Rent out right away, or renovate?

Question

I am stuck between 2 options right now, whether to rent out my home with the small interior renovations I’ve made, giving me more cash flow but less equity, or going through with some major renovations giving me a lot more in equity but less cashflow.

Details-

Currently-

Home Value- 490k

Loan Amount- 400k

Potential monthly Rent Cashflow - $1000

After Major Reno-

Home Value- 800k

Loan Amount- 580k

Potential monthly Rent Cashflow- $700

Is 200k+ in equity worth losing $300 in cashflow?

Whitney Hutten · Answer

@Wesley Canhedo Would selling (or perhaps a short term heloc with the plan to sell) help fix those DTI issues, get your credit restored so you can launch into a buying plan?? There is always a "how"... you just have to find it and commit to it.

Michael Doherty · Answer

@Wesley Canhedo if you can increase your home value by 210k how much cash would it take in renovation costs to get to 800k ARV? Depending on that, I would just sell my house and go buy 2 BRRRR deals with the cash on hand.

Joe Jor · Answer

@Wesley Canhedo, Like others have said, it comes down to your goals.  Here are my thoughts:

If you do the Reno and then BRRRR it, unless you are going to be net positive on the **Loan**, you will be setting yourself back in terms of timing (i.e. downpayment) to get your next property.  In other words, using your numbers, if you are sure the house will appraise for 800 and the reno cost will be <= 180k, they you will end up ahead; if they will cost more than 180k, you will be behind.

You can also rent it out for X years at the higher cashflow, then reno it during a future turnover when you are more stabilized.

Lastly, being this is your first investment, I would recommend waiting on the reno until you see how the place rents out and other learning experiences.

You did not share your numbers, and I don't know the exact taxes in Rye brook, but making some assumptions, my napkin math suggests that you will need to pull in around $4,800 per month to make the $1000 cashflow. $4800 seems high.

Feel free to PM me if you want to chat more.

Best of luck!

Joe

Shannon Robnett · Answer

@Wesley Canhedo real estate is a game of now in a lot of ways.  Right now you can get the equity for a small investment of time and effort and that can be very useful in the very near future.  Let's say we are headed into a bit of a down turn in the next 3 years.  A renovation now would put you on the nice end of the rental market and would increase your rentability in a down market.  It would also give you a better escape plan if you needed it when the market cools a bit, or allow you to sell for a better profit when you find your next project.

I am always a "do today what you can because no one knows tomorrow" kind of guy

Whitney Hutten · Answer

@Wesley Canhedo I agree... What are your goals here? Also, what are your true underwriting numbers? What you posted it only part of the story.  If you do the renovation and push to $800K, you still have quite a bit of equity trapped in the home and if it only rents for $4K a month, that is not a good return on your equity.  True be told, it may already be a horrible return on your equity in its current condition.  So, #1 get abundantly clear on your goals. #2 run your numbers in the calculators here on BP and post to this thread so you (and we) can see what the actual underwriting is and can give some clear sugguestions. Best of luck!

Theresa Harris · Answer

Are you planning on refinancing to pull the equity out after you do the renos?  How much would the renos cost and could you rent it for more after the renos?  If you aren't going to pull the money out and the house is in good shape, don't bother with the renos.  Do them before you sell it.

Steve Bobek · Answer

I think it depends on your financial position, but personally I'd do the major reno(if you're certain you'll add the home value) and refinance to invest the 200k into 2-3 more deals and provide 2-3 times your 1000 cashflow.

Joshua D. · Answer

@Wesley Canhedo

I feel like a broken record sometimes but all most all of these type of questions come back to one question...

"What are your goals?" Will the equity help you buy more properties. Or do you wanna just sit on $1000 a month.

If I was gonna rehab I would prolly sell right away to realize the equity that you have in it.

Rental seems fine (depending on your goals). But I would make sure that $1000 is actually profit and not just $1000 over the mortgage payment.

Jacob McCann · Answer

@Wesley Canhedo I think it would come down to what your goals are personally. Do you want to use cashflow eventually to replace the income from your job. Or do you plan on holding short term to eventually sell. I would personally rent it as-is, use the money I was going to spend rehabbing it and buy more properties that cash flow. Best of luck either way.

Wesley Canhedo · Answer

@Michael Doherty technically I would be around 580k (max, could be a bit less) all in for the house to be worth ~800k.

The rent wouldn’t be substantially different, maybe 400-500 gross rental income more, but the expenses would chew that up. I have thought about buying others after selling it, but then I’d have more personal issues to fix before doing that like my DTI ratio etc... either way 2021 will be the year to fix that

Rent out right away, or renovate?

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