Would you flip this house or rent it?

Question

My friend loaned me 100% of the 15k purchase price for a fixer upper with 5k cash out for repairs.

I completed the rehab with 25k from my home equity line.

For his security, we put the house in his name.

Option 1. Sell:  Sell for 85k. My friend gets his 20k back plus interest and I would invoice him for the difference. After I pay back my equity line, I'd probably gross 35k.

Option 2. Hold: This strategy is in line with my long term goals. Every major component of this house has been replaced so capital expenditures would be minimal. Here's how I would go about "purchasing" the house from my friend:

-I give my friend an invoice for 50k for the renovation improvements.

-I sign a purchase agreement to buy the house for 50k

-I go to the local community bank to apply for financing with 25% down (that's $12,500 down payment)

-I use the money I received from the invoice to come up with the down payment and pay back my equity line and cash to pay my living expenses while I did the rehab. Upon closing, my friend gets 50k back and agrees to add the original 20k into another loan I have with him. There would be no increased payment on that other loan. In the end, I would own a house with a 300 positive monthly cash flow and no money out of pocket.

Does it make sense to keep this or take my profit and run?

Numbers from the BRRRR Calculator:

Gross Income: $10,800

Monthly cash flow: $300

NOI: $6406

Cash on Cash ROI: 120% (I'm not even sure how this was figured since I won't have any money invested in this)

Also, I'd be open for suggestions if anyone knows of a better way to finance this. I know this was a lot to digest so I appreciate you if you made it this far. Thank you all for your advice!

Rick Baggenstoss · Answer

I'm with the others .... flip or hold is made before you purchase.  I also think you need to flip this and build your capital. Sounds like if you flipped this one, you could be several with 25% down.   Go to your local bank and see what you can do on future houses.

It is a nice flip (profit, cash-on-cash using your HELOC, etc.).  Do a few more so you have a war chest of capital and can buy and hold several.

Ryan Evans · Answer

You could look at doing do a lease option or seller financing. You could charge a premium rent for a few years of good cash flow then and fully get cashed out later.

I saw your other post on the location. Since it's on toward the airport, it could make a decent Airbnb if you're inclined to put the systems in place for that. There aren't a lot of great options over that direction.

This wouldn't fit my criteria at the 85k mark, but if you flip a duplex I'd be keen to take it off your hands. I'm looking for more low maintenance deals out that way.

Kenny Lee · Answer

At this stage, I'd flip and start to build your capital before moving into rental/buy and hold.

Thomas S. · Answer

Your choice to hold or flip is made before you start not after completion. Finishes are quite different between the two options.

In this case, without additional info on how you arrived at your hold numbers regarding income, I would definatly flip this property.

Cara Lonsdale · Answer

This sounds like a tax nightmare.

This sounds like a lending red flag unless you are using a hard money lender (who doesn't source your down payment).

At best, you are proposing a huge mess.

Derek Dombeck · Answer

The way you structured this is probably the highest taxable way to do it. For future reference, Give your friend a note and mortgage to secure his position and buy the property from day 1. If you had, now you would be looking for a refinance loan. In your case, you have to find a purchase money loan, which after a bunch of invoicing and taxable events, still looks like possible mortgage fraud as to where the down payment came from. You also have 2 sales, 2 closings, 2 transfer tax fees, and a whole lot of unnecessary risk if you got into a disagreement with your friend. He could refuse to sell it or pay you anything because he has the deed.....

Now, the cool part...... You did a profitable deal!! Congrats!!

Happy Investing

Derek Dombeck

Would you flip this house or rent it?

Does it make sense to keep this or take my profit and run?

Most Popular Reply