First Investment SFH, Flip or Rent?

Question

Little help here as I am torn on what to do. I'm 27, owned my current home for 3 years ($200k equity conservately) and just closed on a nearby investment home.

The home was offmarket/by owner and I purchased it for $400k in a very desirable area, it appraised for $457k as it sits and is very dated, all the comps are in the 500's. I am fully renovating it (paint, floors, appliances, kitchen counters, etc) and am torn on flipping it for 515-540k or renting it out. My renovation costs will be under 20k.

If I rent it, I have two dillemas. One is that the market rent is realistically around $3k, 2-300 more if I get the right person, so cash flow is pretty minimal witha mortgage of $2800. And two, is that I did a conventional loan with 25% down so I have to wait 6 months until I can pull a good chunk of my money out and move onto the next. And even if I do pull money out with a cash out refi, I'd have to hope rates go down enough to offset the higher loan amount/monthly payment.

My gut says keep it the 6 months, get my money out, and move onto the next. But that 6 month seasoning is putting a damper on things. My long term goal is a portfolio where it can be a full time "job", whether I stay in residential or mix in commercial.

I'd hate to wait 6 months with a large chunk of my money tied up before I can get another property. Moving forward I think I should have used a hard money lender to purchase, but hindsight is 20/20 and I'm learning. I have thought about a HELOC on my current home to go and buy another, but that amount of debt has me a little uneasy

Long story short, do you flip it and try to 1031, or rent it and 6 months later refi and keep it given the market rent.

Dave Foster · Answer

@Shane Haas, I'm not the mortgage guy.  But you may be able to work around with private money still.  The model you're looking at is a great way to combine the adrenaline satisfying fix n flip model with the tax savings of a 1031 model.

If you can slow down that first flip so that you rent it and then refinance to get your next property.  You'll find that you can do this forever.  And once some time has passed you'll start to 1031 your first properties.  And voila!  You've got renovations going that the same time sales and 1031s.  And life is just as busy as you'd want it.  Tax free spending money comes from rental cash flow (offset by depreciation) and refinance cash  (tax free anyway).

If I could caution you on one thing.  In my view your numbers are really too tight to make a true flip work for you as a first investment.  Most folk will over estimate what the property will be worth and forget about costs of sale.  And they also underestimate the costs of a reno (there's a rookie tax of 30-50% that all of us have paid at one time or another).  And then you also have to figure tax on your net gain. I don't think there's a lot of meat on that bone without some holding period.

The longer you own the property and generate rent, depreciation, amortization, and appreciation the more it will smooth out those potential hiccups that would otherwise impact a quick sale.

Elizabeth Goff · Answer

You can only 1031 rentals, not flips, so that may be a consideration. Technically it depends on what your intention was....if you meant to rent it and then decided to flip it might be ok.  But personally I am conservative and wouldn't try it.

Kerry Baird · Answer

@Shane Haas You have gotten some great advice here.  I am also investing in Florida and have the same conundrum...but I am 39 houses worth of experience down the road from you.  Half of the Baby Boomers have retired and half are due to retire over the next decade.

---> Given the local demand in your market, do you think demand for your properties will increase or decrease?

If you take a harvest now, in the beginning of your budding investing career, you kill the golden goose.  I know, I've killed a few.  My advice is to rent it, ensure your rents increase year over year to offset property tax and insurance increases.  Find a way to get your next owner occupied house...improve over the year you occupy, turn it into a rental.  Now you have low owner occupied interest rates and have a nice improved house to rent.  Do this again and again.  Stay 2 years if you care about the capital gains.  In your area and in mine, we will have a lot of golden geese spinning off lots of...equity.  The wealth builder.

Dave Foster · Answer

@Shane Haas, That'll net you around $40 - $50K in actual post tax in your pocket (not counting carrying costs and setting up the financing.  Hall of fame careers are made up of singles.  And that's a nice one if you're certain of your numbers.  Ordinary income tax of $20K isn't all that much in perspective.  Until you look at the difference between having that money in your pocket to buy a property now.  Versus having $60K ish (plus loan amortization and potential appreciation) to buy something in a few months.

Shane Haas · Answer

Much appreciated. The closest comp is around the corner and sold for 550 last month. My purchase price was 400, and the renovations will be done in 2 weeks (they started the day of closing). All in renovation costs under 20k, should settle in that upper teen mark. Think selling for 520 range is too tight?

The original part of what you stated was my goal, hold and maybe 1031 in the future, but being stuck parking all this money for 12 months is really really frustrating. I wanted to refi a chunk out and move to the next

Shane Haas · Answer

Got off the phone with rocket and you all were correct, 12 months. Ridiculous that they can tell me one thing and when I close it’s another. Now they want to pitch me a home equity loan at 10%!

So now the question is if I should just flip it? Can a dscr loan with another lender pay off my original loan with rocket and get me some of the cash back? In the process? Apologies if that’s a dumb question, but have to learn somehow

John Karg · Answer

Hi Shane,

As others mentioned, for conventional the mortgage being paid off in a cash out refinance must be at least 12 months old. DSCR loans won't be as strict but will often require at least 6 months as well, and the rate will be a bit higher. A HELOC on your primary residence would be very easy to do, with LTVs up to 90% and very low closing costs with nothing coming out of pocket. Feel free to reach out with any questions.

John

Jay Hurst · Answer

In writing will not matter, the Rocket LO was selling cars 6 months ago and just does not know any better.

Raymond J. Rodrigues · Answer

@Shane Haas, as @Jay Hurst mentioned, it went from 6 months to 12 months. That is a fact and all lenders that administer conventional loans follow the same guidelines. I know it's not something you want to hear... but is the honest truth. The guideline link that Jay posted is directly from the conventional loan overseers that make the rules. Happy to answer questions that you may have. Rocket mortgage honestly is just a big box lender that is not investor focused at all...

Shane Haas · Answer

I can double check, but I talked with the lender (rocket) before closing, and was told 6 months. Even have it in writing when I asked, so that would be interesting

First Investment SFH, Flip or Rent?

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