Should I flip this deal or hold it?

Question

I am under contract on a 3 bed 1 bath single story property for $67,000. Based on nearby comps I believe the property could sell for around $120,000, after a $15,000 rehab, basically need mostly cosmetic updates: drywall repair, new flooring throughout, paint and basic update on bathroom and kitchen. I'll do most the work myself. I should be able to get about $900/month rent. I'll be doing 20% down on a 20 year amortized at 4%. Taxes for the year are $1000 and insurance will be about 700 for the year. I have $40,000 in cash which will cover down payment and rehab. If I did my math correctly I should be able to BRRRR it and pull all my investment out, but in order for it to cash flow I would have to leave 40% equity in the property, or I could flip it and double my capital.

Chris Davidson · Answer

I agree with @Michael Plante. It really comes down to what your goals are. If you flip it you will have more cash for the next deal, or if you have limited time but decent income adding one LT investment now could fit your goals better. Just have to figure what your plan is and work it.

Best of luck!

Michael Plante · Answer

Personally I would flip it but it depends what your goals are and where you are on your path to those goals

If it was me I want as much cash as possible at the beginning of my path. Less cash and more cash flow as the journey continues and finally all cash flow

Christopher Reiser · Answer

Thanks, Michael that’s kind of what I was thinking as well. This is our first deal and I would like to get to the point where I can purchase and rehab with all cash then get a mortgage and never leave any initial capital in the property.

Christopher Reiser · Answer

Yeah, I guess my question is: is it better to leave more than 20% equity in a property in order for it to cashflow better, say $200/month after  cap ex, maintenance, and management using the BRRRR method? Or flip that property to find a property that would have an ARV of $90k that rents for $900/month. So that I’m maximizing my return without leaving untapped equity?

Chris Davidson · Answer

The 20% I referred to in the first post was the $176 cash left over after paying the mortgage or 176/900=.19555. I think that was where I caused confusion. As long as the ARV is 120K and you can get an 80%LTV you should be able to pull all your money out and some, and still cashflow a little if managed well.

Chris Davidson · Answer

@Christopher Reiser Sorry wasn't clear but if I am understanding your numbers above correctly I believe it will work with the BRRR strategy. 20% of 67K is 13,400(downpayment) and rehab of 15K takes you to 28,400 Cash invested with a note of 53,600. If you Refi for 96K which would be 80% of the 120K ARV 53,600 would pay off the existing note and leave 42,400 for you. You put 28,400 in the deal and so now you have an extra 14K (excluding closing cost) and should have a payment of around $724 (taxes and insurance included) with a rent of $900 leaving $176/month for operating cost.

Christopher Reiser · Answer

If I’m understanding you correctly, you’re saying it would not brrrrr out? At 80% LTV I agree, that’s why I was saying I would need to leave 30-40% equity, so it would cash flow. Would still get most of my initial investment out, but couldn’t tap into the additional equity without sacrificing the cash flow.

Chris Davidson · Answer

@Christopher Reiser I am seeing a payment of $582 on 96K(80%LTV)  4% @20 years then 142 for taxes and insurance/ month for a total of $724. which leaves almost 20% for repairs cap-x and management. but that is at a 20 year and year 1. I would check your numbers again and see if the BRRR is possible. If not flip it and roll the rest into your next deal.

Should I flip this deal or hold it?

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