Bad Appraisal, should we brrrr or flip?

Question

Purchased a property a few months ago, this was meant to be our first official BRRRR but appraisal came in lower than expected and we are wondering what to do.

Purchased the property for $265,000 (This included $212,000 from the bank and about a $60,000 private loan) The home is a SFH that we have speced to convert to an up/down duplex.

The appraisal came back at $421,000 (which was for a SFH with an ADU). This means that we've got about $124,000 in remodel budget from the bank to work with. Based on the estimated project costs, $124,000 is at the lower end of our budget, I think we can do it, but there will not be much wiggle room.

Let's say we can complete the project in that budget. That means we are sitting with a loan from the bank for $336,000, but we need to pay back our private lender the $60,000 out of our own pockets (potentially a refinance of another property).

If we keep the property, we are estimating the total monthly income from both units to be $2750. The mortgage would be $2140+insurance+tax+buffer = $2650. So we are looking at $1200 in cash flow annually.

Other option is to flip the property. After talking to our real estate agent, I'm thinking we will be able to clear $500,00 with potential to $550,000.

As much as I want to be a buy and hold investor, it seems like there has to be a better deal out there. We are leaning towards selling, but I want to know if anyone has a different take.

Sarah Linkenhoker · Answer

Thanks @Patrick Britton. I definitely don't have regrets about buying the property. We have learned so much over this process and I think we are going to launch into the next one with a bit more knowledge.

I almost didn't post this, because I was 90% sure we were going to sell, but good to hear that others aren't seeing something here that we aren't.

Patrick Britton · Answer

That $1200 of net cash flow per year is quite frankly, and with all due respect, pathetic for a property worth $421,000.  that cash flow will get eaten up in the first few months with repairs and maintenance and other items that are bound to require lots of money.

In my humble opinion, what you want to be is irrelevant in this case.  If you can sell for $500,000 to $550,000 I would sell as soon as possible and move on to another deal.  Don't get discouraged or be upset though, this happens to all of us at some point.  We purchase a property with certain intentions, then something happens and we end up having to change the entire game plan.  This is one of the many significant downsides to any investment in real estate but if done correctly can actually afford you more and/or better options.

so yeah, sell this thing and get as much as you can and move on to something far more lucrative.