First investment: Buy and hold or flip?

Question

I'm new to BP and excited to be part of the community!

My situation: I have been learning about REI for a while and recently decided to start actively exploring opportunities. Today a realtor contacted me about an opportunity to pick up an unlisted house for less than $20k (3/1, 998sf). Current tenant will be out in November. House is in good condition, with a relatively new roof--single owner for the last 50+ years. Slight foundation issues, which is normal for the area. HUD would pay $950/mo in rent. The BP calculator said the same. I'm conservatively estimating $700/mo.

I'm going to look at the house tomorrow. If it checks out, I'm planning to pay cash to close quickly.

My REI Goal: I want to create $10k/mo in cash flow so that I can have financial independence.

My question: Several realtors I've talked with think the house could go for $35-40k on the market. What is my best strategy: rent it out or sell it?

If I kept it, I would likely add $2-4k in improvements, then refinance and pull out the equity to use for other projects. The monthly rent should more than cover that refinance. Or I could quickly sell it and make a nice project to leverage for other projects.

What would you do in my situation?

Susan Maneck · Answer

With a 3/1 you can probably get $800 a month right now. Rents have gone up a lot this year but you'd need a second bathroom to get $950. Looks like you are going about this right. You're only problem might be the financing. If you'd be willing to live in it for a little while they couldn't deny you that. But if you can make this a cash deal it would be better and refi it later. I used to finance my lower end houses with HELOCs from Wells Fargo a year after I purchased the home but they have a moratorium on those right now. Pity because it was about the only place that gives those on rental properties. Buy and hold, don't flip. Save flipping for properties in the 39211 area.

Elijah Friedeman · Answer

@Rolly Weaver The home is in Jackson, MS, where I live. I'll have a better idea of the home condition once the inspection is done. I still have some digging to do. I don't have a refinance secured yet, but I'm optimistic I can work through some of the local credit unions to make something work. Even if I can't finance, I'd hold on to it and let the cash flow work its magic.

Thanks for sharing your experience! I'm hoping for a similar outcome here.

Rolly Weaver · Answer

@Susan Maneck great advice.

Ken Dunn · Answer

If your goal is to create $10K in cash flow so you  can have financial independence, I would definitely hold and rent it long term. As you mention, you can refinance later and pull out some equity to go buy more projects.

You can get rich flipping properties, but you will not build Wealth…in my opinion.

“Wealth is an income stream”.

Want to build Wealth faster? Then build MULTIPLE streams of income, the type of income where you earn even while you sleep, month after month, year after year.

Top that off with the power of compound interest, the ability to leverage other people’s money and the multitude of other benefits of owning cash flowing real estate and it is easy to see why real estate is responsible for creating more millionaires than any other asset class.

BUT (and this is a huge BUT)…many of these benefits are almost exclusively reserved to those who actually OWN (or at least control) the real estate.

I’m sure others will have differing  opinions. My vote would be to acquire as many cash flowing rental properties as you can and hold them long term, 10 - 15 - 20 plus years.

Cheers,

Ken

Elijah Friedeman · Answer

Hi @Susan Maneck, thanks for the advice! It's great to connect with someone else in the Jackson market.

I'm ready to put more money into this house--your $5k number is a helpful guide.

This house is a 3/1 and relatively new--built in the 60s. I'll have a full inspection done, with a focus on all the key systems. I want as few surprises as possible!

The zip code is 39213. Glad to hear that about rent at your 2/1. That's encouraging. Thanks for the Trustmark tip!

Susan Maneck · Answer

Hi Elijah,

Since I own and rent properties in Jackson let me speak to this. Do not assume you can get away with just investing 2 or 3K into the house. I always plan on spending at least 5K. Check the wiring carefully. These 2/1 houses are usually quite old and often have nickel wiring which is a real fire hazard. Also, check the heating. The heating systems in these houses are usually very antiquated. What zip code is this house in? Be sure you get an inspection before buying as I think you are going to find a lot of surprises. As for rent, depending on the zip code you can probably get more than $700 right now. I get $770 for my 2/1. You probably won't be able to get financing through the credit unions unless you live in the property. Trustmark does do loans for some of these low end properties.

warmest, Susan

Elijah Friedeman · Answer

@Christopher Cole It seems to be a really good situation. I'm not sure what's motivating the current seller to get rid of it--but it may be that he's old and the current tenant is leaving. He may not want to deal with getting a new tenant. I am being cautious in exploring the deal, however. Also, I don't think I'd get $950/mo--that seems too good to be true.

Thanks for sharing that insight from J Scott! That's my leaning, but several people suggested that I immediately relist the property for a quick profit. I ordered the BRRR book yesterday!

Christopher Cole · Answer

Getting a $20k house with only 2-4k worth of work necessary seems too good to be true. Getting $950/mo on a $20k house sounds like it could be in a very difficult area to be investing in. Proceed with caution.

To answer the question directly, I once heard J Scott (a very successful flipper who hosts one of the BP podcasts now) say he wishes he had held onto every house he flipped. That spoke volumes to me.

The buy & hold strategy you are describing is known as the BRRR strategy. You can find lots of info around here and a book on the topic.

Rolly Weaver · Answer

Where are you located? I’m surprised you could refinance with foundation issues and refinance for such  a small sum. if you can rent for $950 a month with 25k, even before refinancing…those are good numbers, but with an older owner, there might be capital expenses.

I was in a similar situation like you and bought  a house for 23k 7 years ago and rented to the same tenant since. It has paid for itself two times over already.

First investment: Buy and hold or flip?

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