Dayton KY BRRRR (Cashout refi) or Flip ?

Question

Closed on my second and our partnerships first investment in Dayton KY. It is a 2 bed 1 bath 800SF house.

PP-42,000

Rehab budget - 10,000

Projected ARV we had was about 80k

Potential rents - 1,000/mo

We got our pre-appraisal back yesterday for based on the rehab plan came back at 108,000.

With these uncertain times, would you look to flip this? Even if we would sell at 100,000 that stands to be about 48,000 profit in 2 months. Less closing costs and capital gains (unless we do a 1031) would be about 30,000?

Or would you look to do a cashout refi of say 75% of 108,000 (or just minimum to get out with no cash in the deal) and take the $1000 rental income/mo and long term hold it?

property is in Dayton KY - a Greater Cincinnati suburb

Whitney Hutten · Answer

@Randy Dargan Depends on your goals. If you want a wad of cash now and no long term stream of income or asset to appreciate over time, then flip it. I don't believe you can do a 1031 right now because you haven't held it that long. So you will be paying taxes.

If you want cashflow, and appreciation, then refinance out and hold it. From a high level it seems like your numbers work.

If you decide to sell, PM me ;)

If you want cashflow, and appreciation, then refinance out and hold it. From a high level it seems like your numbers work.

If you decide to sell, PM me ;)

Dave Foster · Answer

@Randy Dargan, @Whitney Hutten makes a good point. You want to be careful with using a 1031 on this. If your primary intent in purchasing this property was to resell then the IRS considers it inventory and the 1031 is not appropriate. If your intent was to hold for productive use and something has happened to change that intent then the 1031 would be fine. Where it gets tricky is if your intent was ambiguous it becomes more difficult to demonstrate that intent. And if you have a pattern of fixing and flipping then that demonstration of intent becomes even more difficult.

Evan Polaski · Answer

@Randy Dargan as @Whitney Hutten mentions, what are your goals?

With your 1,000/mo and assuming a 3.5% 30yr fixed mortgage I would look at cash flow:
Principle and Interest 365
Insurance 100
Tax @45,000 35
Mgmt Fee 100
Leasing Comm 83
Vacancy 5% 50
Repairs 5% 50
Capex 5% 50

Net, you bring in about $167 per month, and if you can find another one, you have the cash to do another. This does include principal reduction in your mortgage payment, but I also include that in cashflow, since it is not cash I am able to use to buy another property today.

I would not count on much long term appreciation as you are doing most of the rehab now, thereby forcing appreciation today.

I would say you are in a good position either way. Right now, I am more of a flipper than a buy and hold, but the markets I am investing in prices are so high that you can't cash flow buying in last several years.

Dayton KY BRRRR (Cashout refi) or Flip ?

Dayton KY BRRRR (Cashout refi) or Flip ?

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