To sell rehabbed property or hold options

Lender · Chicago, IL · Member since 2021 · 424 posts · 145 votes

1y

Hi there,

Congratulations on starting your real estate investing journey and completing the rehab on your Detroit property It sounds like you've done a lot of work and are now at a critical decision point.

First, let's break down your situation:

- You've already done major rehab and have a tenant in place.

- You analyzed the hold option and know it can cash flow.

- The property is not getting much traction as a turnkey, and your hard money loan is maturing soon.

Here are some key things to consider:

**Refinancing with a DSCR Loan:**

- DSCR (Debt Service Coverage Ratio) loans are great for investors because they focus on the property's cash flow rather than your personal income.

- Make sure the property appraises for the calculated ARV (After Repair Value) to get the best loan terms.

- Consider the loan terms, interest rates, and any prepayment penalties. You can use BiggerPockets' loan calculators to run the numbers. You can also use DSCRANALYZER[dot]com.

**Conventional Loan:**

- Conventional loans might have better interest rates but often require higher credit scores and more personal income verification.

- They might not be as flexible as DSCR loans for investment properties.

**Other Ways to Flip:**

- If you decide not to refinance, you could consider partnering with a local real estate agent who specializes in investment properties to get more exposure.

- You might also look into staging the property or taking high-quality photos to make it more appealing online.

- Another option is to list it on multiple platforms, including local real estate groups and social media.

**Additional Tips:**

- Ensure you have a solid exit strategy, whether you decide to hold or flip. Knowing your next steps can help you make a more informed decision.

- Keep an eye on the local market trends. If the market is slowing down, it might be better to hold and wait for a better time to sell.

It's great that you're thinking ahead and considering all your options. Remember, it's okay to take your time and seek advice from experienced investors.

Feel free to reach out if you need more specific guidance or have further questions. Good luck with your decision

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Taz Zettergren

Real Estate Agent · Memphis, TN · Member since 2019 · 365 posts · 264 votes

1y

@Juan Alvarez congratulations on starting the real estate journey! When selling properties occupied it's a challenging task because your buyer pool is so limited to just investors. If you're wanting to flip and are on a time clock bc of hard money I would recommend leaving the property vacant because it opens you up not only to investors but owners occupants as well.

One thing I was unaware of on these DSCR refinances is the pre-payment penalties. My top 3 go to lenders all have 5,4,3,2,1 pre payment penalties, you can pay some points up from to get that to a 3,2,1 but there's still a penalty for paying off early. So if you have deep enough pockets I'd hold the property for longer and refi into a conventional loan if possible. I'm trying to turn my money quickly so I can get more units because I plan on holding these properties as rentals so I don't mind the pre payment penatly I'll just have to wait to refinance those if/when rates come down far enough for it to make sense.

Hope this helps, best of luck!

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Austin McClainBusiness Member

Real Estate Agent · OH · Member since 2021 · 347 posts · 602 votes

1y

I prefer to hold unless you need the cash. It is better to keep taxes low and get long-term appreciation. If you need the cash liquid, that changes the decision

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Denis PonderPro Member

New to Real Estate · Yuma, AZ · Member since 2023 · 280 posts · 246 votes

1y

Does is currently cash flow? Will it cash flow on a refi at 75% ARV and DSCR above 1? Will that cover you financially?

If the PITI plus expenses are being covered by the renter and you can get most/all of your cash back, hold it. Unless you need the cash now.

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Drew SygitBusiness Member

Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes

1y

@Juan Alvarez hindsight is 20/20, but you should have listed it for sale vacant - which would have given you a large buyer pool!

The last 4 flips we've assisted clients with all sold to owner-occupant buyers - which is great news because they typically pay the most.
(We have also sold several tenant-occupied rentals to other investors, but didn't rehab them)

Some questions to think about:

1) If you keep it, who will manage it for you?
- If you're already working with a local PMC, why hire them when they should have advised you to list if vacant?

2) What DSR prepayment penalties are you prepared to accept?
- Makes it more expensive to sell until they end.

3) Listing for a "few weeks" is ambiguous. Specifically, how long have you had it listed?
- It's after Labor Day when all kids are back in school and as a result, the market has slowed.
- It'll slow even more after Halloween.
- It may be cheaper to see if you can negotiate a reasonable extension fee with your HM lender and continue to try to sell.

DM us if you'd like to chat more...

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Alan AsriantsBusiness Member

Real Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes

1y

KEEP THE BEST, FLIP THE REST

If this is in a D class area and you're chasing cash flow from section 8 tenants, I would sell it, move on and reinvest your capital in a solid area.

If this is a solid area (A-B Class) with lots of job opportunities, growth in area, etc, then hold out for a tenant and rent it. You cannot refi most loans without an existing tenant and lease in place

Being out of state complicates things a bit here.

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Crystal SmithPro Member

Moderator

Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes

1y

Quote from @Juan Alvarez:

I started my real estate investing journey earlier this year by buying an out of state property in Detroit Michigan with the goal to fix and flip as a turnkey. I did some major rehab (new roof, windows, etc) and also have a tenant in place now. I have analyzed the hold option prior to closing to make sure that if I decided to hold, this deal would cash flow. After listing as a turnkey for a few weeks, the traction has been minimal and have begun exploring DSCR loan options to refinance and hold as my hard money loan is maturing in a little over a month and I do not want to extend.

Would like opinions on things to consider that I may not be thinking about as a rookie on conventional or DSCR loan assuming it appraises for the calculated ARV during analysis vs finding other ways to flip now. Any guidance, thoughts, perspectives would be greatly appreciated. Thank you in advance!

My recommendation- Please don't wait until the last minute to move out of the Hard Money Loan. Whether DSCR or conventional get out of the hard money loan. Go with the product that allows you to pull out as much cash as possible.

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Adam BartomeoBusiness Member

Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes

1y

The true benefits of real estate investing are realized when you hold. Typically, the longer you hold the higher the benefit.

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Lynn McGeein

Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes

1y

We actually have regretted flipping because finding good deals in our area is so difficult, wish we would have just kept them all. But it depends on your philosophy. We found that we are better buy-and-hold investors. But like Drew Sygit said, if you're going to sell it, in the future, vacant is best, especially on a new renovation. Owner occupants generally pay higher, and lots of investors prefer to choose their own tenant, not inherit yours. Plus, tenants get upset when you're forcing them to show the home, and can sabotage showings very easily, lying about problems, clutter and cleanliness issues, etc. If it's in a good area, cash flows, and hard to find another one to replace it, I'd rather keep it.

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Ashish AcharyaBusiness Member

CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes

1y

@Juan Alvarez From a tax perspective, holding the rehabbed property as a rental offers several advantages. You can deduct expenses like mortgage interest, property taxes, insurance, and repairs, as well as depreciation on the building (but not the land), which helps reduce your taxable rental income.

If you refinance, any interest paid on the new loan would also be deductible. However, if you decide to sell after holding the property for over a year, you could qualify for long-term capital gains tax, which is lower than ordinary income tax. On the downside, if you sell, you might face depreciation recapture, which would be taxed at a higher rate.Have you done tax impact analysis on both of these cases?

*This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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To sell rehabbed property or hold options

To sell rehabbed property or hold options

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