To rent or to flip is the question

Rehabbing & House Flipping
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To rent or to flip is the question

Ed Perez
Cleveland, OH · Member since 2016 · 42 posts · 12 votes

Hello, I'm just torn between rehabbing and flipping a property I own free and clear or just rent out the property after rehab. I know in this business it's just a numbers game and it just up to you when you want to get paid. Do you want to get paid now and look for the next deal or just recoup the overall $$$ invested over a period time? Should I opt for rent, the monthly gross rent is approx $4150 (or 49,800, cap rate of 5.5% only). My net yearly income from the rent would be $30,670. Should I opt to flip the property, however, I can potentially make $102k (net). This property is located in an affluent community and is in a good school district, and that's the reason why the cap rate is on a low side. 

What other things should I be considering to make a smarter decision? Making a little over 30k a year on a single property I think is a good passive income (less the headeache). To break even, it will take 20 yrs to recoup my investment. Making 102k on a rehab is also nice but, once I sold the property, I'm unemployed once again. I will be searching for another good deal out there.

Most of my properties are giving me between 15 to 22% cap rate (5k yearly income on each). This is the first time I'm torn between the two investment scenarios. 

So, please let me know your thoughts are. Thanks in advance.

Ed

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Troy Zimmerman
Investor · Mount Pleasant, SC · Member since 2015 · 20 posts · 15 votes
9y

Seems like a fairly short payoff.  Wait three years and you will have roughly the same amount to go and find the next deal.  Although the cap rate isn't outstanding, have you considered leveraging the current property?  Interest rates are low, and this might give you the best of both worlds.  You could potentially keep your property and find a new deal that cashflows a little better.  Best of luck!

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  • Jeff Sprunger
    Lockport , NY · Member since 2014 · 265 posts · 124 votes
    9y

    Wow, it appears that this property is a very nice part of Cleveland, if you are pulling $4100/month for rent.  so, you shouldn't have any tenant issues.  Could probably get a very good tenant to sign a 2 or 3 year lease.  this would eliminate you decision to make about selling, at least for now. 

    What would you do with the $100K? reinvest? take a vacation? 1031? maybe, pay off/pay down a few other properties so they are free and clear.  how long have you owned this home, more than 2 years (capital gains)?

    so, the answer always is...it depends.  only you truly know your situation and are in the best position to make the best decision. 

    1Reply
  • Troy Zimmerman
    Investor · Mount Pleasant, SC · Member since 2015 · 20 posts · 15 votes
    9y

    Seems like a fairly short payoff.  Wait three years and you will have roughly the same amount to go and find the next deal.  Although the cap rate isn't outstanding, have you considered leveraging the current property?  Interest rates are low, and this might give you the best of both worlds.  You could potentially keep your property and find a new deal that cashflows a little better.  Best of luck!

    3Reply
  • Matt Motil
    Rental Property Investor · Cleveland, OH · Member since 2015 · 1k+ posts · 880 votes
    9y

    You flip it you make 100k soon versus making 100k in about 3.5 years. In my opinion, you keep it and rent it out at those numbers unless you're hurting for the cash. Best of both worlds would be to finish the rehab, place tenants and then do a loan-to-value cash out refi and have your cake and eat it too. 

    1Reply
  • Vince Lucas
    Flipper/Rehabber · Cleveland, OH · Member since 2016 · 133 posts · 69 votes
    9y

    @Matt Motil Do you know any lenders that will lend loan to value within 6 month of purchasing the property and/or when property is in a LLC?

    0Reply
  • Matt Motil
    Rental Property Investor · Cleveland, OH · Member since 2015 · 1k+ posts · 880 votes
    9y

    Is it a new LLC or established with some history? @Vince Lucas

    0Reply
  • Ed Perez
    OP
    Cleveland, OH · Member since 2016 · 42 posts · 12 votes
    9y
    Originally posted by @Jeff Sprunger:

    Wow, it appears that this property is a very nice part of Cleveland, if you are pulling $4100/month for rent.  so, you shouldn't have any tenant issues.  Could probably get a very good tenant to sign a 2 or 3 year lease.  this would eliminate you decision to make about selling, at least for now. 

    What would you do with the $100K? reinvest? take a vacation? 1031? maybe, pay off/pay down a few other properties so they are free and clear.  how long have you owned this home, more than 2 years (capital gains)?

    so, the answer always is...it depends.  only you truly know your situation and are in the best position to make the best decision. 

     Hi Jeff,

    Thanks for your reply. Yes, this property is located in the suburbs of Cleveland and is one of the most desirable place to raise a family. To answer your questions, I got this property last July '16 and the original plan was to flip this property and reinvest the proceeds into another property.  For some reason, I'm not that attracted to 1031 exchange, as I prefer to face all tax liabilies as oppose to rolling it over. No, i have not live in this property within the last 5 years.

    0Reply
  • Ed Perez
    OP
    Cleveland, OH · Member since 2016 · 42 posts · 12 votes
    9y
    Originally posted by @Jeff Sprunger:

    Wow, it appears that this property is a very nice part of Cleveland, if you are pulling $4100/month for rent.  so, you shouldn't have any tenant issues.  Could probably get a very good tenant to sign a 2 or 3 year lease.  this would eliminate you decision to make about selling, at least for now. 

    What would you do with the $100K? reinvest? take a vacation? 1031? maybe, pay off/pay down a few other properties so they are free and clear.  how long have you owned this home, more than 2 years (capital gains)?

    so, the answer always is...it depends.  only you truly know your situation and are in the best position to make the best decision. 

     Hi Jeff,

    Thanks for your reply. Yes, this property is located in the suburbs of Cleveland and is one of the most desirable place to raise a family. To answer your questions, I got this property last July '16 and the original plan was to flip this property and reinvest the proceeds into another property.  For some reason, I'm not that attracted to 1031 exchange, as I prefer to face all tax liabilies as oppose to rolling it over. No, i have not live in this property 2 years within the last 5 years.  

    0Reply
  • Ed Perez
    OP
    Cleveland, OH · Member since 2016 · 42 posts · 12 votes
    9y
    Originally posted by @Troy Zimmerman:

    Seems like a fairly short payoff.  Wait three years and you will have roughly the same amount to go and find the next deal.  Although the cap rate isn't outstanding, have you considered leveraging the current property?  Interest rates are low, and this might give you the best of both worlds.  You could potentially keep your property and find a new deal that cashflows a little better.  Best of luck!

    0Reply
  • Ed Perez
    OP
    Cleveland, OH · Member since 2016 · 42 posts · 12 votes
    9y

    Troy,

    Thanks for the reply. You're completely right that I would be breaking even as far as the net profit is concern between 3 to 4 yrs. I think I will just rent out the place yo a nice family (hopefully nice). Thanks so much!

    1Reply
  • Ed Perez
    OP
    Cleveland, OH · Member since 2016 · 42 posts · 12 votes
    9y
    Originally posted by @Matt Motil:

    You flip it you make 100k soon versus making 100k in about 3.5 years. In my opinion, you keep it and rent it out at those numbers unless you're hurting for the cash. Best of both worlds would be to finish the rehab, place tenants and then do a loan-to-value cash out refi and have your cake and eat it too. 

     Hi Matt, thanks for ypur reply. As i mentioned to Troy, I will just rent out the place and still keep the property. Thanks again

    1Reply
  • Ed Perez
    OP
    Cleveland, OH · Member since 2016 · 42 posts · 12 votes
    9y
    Originally posted by @Vince Lucas:

    @Matt Motil Do you know any lenders that will lend loan to value within 6 month of purchasing the property and/or when property is in a LLC?

     Hi Vince, I also do private lending to RE investors, but it really depends on the area as i like my money invested in safer communities. I see that you're in the Cleveland area. You can just PM me and discuss it further. Thanks

    0Reply
  • Vince Lucas
    Flipper/Rehabber · Cleveland, OH · Member since 2016 · 133 posts · 69 votes
    9y

    @Matt Motil It is an established LLC 1 year+ with history.

    0Reply
  • Tuan Le
    Flipper · North Olmsted, OH · Member since 2016 · 7 posts · 7 votes
    9y

    There are lots of options to do with what you have.
    I can buy and hold and make about 2.5%-3%/month plus average appreciation, thus for me I would sell that property.

    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    On the surface, my opinion would be to keep it. Getting paid ~3 years of cashflow to liquidate now and giving up any future cashflow, appreciation, and rent increases beyond that on a no headaches property doesn't make great sense to me ... the way you would best compare the two scenarios IMO would be to calculate IRR for both. For the hold, you will need to assume an appreciation rate as well as a rate of rent increases. This is something you should consider anyhow, and can use the long term historical averages (averages spanning multiple RE cycles) as a good guestimate. For hold, you should also consider for a hold period of say 10 years (or whatever your planned hold period before you sell or cash out refinance your entire investment, but don't assume hold forever in the analysis). Finally, the other tricky variable to figure is what would you do with the money if you sold, and what would the return be on that new investment (again, over the entire life of the investment or at least a comparable hold period and considering best guess for forced & market appreciation and rent increases and your time and headaches) ... here again IRR analysis can help, but you have to make some educated guesses. This raises more questions than answers, I know, but hopefully it gives you some factors to consider and an analytical framework to assess them with.

    1Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    Uncle Sam votes for you to sell!  40% baby.

    I would not and don't sell until day 366. 15%.

    Congrats owning free clear RE, Vince!

    1Reply
  • Jeffrey Hotz
    Real Estate Professional · Dublin, OH · Member since 2013 · 251 posts · 165 votes
    9y

    @Vince Lucas I have a lender that will lend in Cuyahoga county at 75% of purchase price, if that helps. I don't think theres much season required.

    If its outside Cuyahoga then I have a lender that will lend 75% based on appraisal and only 1 month season.  

    @Ed Perez 4k rent in Cleveland is a tough sell from my opinion, that price point people have options and most likely would mean short term rental with high turn over and expensive upkeep.  Go for the cash, if you can make 100k on it do it.

    (I am from CLE, lived there a long time and an active investor in the area, so can speak for CLE market.) 

    0Reply
  • David TerbeekPro Member
    Property Manager · Cleveland, OH · Member since 2016 · 260 posts · 162 votes
    9y

    If you were able to find this deal, do you think you could find another similar deal.  If there is any chance of doing even close, it is time to flip and reinvest in that next deal.  As @Steve Vaughan said, watch the taxes.  I know you said the 1031 wasn't for you so maybe 1 year is not so bad before the flip.

    216-926-2900
    0Reply
  • Ed Perez
    OP
    Cleveland, OH · Member since 2016 · 42 posts · 12 votes
    9y

    Hi Jeffrey,

    Thanks gor the reply. Nothing in Cleveland has a good public school district. I'm merely speaking about the suburbs of Cleveland. This property is located in Hudson, Ohio where the lowest price point in Hudson is the highest in Cleveland. 

    0Reply
  • Ed Perez
    OP
    Cleveland, OH · Member since 2016 · 42 posts · 12 votes
    9y
    Originally posted by @Jeffrey Hotz:

    @Vince Lucas I have a lender that will lend in Cuyahoga county at 75% of purchase price, if that helps. I don't think theres much season required.

    If its outside Cuyahoga then I have a lender that will lend 75% based on appraisal and only 1 month season.  

    @Ed Perez 4k rent in Cleveland is a tough sell from my opinion, that price point people have options and most likely would mean short term rental with high turn over and expensive upkeep.  Go for the cash, if you can make 100k on it do it.

    (I am from CLE, lived there a long time and an active investor in the area, so can speak for CLE market.) 

     Hi Jeffrey,  thanks for the reply. The property I have is located in Hudson, Ohio and the average property valuation in Hudson is $320,000. I don't think the highest price point in Cleveland can come close to Hudson. According to my realtor, we can list the property between $975k and 1.M.  A property in the area was just sold for 1.1M within 60 days. Just like Cleveland, I've always invested in Akron, Ohio where I get 15 to 22% cap rate. The city of Hudson is a different ball game, like major league compare to a minor league. 

    0Reply
  • Ed Perez
    OP
    Cleveland, OH · Member since 2016 · 42 posts · 12 votes
    9y
    Originally posted by @Jeffrey Hotz:

    @Vince Lucas I have a lender that will lend in Cuyahoga county at 75% of purchase price, if that helps. I don't think theres much season required.

    If its outside Cuyahoga then I have a lender that will lend 75% based on appraisal and only 1 month season.  

    @Ed Perez 4k rent in Cleveland is a tough sell from my opinion, that price point people have options and most likely would mean short term rental with high turn over and expensive upkeep.  Go for the cash, if you can make 100k on it do it.

    (I am from CLE, lived there a long time and an active investor in the area, so can speak for CLE market.) 

     Hi Jeffrey,  thanks for the reply. The property I have is located in Hudson, Ohio and the average property valuation in Hudson is $320,000. I don't think the highest price point in Cleveland can come close to Hudson. According to my realtor, we can list the property between $975k and 1.M.  A property in the area was just sold for 1.1M within 60 days. Just like Cleveland, I've always invested in Akron, Ohio where I get 15 to 22% cap rate. The city of Hudson is a different ball game, like major league compare to a minor league. 

    0Reply
  • Rolanda Eldridge
    Investor/Realtor · Hoover, AL · Member since 2010 · 1k+ posts · 459 votes
    9y

    @Ed Perez...That's a sweet deal!  I would hold the property and collect that $4150..

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    9y

    I would probably factor in how much you can make in a flip on it and how much you can make renting it over your lifetime.  

    1Reply
  • Account Closed
    Investor · Excelsior, MN · Member since 2017 · 85 posts · 37 votes
    9y

    Great numbers on the rental side.  To me it is a clear rental investment unless you have another deal lined up that you need the capital for.   

    1Reply
  • Lesley Resnick
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    I would hold and leverage it.  the money is going to expensive but you can get 75 - 80% out.  This would allow you the best of both worlds.  At a 5 year pay out I would start to look at flipping it.  There is depreciation and interest expense on owing it.  You need to consider the  tax impact by holding it vs selling it.  

    2Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    9y

    @Ed Perez Given the property is in a good area and you will make the $102k back in 3-4 years I would keep it.  I am a big advocate of taking significant gains when you can but I am more of a fan of owning bigger buildings in good areas that cash flow well.  Not sure about your neck of the woods, but in mine deals like this are rare.

    1Reply
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