Hold or Flip -- Need some advice

22 Replies

I currently have a SFR undergoing renovations that should be complete by mid-August. I purchased the property using hard money (including financing most of the renovations) and now I am trying to decide whether to flip it or refinance and hold it for a year. I started out with the intent to flip, but after more investigation on taxes and a little unsure of which direction to go. This is my first deal, any advice would be great appreciated. Here are a few numbers on the deal:

- purchase price 140K

- estimated ARV 230K

- renovations 40K 

Jason,

Market rent is around 1250, PITI will be around 1050 for traditional refinance or 1150 for cash out. This won't be a cashflow property, but not sure if holding it for a year to avoid high taxes is worth it.

I would guess that, unless the value goes down in the next year, you'll probably be ahead by a little bit by holding it for a year. What you'll have to decide is whether that few thousand dollar difference is worth the hassle of being a landlord.

You really need tenants with nice furniture that live clean and are very cooperative. Most will be resentful of being sold out from under them. Normal tenants will not want to save $100 month to move in a year...or whatever you’d offer. I have tenants that tried to buy their last place to avoid moving when their landlord wanted to move back in their former home. Rent to sell complicates things. Retail doesn’t want to wait for a lease to end and it may cost you 1-2k to buy out the lease for a sale... unless you write it into your lease. If you personally move in that could work.

Sounds like you have not defined your criteria for a buy and hold. It's vital to do this if you want to achieve long term success. Personally, I only buy with the intent to hold forever, and I am a BRRRR guy. Sometimes the renovations don't go as smoothly as I hope they will, and I go over budget. If that happens and the property won't cash flow to meet my criteria, I sell it and take the cash to the next deal.

Since you are asking advice- I'd define what you expect rent vs monthly payments to be, ie, how much cash flow you require on a deal. If you can't get there, sell. If you can, you keep it. If you get a great deal every time, you should have multiple exit strategies available to you. 

Best of luck!

1. Option 1: Sell and pay the taxes. After all, you'll not have that much tax to pay on the 40K profit.

2. Option 2: Refi into long term and sell as owner finance. You'll get your money out and defer the taxes. Plus, the house might come back to you.

Whether you hold it or sell it really depends on your ultimate goals doesn't it?  It also depends on what you are going to do with the proceeds should you sell it and the prospects for appreciation/rent growth for the property in the short and medium term.  

Originally posted by @Corby Goade :

Sounds like you have not defined your criteria for a buy and hold. It's vital to do this if you want to achieve long term success. Personally, I only buy with the intent to hold forever, and I am a BRRRR guy. Sometimes the renovations don't go as smoothly as I hope they will, and I go over budget. If that happens and the property won't cash flow to meet my criteria, I sell it and take the cash to the next deal.

Since you are asking advice- I'd define what you expect rent vs monthly payments to be, ie, how much cash flow you require on a deal. If you can't get there, sell. If you can, you keep it. If you get a great deal every time, you should have multiple exit strategies available to you. 

Best of luck!

Corby,

Thanks for the feedback. As a new investor I have two goals. To continue to build capital while also slowly acquiring cashflow properties. I have a great cashflow deal set to close end of August.  The deal in this thread was supposed to be one of the "build capital" deals by flipping. Ss I have gotten further into the project and I am seeing the reality of the numbers (including taxes), it has made me question if I would be better off to do a cash out refi at 6 months and then sell after the first lease ends to maximize the payout and reduce the taxes. In this scenario, I would be able to get most of my cash back out, but I would only break even monthly. I live in Asheville, nc and our current market appreciation is ridiculous.....so there is the risk that it slows down. So, all in all, I am learning how hard making a profit can be and questioning my original strategy. Any additional thoughts??

Originally posted by @Costin I. :

1. Option 1: Sell and pay the taxes. After all, you'll not have that much tax to pay on the 40K profit.

2. Option 2: Refi into long term and sell as owner finance. You'll get your money out and defer the taxes. Plus, the house might come back to you.

Updated almost 3 years ago

That's interesting. How can you owner finance without owning it free and clear?

@Costin I. That is interesting. Two questions: 1. I am afraid the 40k profit gets eaten away quickly w realtor fees and taxes. Isn't the tax burden on flips upwards of 30% +?? 2. How can you offer owner finance on something you dont own free and clear?

Hi @Amanda Williams - you are definitely thinking through all of the possibilities, so I commend you for that. If a property doesn't cash flow the way you want, why would you keep it for a year? I understand your concern about taxes, but on a flip, you pay income taxes at your standard rate. If you keep it long enough to avoid those taxes, now you are looking at either paying capital gains and depreciation recapture or doing a 1031. Depending on your situation and the amount of profit you are dealing with, any of those strategies might be just fine, but if you plan to sell at any time, they'll get you with the taxes one way or another, unless you 1031 until you die. 

This is why I love the BRRRR strategy- you get the benefits of pulling cash out of a property without selling it and without the capital gains or income taxes. In order for it to work, a rental has to cash flow the way you want it to. If you are strictly looking at building capital so that you can start putting bigger down payment down or paying for rentals with cash- my two cents would be to get in and out as fast as you can- pay the income taxes and build that capital quickly.

Best of luck!

sell it and move your capital into a cash flowing property, if you want rentals. To be a landlord for a year to save a small bit may not be worth it. Besides, you have to consider refinance costs. 

@Amanda Williams One way or another you will pay taxes. You might be able to defer them through owner financing or 1031 exchange (not sure how that would work if you have HML) but ultimately you have to factor them in your investing strategy. And if you sell you'll pay for closing, commissions, maybe excise taxes, etc. which you should have factored in your analysis of the deal before acquisition. So, looks like you'll also pay for your "tuition" - if a deal doesn't make sense as a rental, most likely will not make sense as a flip either (since a rental you don't buy and sell, just buy).

Anyway, that's why I was saying you'll not have that huge of a tax - based on your numbers, when all is said and done, your net profit isn't going to be huge. Yes, the tax on flips is at your personal tax rate, so that depends on the rest of your income.

To owner finance, you'll have to refinance out of the HML. Then you put it on the market for sell with OF and wrap your mortgage into another note to the buyer. Depending on your local market, you might be able to request enough down-payment to recover your money in the deal and/or higher APR than your note, thus realizing a little profit from the differential. It's like being a landlord, but without any of the landlording problems. You become the bank. And if they default, you foreclose on the house, get it back and repeat. Due your diligence, find someone local who done it, make your calculations and see if it's worth.

thats looking like 20-25k max profit on flip..to be taxed.. or refi cash out 6k in fees..and the cash flow on that would be a few hundred or break even annually?

...or from an emotional standpoint, sounds nice to own in that beautiful area and airbnb it..

nice options..

- make sure you qualify for the refi cash out ahead of time.....

the first rehab flip aint over though until its over..congrats on learning.....there might be more unforseen factors coming to sway your decision.

@Amanda Williams , I'm sure the HML isn't cheap. and refinancing just to get rid of that for a few months might not make sense amortized over time. That could be 30-40% of the tax you would pay by just selling.

But if you've really had  the intent to maybe hold this property for productive use and it's just not penciling out then you may want to think about a 1031 then or now if you end up selling and then buy your next hold property with financing that will let you keep it.  That would defer all tax into the next property and with and additional $50K or so to use as a down payment it may make more sense that time.  Property you purchased specifically to resell does not qualify for 1031 but I hear you waffling between two strategies.  Fly it by your CPA.  

Originally posted by @Amanda Williams :

Jason,

Market rent is around 1250, PITI will be around 1050 for traditional refinance or 1150 for cash out. This won't be a cashflow property, but not sure if holding it for a year to avoid high taxes is worth it.

 I'd sell.

All,

Thank you for all of the great advice and thoughts. So great to have a group to get feedback from. After reviewing all of your comments, I met with my CPA yesterday and reviewed scenarios. We landed on selling as a solid option that shouldn't have a significant tax impact with the new tax law (and the fact that this will be my first flip). Now, trying to get the project finished and dealing with the various challenges of managing contractors :( !! 

- Amanda