First Deal- Should I sale or rent and cashout refi?

[Eric Radich]

I purchased a property last summer in Mobile Alabama for $38,000. The deal was financed using hard money at 12% and the total loan was $65,000. After closing cost I received approximately $24,000 for repairs from the loan and I have put in approximately $66,000. To date I have approximately $9000 in holding cost.

My real estate agent feels that we will list the house at $155000. My property management company says that it should rent at $1200 a month. I have used both the fix and flip calculator and the BRRR method calculator. Both show a loss to little return so, my question is should I sell and take a loss or should I do a cash out refinance (75-80 % LTV)?

Thank you for any insight and/or advise,

Eric

[Greg Scott]

Two thoughts for you:

1) Don't forget about income taxes.  If you sell before owning for 1 year, you will pay short term gains, so there is benefit in holding for at least 1 year.

2) Are you sure your assumptions are correct?  Based on the numbers you provided, this look like the sweet spot for a rental. You may want to scrub your numbers.  For example, you paid $38K for the house, did you fight the property taxes to get them lowered to reflect that purchase price?   When I rehabbed rentals I often was able to get my taxes down a bunch in year 2. Did you assume a lot of repairs and capex?  You just spent a lot of money fixing this place. Realistically, those costs should remain fairly low for at least 3-5 years.

Assuming you take a closer look and it works, I would absolutely go the refi and rent route. In the long run, holding income-producing assets is where real wealth is created.

[Mike Klarman]

This is a great question for new investors who have capital being their greatest deficiency.  The end goal of this game is have a portfolio of dozens of cash flowing properties but does that mean you hold day 1?

I think no.  If you're a barely enough capital type of guy that happens to get a deal done and you decide to hold, you will be stalled until you have the money for another which can take a while but if you sell the first and net 25k let's say after everything is taken out then that's 25k more you have now and look for another deal - your capital has increased and the second deal will be easier than the first.  Let's say you sell again and net another 25k, well now if you started with 50k you have 100k now, now you can do both.  Hold and Flip at the same time.  Flipping is short term income and unless you come into this game with mucho dinero then flipping can be used as income that then is deployed as investment.