Better to resell or fix and hold for rental

24 Replies

Hi BP,

I'm deciding whether to rehab and resale or rehab and hold for rental. Here are the details:

Single family, Purchase price $25k

Rehab costs $23k

ARV $75k

Estimated profit for flip is $10k (13.5% of ARV), or monthly rent is $800/month

I would like to make a definitive decision upfront because the improvements/scope of work will vary slightly depending on if this will be a flip or rental. 

Bottom line is it worth the effort, money and 4-5 months time to make $10k, or is it better to put less than $23k rehab (let's say $15k) to just get the property rent ready for a tenant @ $800/month? Thx

Buy/hold, but that's my strategy.  The 10K could end up being less with holding cost, higher repairs, commission, etc...I'm hoping to do a resell, but looking for 20K min...

thanks for the reply @Rolanda Eldridge  

Im not finding it too easy to make $20k with resale values under $100k. I totally agree that higher repairs could eat up some or potentially all profits on this. But on the positive side the holding costs, buying/selling costs and commissions are already factored in when determining the $10k profit. I also used fairly conservative numbers.

So you're saying that renting at $800/month is worth paying $48k total out of pocket (25k to buy and $23k to fix) ?

Yes, but for a rental try to stick with the 15K or less in repairs..all in 48K or less good..I did a similar deal in 2005 but purchased retail..current tenant in place 7yrs..bank mort, taxes, insurance less than $500....go for it!

Disclosure: I am not an accountant. You should discuss the tax pros/cons of flip versus buy and hold, with your accountant. That $10k profit, from a flip, can easily be thousands less after taxes. Where as with the buy and hold, you will be able to benefit from depreciation.

Brian Ortins, Ortins Group | [email protected] | 978‑979‑5007 | http://www.ortinsgroup.com | MA Agent # 009530456

Rent it out dude. $800 x 12 = $9600 gross the first year. That's a 20% return on your investment.  The house pays for itself in roughly 5 years, then it's 100% return. Repeat until you have enough cash flow to replace your J.O.B

If you like the area of town then I think those numbers look good to hold.  Build that passive income, one chunk at a time.

@Brandon Eleazer   I think this is largely going to be based off of your goals. We are in a similar situation with a property and although we would be making more (closer to 25k after all costs/fees) we have decided that having the liquid funds is more beneficial then the small amount of cashflow we would be receiving. Our strategy is long term passive income but we are flipping to build up capital to be able to afford to move on bigger deals.

Medium head icon colorRyan Dossey, Call Porter | http://Callporter.com | IN Agent # RB15001099

Is there any underlying issues that are you are not telling us about I.e. Bad neighbourhood older house that can cause more in repairs down the road depreciating home values etc because the obvious answer would be to buy and hold and rent it out purchasing a property at $40 000 give or take with an $800 gross income can be recouped very fast vs a small $10 000 lump sum something just seems off as to why a you are struggling with a decision

wow thanks guys I appreciate it. 

Ryan D. just when I thought it was unanimous, haha....

Side note- Bigger Pockets is tremendous. I remember back in the day sometimes you had to wait for hours to receive a forum post response. But now you get many replies within minutes. It's great.

Here's another thought about buy and hold rental strategy:

Some investors view buying and holding as "tying up too much cash". But this $48k sitting a savings account would earn about $40/month. To compare, having the cash in the property (taking a Cashout refi out of the equation to make this point) the money generates $800/month - less some expenses of course and you still earn a few hundred per month. Seems like a sensible approach to investing to me.

@Brandon Eleazer   if you have 48k sitting in savings why don't you spread that out to several properties? Depending on total cost of the homes you are looking at you could end up with 2 or 3 cashflowing properties vs just one. I personally would look into splitting it into 2 and keeping several thousand in savings just in case. You want to make sure you are getting a good cash on cash return as well. 

Medium head icon colorRyan Dossey, Call Porter | http://Callporter.com | IN Agent # RB15001099

@Andrew Nandee  there's many details I didn't include for time's sake and sparing readers all of the additional property information. 

The neighborhood isn't great but it's located on a "stable" street with no boardedup houses and mostly long time homeowners.

My question was really to find out if other investors would do the quick flip and move on to the next one. I am focused on acquiring more rentals, but at the same time don't want to fall in love with any property just because I want more rental property. Does that make sense?

I would buy, fix, and hold. Let's take your ARV at $75k, and your hard costs at $48k (25k purchase and 23k as your highest rehab cost) all as you've said

If you took this to a lender, you could pretty easily get 80% LTV in a refinance, so the bank would be willing to pay you $58,000 (assuming 2k of closing costs.) You would get pretty quick access to your capital to get into another deal, plus $10,000 of profit (the same amount of profit as if you'd sold it.) The cash flow should *easily* make the payment, and you have very quick liquidity. Take the cash benefit of a flip and the cash flow of a buy and hold! Infinite rate of return - because after the refi you have no money in the deal.

Ryan D. that would be awesome. I may be looking to follow precisely that plan. Should I speak with a lender early in the process or wait until the work is finished?

@Terry Hershberger  I hope to be a very wise Millionaire RE investor one day as well. Thanks for the inspiration and words of wisdom!

Ryan D. I would probably chat with any lenders that you have a prior relationship with. If you don't have any relationships built they may ask for more like 6 months to "season" the investment before a refi - but your cash flow is going to make a ton compared to the interest rate your margin account will charge you. I think it's a home run!

Originally posted by @Brandon Eleazer:

Hi BP,

I'm deciding whether to rehab and resale or rehab and hold for rental. Here are the details:

Single family, Purchase price $25k

Rehab costs $23k

ARV $75k

Estimated profit for flip is $10k (13.5% of ARV), or monthly rent is $800/month

I would like to make a definitive decision upfront because the improvements/scope of work will vary slightly depending on if this will be a flip or rental. 

Bottom line is it worth the effort, money and 4-5 months time to make $10k, or is it better to put less than $23k rehab (let's say $15k) to just get the property rent ready for a tenant @ $800/month? Thx

 Do not forget that you have an issue of it being taxed as ordinary income if you sell plus SE tax. I recommend figuring out what you want to do definitively. In this case I'd keep the property. Seems like it may cash flow rather well.  Do not forget your 50% rule.  You also could look at getting a line of credit on the equity to invest into another project.

Medium hta logoSteven Hamilton II EA, Hamilton Tax and Accounting | [email protected] | (224) 381‑2660 | http://www.HamiltonTax.Net

@Brandon Eleazer  

I agree with all that's been so well said and only want to ad the question... If this home is not in a war zone. Why kill the Golden Eggs Goose? 

Good luck!

Pyrrha

I second @Skyler Smith   - buy with cash then refi as soon as its fixed up and rented. Great strategy! Remember even if you flipped this for $10k quick cash, you're probably going to walk away with only $6-7k after taxes. Much better to hold on to it as a rental. 

@Brandon Eleazer  The good news is you have got two good exit strategies. The best strategy, as always, depends on many factors.  And even though @Terry Hershberger  is not going to like it, I would side with Ryan D. and suggest you flip IF you can reliably come by flips like this and IF you don't have a lot of money to invest and IF you don't have a lot of experience.

If you make $10k off a $50k investment and can do that twice a year (reliably find flips) then that is a $20k or a 40% ROI per year. If you keep doing it you will learn to cut the time down and do three a year and maybe do it for less, pushing your ROI to 60% per year. Plus you'll learn a ton and have no long term obligations.

If you've got lots of money to invest then ultimately passive income is the way to go. 

@Larry T.  , If you need the quick cash, flip but that is not going to get you to financial freedom is my point. Flipping is a job, not really investing. Don't forget the time he will put intro it doing the flip, unless he is doing it hands free. There really is no wrong answer to his question depending on his goals and where he is financially. I know many investors that buy three, flip one and keep two or flip two and keep one. I do know that in the game of monopoly, he who has the most houses or hotels will end up wining the GAME. It is the sam win the game of LIFE. LOL. Also if @Brandon Eleazer  lives off the $10K, then he is starting over each time. Might as well go get a job if that's the case. 

Happy Investing! or Flipping! Whichever you decide to do!