Rent or Sell my Flip?

[Jess Turner]

Hello, 

I am a brand new investor who bought my first property (a small split entry 3 bedroom, 2 bath) and am in the process of nearly gutting it now. I bought it for $180,000 with 25% down, so I have a 20-year mortgage for $135,000.  I will be at $40,000 to $50,000 for rehab costs including a $25,000 Heloc. Tax and insurance is high in my area- $2,000 a year for insurance and $3,600 for tax. If we sell it, I expect I could get $280,000. Potential rent could be $2,100. The house is located in the best school district in the state, and it’s one of the few older homes in the area. Most homes nearby are in the $700,000+. Please talk to me about the formulas you use to decide to rent or sell. I want to flip again as soon as possible. What’s the best method for that? Also, any tax advice or any other tips would be super helpful and appreciated! I am absolutely loving this industry and can’t believe I didn’t do this sooner!

[Benjamin Aaker]

Welcome to BP, Jess. I know the Omaha area well. You identify yourself as an investor, so I'll assume you plan to either keep it and rent or sell and purchase a new investment. You call the house a flip in your post, so I suspect that was your initial plan. What is making you question that? I don't love flipping as it becomes more of a job than an investment (though there are valid arguments that flipping is investing). If you haven't paid for the rehab yet, you will be $95k all in once fixed. If you sell for 280k, you'll net $145k for a profit of 50k or a 52.6% cash-on-cash return. Also, the tax man will take up to 20% depending on your income. It's still a nice return, but selling it is like cutting down the apple tree and it won't produce any more fruit.

On the buy and hold side: Your home is at the bottom of the neighborhood in terms of value and that might hurt a little on the rent. I'll also assume that you are correct in your $2,100/mo rent assumption. You are about at the 1% rule (0.91%) to be exact. That's fairly low but typical right now. Your monthly mortgage is about $1,088 (because you just bought it and I assume a 7.5% rate). Remove $467 for tax and insurance, another 10%, or $210, for cap ex and rehab, that leaves you with $335. That's a 4.2% cash on cash return. Not a home run, but pretty ok for a first investment. And it likely will increase each year.

You should hold on to the property and rent it out. Your flipping career is temporarily over and now you are a landlord. Congratulations! Let me know if you have questions about my overly-professorial answer.