Very simple flip or rent it, get an equity loan and buy 2 more rentals?

5 Replies

A little about my situation is that I live in a depressed area of the United States and have been investing in just buying rental properties and managing them myself. I only have 2 right now and so far have avoided all the nightmare scenarios experienced by some of you. My renters have been clean with the property and have been on time with their rents, even if they will be a day late they will text me. Because of the area I have a rule of about $25,000 that I will spend on a rental property, that is including any rehab work. Living in the rust belt there is more of a demand of people looking to rent so it is fairly easy to find people, but I am a little bit more thorough with background checks so I may sit on a property for a month and wait for decent prospects.

That being said my scenario (A): I just bought a house that was up to sell quick because the previous owner is elderly with dementia without  any kin. I spent $23,000 cash for it. The house is in very good condition, it was well maintained and is in a decent neighborhood. I can sell the house quick for $50,000 (appraised for $60,000 on auditors site) with maybe investing $2,000 so I would have a 100% return on investment, (there are 2 people I now that are interested in buying right now). I can just sell it quick with great profit and would be able to buy 2 more rental properties without financing @ about $25k. Reason I wouldn't ask for the appraisal price is the competition of other houses on that street are all around that price and I am just undercutting and selling to a friend to make a guaranteed quick profit.

scenario (B): Now the other option I was considering was keeping the house and renting it. I would get $650/mon for it and I would take a HELOC on it for $50,000 @ about 6.50% ARM and buy 2 more rental properties from the HELOC and say get approximately $550/mon per house. I would take the rent from the original rent and put it toward payment on the HELOC and still have about a $500/mon profit, expecting payment around $150/mon, give or take a few since my minimum payment would only have to be on the interest until the ARM is up but then I just refi anyways to keep the payment low. My concern is however that I am not sure I would be able to sit on the house while renting through the years and be able to make the same amount of equity on the house down the road as to what I am offered now. The city I am in has little chance for bouncing back and for property values to rise again. There is a better chance for the values to drop some more then remain stagnant.

My gut is telling me to go with scenario (B) for the long term rents, but I keep thinking about how easy it would be to make the quick flip now. Any advice or experiences like this encountered?

My two cents worth: Will this house hold it's value for at least a little while? Perhaps you could sell it down the road if needed, and for now use it to get two more houses. Now you are building equity and cashflow with three houses instead of two! Then sell it and invest in an area that shows more promise of appreciation?

Best of luck to you!

@Mike Evatz

Hi Mike - I originally grew up on the south side of Youngstown, so Canfield is like the beautiful suburbs as far as I'm concerned ;) I agree with you long term views for the area, I got out as soon as I could at 21, as I felt that the area itself is in a steady state of decay. I highly doubt that homes there will see future appreciation, as I see no driving force.

Anyhow, the real question is, what do you want to do with your life as an investor? If you like being a landlord (as I do), Option B gives you the greatest future benefit. While the house itself may not be worth quite as much in the future, you get to collect rent every month to offset the depreciation. Additionally, the taxing of the rental income vs the sale of the property will be more favorable over the long run. This is the option I've personally selected for myself, but I moved to a different area where I expect future appreciation to be acceptable.

If you don't want to have a large rental portfolio, there is nothing wrong with taking a 100% profit and moving onto the next project. It doesn't take too many deals like that to build up a huge nest egg.

-Christopher

Wouldn't it be nice if things were only that simple? Do not forget Uncle Sam will be there to take his cut in taxes should you decide to sell. However if you have a good number of years left to live you could think that your mortgage or mortgages will some day be paid off and you could have two rental incomes coming in versus only one or however many you have coming in now they will be increased by one more unit rents. 

Thanks for the inputs. Uncle Sam always has his hand in the cookie jar, that's for sure.

@Christopher Brainard , these houses are on the west side of Youngstown.

 As for holding any value.... That depends if you believe in miracles. City population has been at about a 20% decline every ten years according to census. The house has lost about $10k in a 5yr span on the auditor site from recent appraisals, but that was also through the recession. Unfortunately this area doesn't rebound like other areas of the US.  I am definitely looking to expand my portfolio. Realistically I would like to have 10 more units in a 5 year goal and settle with about 30 units in 10yrs.

@Mike Evatz

I would have to lean towards scenario B personally.... I'm here in the Youngstown area as well, Boardman actually, and though I agree that we are very unlikely going to see an appreciation in most all of the surrounding areas I do think that for the most part the values won't drop significantly over a short period of time. We don't and haven't really ever had the large swings that other areas have had in property valuations as we just really never have a demand change, it's been pretty darn constant even through the crash we were only slightly affected as we were already in a "depressed" area. Depending on where your properties are of course, I'm going to take a guess and say that you've got them on the West Side being as the prices would match and it seems that for whatever reason in my experience the Canfield guys dabble the most on the West Side of Youngstown. So if that's true, I'd hold them.... the West side has been very stable and at those prices you should be able to make the numbers work with rent & your cash out refi so the long term strategy makes the most sense for you. Though I do question your plan with the 50k cash out through the refi.... I'd talk to your banker to make sure they realistically think that you will be able to pull something close to that number out on the property. In my experience the appraisals on cash out in the city have been a bit lower than market value and then 75% LTV or less at that... so you might be looking at pulling 35-40k out instead of the 50k that you're hoping.

If you do have a great cash-out situation with a banker, certainly let me know who you used as I'd love to find a better one for future properties for myself.

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