Fix then Sell or Rent?

Question

We acquired a rehab for about $30,000. Requires about $18,000 repairs. ARV for property is about $85,000. Average rent in area is about $800. Would you sell or use property for rental after repairs? Whats the best rationale for either? If partners are split on either route and consequently have to sell prior to any repairs, what price point makes most sense?

Scott Trench · Answer

It comes down to what you want and what you will do with the proceeds.

Personally, my goal is long-term wealth through real estate. I buy properties like what you are selling in order to hold them, long-term and build wealth through appreciation, cash flow, and debt amortization. I also like the tax advantages of long-term real estate investing, vs the ordinary income that flipping generates.

In your case, it sounds like you have a partner in the deal. If they want to sell, then you should sell. You don't want to be in a long-term investment with a partner who does not see eye to eye with you. Another option, if you would like to hold the property, would be to cash out refinance. If you can both agree on an ARV, then you could pull out a mortgage on the property and use the cash to pay out the partner who wants to sell, moving them off the title. This might even be tax advantaged for them (if there is no sale, is this ordinary income for them?). Something to ponder with an accountant.

Basit Siddiqi · Answer

I would rent it out.The numbers make it a great rental almost being a 2% deal.

Kevin Brian · Answer

Thanks for the response. The deal in this case might make more sense fixing and selling; especially in the current environment of increased rates. From a time value of money perspective, it seems we can probably clear net profit of $35k from selling the rehabbed property and redeploy funds towards other projects with similar margins. Depending on what the rate is on the note, net cash flow etc.. it probably could still make sense as a rental.

Kevin Brian · Answer

Not the 1031 exchange route... usually if the property is sold a year from when acquired, seller is not classified a 'dealer' for income tax purposes. The capital gains tax is however an interesting argument especially since we are staring at a contract to acquire an additional 4 or 5 rehabs in a different area but with almost similar margins.  Rehabbing can be an intense offense based strategy. While you could attempt to evade $30k or $40k in capital gains by waiting a year; that could mean incurring the stiffer opportunity cost of in excess of $300K in profits.

Andy Sabisch · Answer

Keep in mind the profit you are referring to on a flip will be taxed as capital gains unless you are looking at a 1031 exchange.  The amount you will net is reduced by the taxes you will be paying so be sure you are comparing apples to apples.

The rental market should heat up as interest rates increase and people that could buy are now priced out of the market due to the interest rate.  This will drive up demand for rentals and as a result, rents that are received.

The market is changing quickly in many areas . . . . the ARV you are looking at may not be what you find you will get if the pool of buyers shrink and the number of properties shifts from a sellers market to a buyers market.  It is happening already in some markets . . . realtors can tell you if showings and sales are turning and if so, how quickly in your market.

Fix then Sell or Rent?

Most Popular Reply