I have about 20 rentals that are generally all rented every month. Net cap rate on them are about 5-6% yearly. In the past 2 years I've stepped up doing flips and have found them to be more profitable and frankly more fun. Each one usually nets 9-15% pre tax ROI and if I do several in a year it's much higher once combined on an annual basis.
My question is this - Should I take a LOC out against maybe 5 of my rentals (they're all owned for cash) and use that money for additional flips. Or sell those 5 rentals (at a profit), and use that money for flips. Both have pros and cons. LOC allows me to keep the rentals, but that comes at a cost - $10k setup fees and ~4% APR on what I use.
Both. The rentals will give you cash flow. Flips, although they appear to give you more return, is a one time return. In other words, you are going from flip to flip. When you stop flipping, where does your income come from?
Back to my answer of both. Take the money from the REFI and use it for the cost of a flip. Then, refi that one and use it again. The beauty of this is you get to tap both wells...holding and flipping, but instead of flipping to move forward, you are just tapping into our equity.
The costs of selling rentals will be about 7% counting commissions + you will lose 5-6% pretax against $10,000 set up fees and 4%(pretax). You are taking on slightly more risk with the LOC. Also you are losing any appreciation if you sell.
Do whatever you want.
@Shawn Walters If you sell and have a blast making a lot of money on those sexy flips, what will you do with the money that will give you residual income? Can you make enough to live off of the rest of your life? What happens if you get tired of flipping houses or if market conditions make it less feasible as a main source of income?
It sounds like you may want to consider trading to properties that will be more profitable. Nothing against having some fun, get some of that, but don't throw out the baby with the bath water.
Thank you all - great advice! I will take the LOC right now and that way if I decide to stop doing flips or whatever I still have those passive income producing assets! Thanks again!!
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