To Cash or to Hold, that is the question?

Rehabber · Sacramento, CA · Member since 2013 · 13 posts · 0 votes

Hi There
Would like to get some of your ideas on what would you do?. I have a SF that I bought to flip 5 months ago, I am in it for almost 100k, purchase and rehab of my own money. I initially planned on getting out 40K of profit; looking at the current comparable now I am pretty sure I can get 80K to 85K out; no problem there, but I am starting to question if it is a good idea to flip the property at this point, or is it better to hold it and find financing to get my money and my originally planned profit out to reinvest while holding the property and still be able to make a small cash flow. The more I think about it seems like the way the market is going (less inventory, higher prices) it probably is better to start holding property, that was my end goal anyways, what do you guys think?

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Brett Russell

Investor · Chelsea, MI · Member since 2013 · 350 posts · 138 votes

13y

Hi Yulissa Candiotti
I'm a bit confused: you stated you "bought to flip" but later state "holding...was my end goal anyways." ? Also, if I'm understanding correctly, you're saying that you think you could make significantly more profit than anticipated now? Nice problem to have.
I would say it has to come down to your goals and what you're willing to do. Do you want to be a landlord? For me, the prospect of being able to refinance and just get out the initial outlay, not even hoping for any profit, would be great as long as the property will cash flow. But, it has to come down to your plan/goals/etc. (AND, definitely make sure you're accounting for vacancy, maintenance, property management, etc if you're considering renting it out).
Just my $0.02
Brett

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Brett Russell
Investor · Chelsea, MI · Member since 2013 · 350 posts · 138 votes
13y
Hi Yulissa Candiotti
I'm a bit confused: you stated you "bought to flip" but later state "holding...was my end goal anyways." ? Also, if I'm understanding correctly, you're saying that you think you could make significantly more profit than anticipated now? Nice problem to have.
I would say it has to come down to your goals and what you're willing to do. Do you want to be a landlord? For me, the prospect of being able to refinance and just get out the initial outlay, not even hoping for any profit, would be great as long as the property will cash flow. But, it has to come down to your plan/goals/etc. (AND, definitely make sure you're accounting for vacancy, maintenance, property management, etc if you're considering renting it out).
Just my $0.02
Brett
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13y
Is a single family what you want to be holding??

Would you prefer a duplex, tri- plex, quad or a larger apartment building or commercial??

Some investors build up rentals just for the tax depreciation part. It's all in how much you make a year and how you want to go about growing a portfolio. Everyone sees this differently.
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Lynn McGeein
Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
13y
Also, some other considerations: Did you rehab it with higher end appliances & fixtures, custom finishes geared toward attracting better buyers, or is it more renter-friendly (average for the area & won't upset you too much if/when renters damage it)? Are there other great deals out there that you could sell this one, invest the profits in purchasing another rehab project to rent? Or are deals few and far between, and this is one of those you may not come across again for a while?
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Yulissa Candiotti
OP
Rehabber · Sacramento, CA · Member since 2013 · 13 posts · 0 votes
13y
Thanks for all the questions, it gave me some things to think about. Holding property for cash flow is my long term goal, preferably multi-units, but as Lynn suspected it is now harder to come by a good deal, and it may take a while to get the next property, I don't mind been a Landlord, but to continue to grow my portfolio i do need to get my investment out. Finishes are a bit above average for the area, but nothing that would break the bank. I didn't count with this kind of appreciation, it actually went up so fast many talk about been a mini bubble, I guess the question is. is it better to take my good fortunate and run with it, or to keep a small monthly cash flow and weather whatever the market may or may not bring, having in mind it would take at least 10 years to make the same profit off cash flow.
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Robert Steele
Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes
13y
If you can pick the top in the CA RE market then hold it and sell at the top otherwise get out now while the getting is good before CA blows up again. ;)
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Jimmy Hong
Flipper · Irvine, CA · Member since 2013 · 349 posts · 45 votes
13y
What about finishing your flip as you originally intended, then use that cash capital and buy other properties to proceed with your long term buy and hold strategy.
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Suzette Lowery
Savannah, GA · Member since 2010 · 25 posts · 0 votes
13y
I am in the same position. Originally have a buy and hold strategy, but found a great deal where I can do a quick flip and make between 25 to 30K. The property will cash flow nicely, but it will take me 3.6 years to make the profit from cash flowing that I would make immediately with a flip. Maybe we need to now consider the tax impact on the flip to help decide?
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Raymond B.
FL · Member since 2009 · 2k+ posts · 357 votes
13y
Suzette Lowery,
A friend of mine, has always told me, when you have a chance for quick $$$, take it, and then reinvest the money.
I've asked him about the Tax problems, and his answer was, talk to an Accountant.
Another thing to think about, what is the status of the Real Estate Market where you own the property?

You're profile is Incomplete, so your City and/or State is not visible.

Raymond

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David J.
Investor · Houston, TX · Member since 2009 · 210 posts · 261 votes
13y
Consider this. If you are 100k all in and can make 80k it sounds like the property will appraise for 180k. A cash out refinance at 80% LTV would put close to 45k in you pocket now tax free. That's what you expected to make in the first place and now you not only get it tax free but you also get to keep a cash flowing property with 36k in equity. You went from winning one way (45k taxable profit) to winning 3 ways (45k nontaxable profit now, immediate cash flow, and 35k equity with a chance to ride the appreciation roller coaster). With all you investment back you are now on the infinite return club. Well played.
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William MorganPro Member
Fix & Flip or Hold · San Luis Obispo, CA · Member since 2012 · 136 posts · 63 votes
13y
Smart one, that David Jackson.

To add, if you hold you'll have deductions for depreciation.

If you hold longer than 1 year then you'll be eligible for long term capital gains rates upon resale.

Your equity can serve as a saving account to be used for future acquisitions.

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David J.
Investor · Houston, TX · Member since 2009 · 210 posts · 261 votes
13y
Your equity can also be leveraged to buy additional houses. Some banks allow you to pledge the existing equity as a down payment rather than forcing you to cash out refi to put it down on another property.
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Suzette Lowery
Savannah, GA · Member since 2010 · 25 posts · 0 votes
13y
Great strategy @ David, so why do people flip and barf at buy at hold?
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Raymond B.
FL · Member since 2009 · 2k+ posts · 357 votes
13y
Suzette Lowery.
Some people do NOT want to be landlords.

Raymond
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David Beard
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
13y
Most props purchased for retail flipping are a big high end to be ideal cash flowing rentals.

I would sell:

* The runup in prices has been rather sudden and disjointed from economic realities; a Fed-driven bubble by most accounts. Any bad economic news could cause a sharp retracement in recent price increases, especially in CA, and you will be very unhappy in that event. Take a look at what has been happening in Japan using the same ridiculous monetary policies.
* Tenants will cause damage to your flip-quality finishes, so you will end up spending more money when ready to re-market. If you see the market start to reverse and move back down, you will be stuck with tenants in a lease. And God forbid you get a problem tenant that does extensive damage.
* If more opportunities present themselves in the near future, you will not be able to capture them as completely (or not at all), because you'll have this house tied up with a tenant in a lease.
* A $200K house is not an ideal rental. What is the market rent? $1,500/mth? Would you go out and purchase this house as a rental? If not, then likewise you should consider whether you should KEEP it as a rental? (I admit the selling costs might tip this slightly if it's a close call.).
* Your max LTV on cash-out will be 75% of value, and "value" will be at the mercy of an appraiser. Without a sales price to provide a price indication, the appraisal may come in weaker than you think.

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David J.
Investor · Houston, TX · Member since 2009 · 210 posts · 261 votes
13y
David Beard has a great point. To keep as a rental the numbers still need to work out. Also, if you put high level finished on the place you run a solid risk of having to repair again after erring it out.

I like the advice that if you not buy it as a rental in the first place then you shouldn't keep it as a rental now. The 180k price point on my area generally does not rent for more than $1,600 a month. That is not one I would buy.
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Charles Morgan
Investor · El Paso/Socorro, TX · Member since 2012 · 365 posts · 75 votes
13y
I do like David Jackson 's plan. If you can get your principal and profit back out tax free while keeping a cash flow property, wow! I am trying to work out a similar deal on my latest as soon as it is rehabbed.
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Douglas Quaid
Montreal, Quebec · Member since 2013 · 18 posts · 1 vote
13y
The return on equity of your property should decide what you should do with it.

How much end of year profit are you making divided by that 80-85 000$ + 100 000$ that you put in?

I expect this ROI to be quite small given it is a single family home.

Sell it and use that money to buy more deals like it or use it to move up and start flipping multi unit buildings. Your end goal is to hold, buy why hold properties that have low yield? Why not reinvest that capital into properties with high yields and hold those?

Even though deals are harder to come by, holding this one does not make it a "better" deal. The return on equity you get on this one is low, if you move that equity into a multi unit with higher yields, than you are better off.
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Yulissa Candiotti
OP
Rehabber · Sacramento, CA · Member since 2013 · 13 posts · 0 votes
13y
Originally posted by Douglas Quaid:

Even though deals are harder to come by, holding this one does not make it a "better" deal. The return on equity you get on this one is low, if you move that equity into a multi unit with higher yields, than you are better off.

Great point.
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Yulissa Candiotti
OP
Rehabber · Sacramento, CA · Member since 2013 · 13 posts · 0 votes
13y
Originally posted by David Beard:

* A $200K house is not an ideal rental. What is the market rent? $1,500/mth? Would you go out and purchase this house as a rental? If not, then likewise you should consider whether you should KEEP it as a rental?

This is a great point too, this house doesn't have enough cash flow to be worth keeping.
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