at first but have higher year over year rent growth and appreciation potential. You can hold that long term and refi out the cash.

I just wouldn't be excited about holding a portfolio of medium to low quality properties with high cash flow. I would rather just get the cash and build up for better quality long term stuff. 

I think it really depends on where you are in your investing career.  For me, that is a screaming deal because I am looking for cash flow and want to leave my full time J.O.B. ASAP. But if you can pay your bills just fine without working and are looking to build long term wealth, you may just want to flip it and put the capital into better quality long term stuff as Joel put it.

Given the neighborhood the likely hood for significant appreciation probably is not there. 

From the numbers if you sell it for 55k you would make around 38,500.00

If you have nothing go wrong and keep it completely rented you would be paid off in 17 months. It would take you 4 years and 7 months at that rate to profit 38k. Do you want to hold it for 4+ years? Is the cashflow more valuable in your financial position or the liquid assets? Obviously most investors set aside a certain % for repairs. Not to mention is that roof going to last 5 years plus? 

Personally I would attempt to cash out. If that doesn't work you have a great rental. Also don't forgot to consider the tax ramifications of either approach.  

Ryan Dossey, Real Estate Agent in IN (#RB15001099)

I am not to worried about taxes on this particular deal because we just started our LLC last year and had a lot of expenses. We do have another deal that looks similar or better in Greenville IL so if we cash out both of them we will have a tax consequence.

The cash flow looks good. If you can afford to keep it and continue buying others like it, that's what we do. When you run out of cash, get some HELOC money pulled out of them and go again. When the deals dry up (like they have in Denver), pay off the HELOCs and wait for the next cycle.

I would say it depends on how much time you have to spend looking for the next flip.  If you like finding these deals and moving on, then you should cash out and put the money towards the next deal.  If you don't have much time then hold it for cashflow.

Here's the question I always ask myself and others.

If you sell the house what will the proceeds be working as hard for you as they are in the house? 

For us!- We get more out of the house through the long term cash flow than the short term "profit" by selling! 

If we sold all the houses are "equity" wouldn't produce even close to the current cash-flow. So that's how I always decide.

Originally posted by @Bob E. :

@Charles Marchiondo Interesting idea on the HELOC, we own the ouse free and clear but is is held by our LLC, do you know if banks will do a HELOC loan to an LLC?

 Yes most will but some might require a personal guarantee but that's no big deal.  The house is their collateral so pretty simple.  Some will have no cost 60% ltv and another might go 80% but charge points or higher intrest, etc.... 

Originally posted by @Charles Marchiondo :
Originally posted by @Bob E.:

@Charles Marchiondo Interesting idea on the HELOC, we own the ouse free and clear but is is held by our LLC, do you know if banks will do a HELOC loan to an LLC?

 Yes most will but some might require a personal guarantee but that's no big deal.  The house is their collateral so pretty simple.  Some will have no cost 60% ltv and another might go 80% but charge points or higher intrest, etc.... 

If you purchased the house in an LLC for asset protection or to limit liability a personal guarantee may well be a big deal. It may, in fact, provide an easy means for a lawyer to pierce your LLC in a lawsuit. I am not a lawyer but I would recommend consulting one before giving a personal guarantee on a loan.

I think it just comes down to whether or not you want to be a landlord, or if you want to just sell it and move on.  If you don't really WANT to be a landlord, but are just thinking about it because of the numbers, will that really make you happy in the long run?

Our goal is to have 50 assets (Rentals or Notes) netting $400 a month by 2018. 

We ended 2014 with 6, 1 cash flowing and the rest in the pipeline, this property being one of them.  We are targeting to take that to 12 in 2015.  if we sell the property we could buy 3-4 additional assets, covering most of our goal for the year.

Bob

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