First House Under Contract....Flip or Rent?

Question

Got my first house under contract. One thing I'm doing in my due diligence is deciding how much to invest in rehab. Seems like a potential good rental to keep.

Purchase: 140k (3BR/2BA, 1550 sq ft w/2 car garage, Fountain, CO)

Comps: 185-205k (205 was this month, same floor plan, same neighborhood and fixed up)

Rental Rehab: 10k (cosmetic paint/carpet/appliances)

Flip Rehab: 25-28k (adding 4th BR and bath in basement)

Rent: $1275-1300 a month (was already getting $1250 in "not great" shape, consistently)

Can get 3.99-4.99% money either way I go off line of credit. I worked the BP rental calc and looks like I can cash flow 350-400 a month with allowances for maint., occupancy, etc...  Most I'm likely to make on flip is 10-15k.

Leaning toward keeping as a rental but appreciate any thoughts or strategies.....

Rowland Smith · Answer

Hey John:

Understand your thought process.  The only difference is that I have 4.99% money available as a renewable line of credit up to 75% of appraised value and have 3.99% available for balance or 25%.  If I used these lines to purchase and hold for awhile, then I'm 100% financed at 4.75%.

The ARV of the home after we put about 15k in it, adding a fourth bedroom, based on recent comps, should be 180k-200k (4 BR, 2 ba).  With 4 br, it looks like I can get 1350 a month in rent in that area.

Here are numbers I've put together so far:

Monthly P&I:$802.80 (includes purchase and rehab costs...zero down)

Insurance: $75

Taxes: $50

Occupancy: 5% allowance

Repairs: 3-5%

Other: 50$

Rent: $1325

Cashflow: $303.47

This is assuming that I pay principle back to my line of credit and not only interest, which I could if I want to.  My plan B at this point is to rent it over the winter months, then possibly finish out the basement in full, upgrade some rehab items then sell it when the market is hot in early summer.

The other positive of this rental is that it's very close to Ft. Carson, where there are many family rentals needed for armed services stationed there.

Have to decided in next couple of days...had GC, Inspector through and looks good so far. Doesn't cash flow a ton, but looks like renters will pay for property for me.

John Matthews · Answer

So, I didn't run all of the numbers, but I'm thinking you're going to be making a bit less than the $10k if you include holding costs. Let's assume you are though. Say you're all in for $185k to make $15k, you're looking at a 12% return...before taxes. Assuming you can get this done in 4 months (one month for rehab, one month to get it locked up and 2 months to close) that's 48% annualized.

Instead if you rent and refi, lets say you go a business loan with the following terms: 30 year amortization, 5% and a DSCR of 1.2, you're looking at a max loan of about $145k. In that case, it doesn't make sense to pay to fix it up. So let's say you don't fix it up and it's currently worth $140k, and you refi at 80%, so you're looking at a loan of $112k, for $28k left in the property as equity and $14k lost as closing costs. So you're all in at $42k. Assuming $100/mo net after all expenses and debt service, you're looking at $1.2k earned per year for a measly 3% annual return, not including tax benefits and equity in property. The numbers change if it'll appraise for more than $140k, if you can get it to appraise for up to $175k as is, then I'd almost definitely say keep as a rental to pull almost all of your cash out and try again.

Personally I love the rentals vs flips, but this is a pretty cruddy rental. My suggestion would be to sell and get a better rental.

Dawn Jett · Answer

If it cash flows, rent it out for a few years.  The property will appreciate in value, which you'll enjoy a little extra cash and some nice tax breaks.

On the flip side (no pun intended), if you sell, then you can move onto another flip with no tenant headaches.

I have a number of rentals and also do fix and flips, so I benefit from both.

I thin it's a winner either way.

Good luck! Let us know what you decide.

Dawn