Crossroads; Refurb and Hold or Filp

[Account Closed]

Easy market in small town; scarce rental opportunities available with a healthy demand. 

I am interested in acquiring my first property, but it has some variables that are not ideal:

1 BR/1 Bath and not expandable, needs full kitchen refurb, new roof, minor interior work (paint and floor covering)

My main concern is the 1 Bed aspect as that puts me in a small niche of buyers. I am able to do most all of the refurb myself minus the roofing install. But my total reno cost are still around $10k. 

For the good: It's listing at $35k, huge lot and growing community and school system. Taxes are little to nothing and the home is close enough where I can do all the property maintenance myself. I could fill the unit at $600/mo very easily, possible get more if I waited a few months. 

There's the basics, here's my question if you will. After the purchase and reno, I will be in around $47-50k. But in this market, the home will have a value of $55k-60 at best. So, in order to recoop my investment, which avenue would you go down, either reno and hold or flip? 

[Ammon Brimhall]

It really is crazy how much there is to learn!! I'm excited that you're taking the bull by the horns and making it happen though. You're asking good questions and taking action so I know you'll get it figured out and nail it!

As for a general rule, there is what we call the 1% rule when it comes to a rental. It says that if you can get 1% of the value of the home in rent then the house should cash flow. For example, your house is worth 55-60k after it's fixed and gets about $600/mo in rent. As $600 is 1% of 60,000 your rental would fit the bill.

My word of caution is to understand that single family homes are really good investments as rentals so long as you don't count on the cash flow (in most cases -- NOT ALL!!) in the first 10 years. Most of your money will go to vacancies, management (even if you manage it yourself you still need to pay yourself!), repairs, maintenance, etc. After 10 years, your rents have gone up and you've normally made enough repairs to the building where you can really start pulling out 250-500/mo.

What happens to many beginners is they don't understand that long term nature of rentals and think they'll buy 3 or 4 and be well on their way to retiring in 6 months. Because of the cash flow misunderstand I very briefly lined out before and because of loan issues that pop up after about 5 homes -- it takes a lot of work and time to get the cash flow to really think about retiring.

It's not impossible, but you have to know that you want to do it and get strategic about it. There are ways to speed it up too (lease options, taking over payments, etc) but the FASTEST way I've seen to get cash flow from rentals is to flip like a maniac and then take 200-300k for a down payment on a 20+ unit apartment building.

I hope that wasn't overwhelming! I also hope I didn't scare you away from rentals as I love them -- but I wish someone would have helped me see the challenges so I didn't waste my first 12 months in the game thinking that 3 rentals would have me 25% of the way retired. :)

Finally, if what I said makes you pause, you could wholesale the deal to a dedicated landlord and walk away with a couple grand (landlords always pay for than rehabbers for properties that can be used as rentals-- GREAT TIP!!).

Very Best!