Rent or flip?

[Mark Forest]

I am flipping my first house now, but if we don’t get the price we want we plan to rent it out. What considerations do you all go through to decide if your investment is a flip or rent? I know one consideration will be positive cash flow. I have no problem being a landlord.

Thanks

[Jon Holdman]

This is just a math problem. There are numerous posts here that talk about the details of the math for both flipping and renting, so I'll only briefly summarize here. Please do go read other posts that go into much more detail. These are roughly the forumulas I use when evaluating a property.

Flip:
Profit = Sales price - sales closing costs - hold costs - buy closing costs - purchase price - rehab costs.

Sales prices is usually something less than ARV because you're wanting a quick sale.
Sales closing costs are roughly 8% of the sales prices. These days, add another 2-3% for seller concessions. You can save, maybe 3% of this if you FSBO is. But, it may take much longer to sell.
Hold costs are the utilities and interest. For a six month hold with hard money, figure 8% of the loan amount.
Buy closing costs are about 2% plus points. Hard money can be anywhere from 0 to 6 points, probably in the 4-ish range. You'll also have other prepaid items like a appraisal, insurance, inspections, and surveys.

Rental:
You have your total acquisition costs as a starting point. About the same as above, though you may have fewer points if you do conventional from the start. You'll have more costs is you do the hard money/refi route. Then, your monthly cash flow is
Cash flow = rent - all expenses - P&I payment
Expenses is a subject of much controversy. Go read the long thread on this topic in the landlording forum. I use 40% of rent as my assumed expenses, which assuming I'm not paying for property management.

Now you know your immediate profit and your long term monthy cash flow. If you have money invested yourself (very likely), you'll need to factor the opportunity costs of that money out of the returns. I would usually just use CD rates as a base case. So, if I have $15,000 into a deal, and I could get 5% for CDs, I'll subtract off $750/year in opportunity costs. So, just compare the money now to the income stream and see which works better for you.

The rehab piece for rentals vs. flipping is different. For flipping, you want to be as nice or a little nicer than other properties that are for sale. You want your house to be the best deal around. For rentals, you want it to be sturdy and easily fixable. You want basic cabinets, floors and countertops. If your about to dive into a rental where you're thinking stainless and granite you're almost certainly about to lose your butt. Maybe someone can find an exception, but "nice" rentals translate into the landlord subsidizing the tenants housing.

So, the problem with the "flip if I can, rent if I must" strategy is that you'll do a flip level finish, then end up renting. You may be able to get a slight premium, but probably not enough to cover the extra cost. And, you'll have to fix it up some more when you do decide to sell.