Need help with Rent or Flip Dilemma in Los Angeles

BRRRR - Buy, Rehab, Rent, Refinance, Repeat
5yFollow

Need help with Rent or Flip Dilemma in Los Angeles

Ben Taft
Member since 2018 · 5 posts · 0 votes

Hi all,

First time posting here. I'm 34, own a business, and am very entrepreneurial. Not scared of rehabs or dealing with tenants and am happy to deal with both. RE is a passion of mine and I love it but it's not a full time job for me.. yet! I had my RE license in CA and MA back in college so I have a short background in sales and rentals. I'm trying to solve a problem here and was hoping the community can help. In the last 1.5 yrs I've purchased 2 SFR's in West Hollywood, CA. SFR #1 I rehabbed and live in - will be putting a tenant in here shortly and REFI. BRRR will work well here because it's a corner lot with a good yard and can make decent cashflow after pulling my money out.

My issue and question is on SFR#2. Purchased for high 6's as owner occupied w/ 10% down @ 2.8% on a 30yr (plan was to move in but changed), got a seller assist to cover closing costs, did light rehab and it's on the market now for 1.05M. Comps out w/ recent sales on a $/pf basis so this price is not a stretch at all and is inline w SFR in the area. I wanted to flip it to trade up and take down a bigger project that I had in the works(recently fell through) but I haven't had any offers because there is a vacant lot next door - feedback from 20+ showings. In short, it's on the market for 45 days w/ 0 offers.

Here is my conundrum ... should I drop the price, and assuming a sale occurs, take the cash (approx.150k) or BRRRR and make a few hundred bucks a month (+mortgage paydown) and just leave it forever. If I do leave it as a rental do I rent long or short term. Assuming I BRRRR, and take the initial equity + rehab $'s out, the 150k in gains won't really change my life but may come in handy for bigger projects if they come. I have other money so it's not make or break either. I also like the idea of a free house in West Hollywood giving me a few hundred bucks a month. What I'm suffering from here is a major case of analysis paralysis!


Also, here are some thoughts/ assumptions in no particular order:

~ Monthly carry is $3,550 .. includes $150 PMI

~ Monthly principal paydown is ~1k

~ No other deals in pipeline and love idea of BRRRR and having a back up plan for X years down the road

~ Don't especially like ST rentals and people trashing the house

~ Concerned over eviction moratorium and having someone move in and stop paying rent

~ Assuming I drop the price by 50k to 1M and someone buys it

~Assuming ADR + vacancy on rentals based on AirDNA

~ Not including maintenance costs on rental I know it will come up but for this exercise I want to keep it simple

~ Taxes are a +- estimate

      Flip:

      Sell $ 1,000,000
      Mortgage $ (610,000)
      Closing Costs $ (70,000) 7%
      Proceeds $ 320,000
      Initial Equity + Rehab $ 85,000
      Net $ 235,000
      Taxes $ 82,250 35%
      Net Income $ 152,750

      Rent:

      SFR 2
      Short Term Analysis
      Occupancy (%) 70.0%
      ADR $ 225
      Days 365
      Short Term Rental Revenue $ 57,488
      Monthly Short Term Revenue $ 4,791
      Management Fee 10.0% $ 5,749
      Net Short Term Revenue $ 51,739
      Net Monthly Short Term Revenue $ 4,312
      Long Term Rental Revenue $ 46,800
      LT Monthly Rent $ 3,900

      I'm sure many of you were in a similar situation so any input/ help/ advice etc. would be appreciated! 

      Best,

      Ben

      P.S. If anyone is in LA wants to meet up and have a coffee to chat about projects I'd love to get together. I'm always looking to get involved and work on interesting deals.

      0Reply
      12 views

      Most Popular Reply

      Will BarnardPro Member
      Moderator
      Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
      5y
      Originally posted by @Ben Taft:

      @Darius Ogloza Thanks for the response! I did but I think you have to own the property for 1 - 2 yrs min. before 1031. 

       Flips do not qualify for 1031 exchanges and your intent plays a large role. In cases of changes of circumstance, an intent to hold that had to turn into a flip could be 1031 exchanged. 12 month minimum hold period is also one of many criteria.

      Podcast Guest on Show #130
      1Reply
      See this reply in the discussion

      11 Replies

      Jump to latestLatest
      • Chris Tarpey
        Investor · Jacksonville, NC · Member since 2018 · 193 posts · 107 votes
        5y

        Hey Ben!

        I think there is pros and cons to each option. The best way to answer your questions is by asking another...are you a flipper looking to buy and sell or a long term investor looking to grow a portfolio of rental properties?

        That may raise more questions than it answers but it brings up the most important question as to where you see yourself heading, identifying your strategy and taking action.

        Im sure you will get A and B answers here, but my personal 2 cents is to BRRRR the property. Start growing your portfolio, cash flow every month and still pull out enough capital to start another project. Sure there is a RISK for a crazy, non paying tenant who blasts loud music and calls you at 2am for a broken toilet, but doing your due diligence when placing a tenant will mitigate that. Im going to also assume that the person renting a $1M home has a decent and secure enough job to rent it (TikTok'r LOL), but be sure to verify!

        Best of luck!

        0Reply
      • Tina Tsysh
        New to Real Estate · Orange County, CA · Member since 2020 · 214 posts · 184 votes
        5y

        Do you have any plans on what you would like to do with the cash if you sell the property? Do you want to grow your RE portfolio and start buying multifamily or are you satisfied with having the 2 homes that you have? I think that you have to evaluate your opportunity cost in this situation and take into consideration your greater vision around real estate. 

        If you want to continue growing your RE portfolio, you can sell the home and buy more units with that cash BUT as you mentioned you have to be very careful because of the eviction moratorium. Especially in CA the laws are extremely tough for landlords when it comes to evictions. Are you comfortable at looking out of state for multifamily? 

        Hope this helps in some way! 

        0Reply
      • Ben Taft
        OP
        Member since 2018 · 5 posts · 0 votes
        5y

        Thanks @Chris Tarpey much appreciated!

         

        0Reply
      • Ben Taft
        OP
        Member since 2018 · 5 posts · 0 votes
        5y

        @Tina Tsysh thank you as well! No concrete plans just compounding as much as possible. I'm not against out of state but I prefer something driveable. 

        0Reply
      • Darius Ogloza
        Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
        5y

        Have you considered a 1031 exchange on the flip?  This way, you can keep the $85,000 working for you instead of paying the tax man now.  

        0Reply
      • Ben Taft
        OP
        Member since 2018 · 5 posts · 0 votes
        5y

        @Darius Ogloza Thanks for the response! I did but I think you have to own the property for 1 - 2 yrs min. before 1031. 

        0Reply
      • Darius Ogloza
        Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
        5y

        A two-step.  Play landlord for a short while until you qualify, then execute.  

        0Reply
      • Amit M.
        Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
        5y

        This decision really depends on your long term goals. If you believe in the long term appreciation of LA (I do, for the better areas) then I'd keep it, rent it out long term (only to qualified tenants to minimize risk) and pull money via refi when you can and need it. It's hard to buy a relatively expensive SFH in LA and get it to cash flow, so that's an achievement on its own. And if it's in a decent neighborhood that is continually improving, then that's a golden ticket to significant appreciation in the future. If it's in an area that will only improve marginally, then that's a different calculus. To put it simply, long term appreciation is where the big bucks are made in RE, and prime CA locations are the center of gravity for that to happen.

        0Reply
      • Will BarnardPro Member
        Moderator
        Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
        5y
        Originally posted by @Ben Taft:

        @Darius Ogloza Thanks for the response! I did but I think you have to own the property for 1 - 2 yrs min. before 1031. 

         Flips do not qualify for 1031 exchanges and your intent plays a large role. In cases of changes of circumstance, an intent to hold that had to turn into a flip could be 1031 exchanged. 12 month minimum hold period is also one of many criteria.

        Podcast Guest on Show #130
        1Reply
      • Ben Taft
        OP
        Member since 2018 · 5 posts · 0 votes
        5y

        Thanks @Amit M.. If a crystal ball existed I'm sure we'd all be rich so I won't even bother asking about the future but the valuations seem rich for West Hollywood @ $1,200/ ft. My agent is saying growth is tapped out but who knows. Is it insane to think that, pulling arbitrary numbers here for arguments sake, Weho can grow to $1,300 +/ ft in 2,3,5,10 yrs?  I can refi 70% ltv pull the original cash, make a few hundred a month, and let the equity ride but it may not be it's highest and best use. That's my biggest concern here. You know what's going on here in Cali, SF specifically, but I don't think West Hollywood is going anywhere.

        @Will Barnard thank you for that. Not for this deal.. but in theory..  Can I prove this by showing a posted rental listing and/or cancelled leases within the first 12 months from tenants who changed their minds E.g.  I have a tenant who was going to move in, experienced a hardship, and terminated the agreement?

        0Reply
      • Will BarnardPro Member
        Moderator
        Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
        5y

        I’m not sure if that alone proves intent or not, I would want to ask my real estate attorney if I was in that spot. Another key factor is your “main business”. If you flip 10 properties per year and hold only 1 evacuees year, you are likely going to be looked at as a flipper and not a holder. Check with your legal/CPA on that question.

        Podcast Guest on Show #130
        0Reply
      Join the conversationCreate a free account to reply, vote on answers and follow this thread.
      Log InJoin for Free