New purchase-Flip or Hold?

Question

My partner and I purchased a home two weeks ago. It was a great deal in terms of price and potential resale value. One of us feels that this is a house we want to rehab and then flip. The other is not so sure and is leaning towards holding and renting. We are close to begin rehabbing the inside-and how we rehab it(how nice we make it) really depends on what our plan is. Do we rent it or do we sell it? Here are the specs:

Purchase Price         $58,000

Rehab Cost              $15,000

Total Investment     $73,000

Median Sales Price  $110,000

Post-Tax Gain         $28,860

As you can see this would be a huge cash gain for us. Our LLC is new and could use the cash. We have no intention of pulling that cash out of the business but rather would use it to continue investing (down payments, rehab costs on others, etc.) However-our business plan is to be a buy and hold investor-not a flipper. We want passive income. One thing we have going for us on this home is a 0% family loan not owed until January 2021. We should be rehabbed by the end of February 2020. here are the renting specs/metrics

Total Investment  $73,000

Projected Rent     $1,000

Cap Rate               8.97% (does not include capx. Includes 10% vacancy, prop tax, ins, interest, maintenance, etc)

1% Rule                 1.37%

This house will have, after potential mortgage, a decent cash flow. The metrics above are solid. However, when compared to our other two rental properties, it has the worst Cap Rate and 1% ratios of our other two properties. We can do better, even in this hot market. Also-I am using our investment as the denominator for metrics-not the market value. The market value, see above, is much higher than what our investment will be. That leads to credence of selling IMO.

What is everyone's thoughts? Again-we do not want to necessarily be in the flipping business and want long term wealth through passive income-but this seems like a property that can be sold based on the potential sales price.

Kevin Dong · Answer

I think flipping is the best option for u. I was in the same shoes as you are. I am all about buy and hold long term but guess what I have to flip to make capital to fund rental.  If I was just pouring the money for rental I would have been only 4 rental units total now instead of 26 units.  You have to grow .  I am selling off some of my rentals now as well to get the most out of the property value. For instant. I have rental property I bought for 55k and rent for $1100 a month. But I can sell it for $110k and use that money to get two property at 50k each and rent for $900 each for the total $1800.  Get more case flow More depreciation and other factors.  No brainer

Scott Jensen · Answer

@Kyle Galloway There's not a right or wrong in this scenario. It completely depends on your goals, cash position, and available deals.

A scenario that seems to make sense in your situation is to purchase the property using the family loan, then after a six month seasoning period refinance at the new appraised value. If the numbers you provided are accurate you can get all of your money back out for and use them for the next deal.

There are lots of ways to do this one. Congrats on getting a good purchase!

Side note: on your "Post-Tax Gain" are you including income tax as well as realtors fees/closing costs?

Scott Jensen · Answer

@Kyle Galloway Either way works fine; just depends on the situation... If you can continue doing deals without selling...that would be preferable.  If you need to liquidate a property to fund more deals that is fine too.

Tom S. · Answer

@Kyle Galloway  I would keep it and refinance to try to pull out that $28k gain (or something close to it).  If you sell, you have closing costs (as Scott mentioned) plus taxes, that will eat up your working capital.  If you refinance, that $28k pulled out is not taxable.

Welcome to BP!

- Tom

Kevin Dong · Answer

@Nilo Ignaciomy market is at fort Myers FL .   These $50k deals are hard to find. Of course off market.  At C neighborhood

Nilo Ignacio · Answer

@Kevin Dong

Where are you buying 50K

Properties at?

Kyle Galloway · Answer

Thanks for the insight. I am still unconvinced. This property will be our lowest performer in terms of metrics simply because the value is high compared to the rent we can command in our area. It is easy to find a 50k piece of property and charge $800-900. This will be a 75k (invested) property commanding MAYBE $1,000. Worth 100k FMV. I'd rather have two properties at 50k each getting 800 each vs one property getting $1,000 each. Am I crazy?

Well noted on the "cost" of selling-A.G. closing costs and taxes.

Marc Winter · Answer

Great you found a deal; not great you had no definitive plan in place before you closed.  The comments given above are solid--just make up your plan and stick to it.  Good luck!

New purchase-Flip or Hold?

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