Pay more to buy and hold?

Question

Hey Everyone!

So I'm new to real estate and have a question. I'm looking to flip but am certainly open to buy and hold/rent. To me it seems that when looking at a foreclosure that it makes sense to pay a little more if the plan is to buy and hold instead of flip.

Just throwing numbers out here. For example if a house after repair value is 200k. Knowing the rehab cost lets say I would need to get the home at 110k to make sense to flip it. However, if I want to buy and hold it may make sense to pay up to 135k.

Would you agree to this approach? If so how much higher would it make sense to pay if you're going to buy and hold.

Garrett M. · Answer

I'd vote that you apply the BRRRR strategy. Buy and rehab a C/D house in a B area with cash and some credit if you need it. Then get it rented and cash flowing and refinance your cash back out of the property and repeat. You may be able to generate a surplus of cash if the ARV comes back higher than anticipated. You could repay your cash back into the bank, have 25% equity in a cash flowing property and make some extra capital in the process. BRRRR beats flipping because you keep the asset, you potentially make the same profit you could on a flip, and you get all the other benefits of rentals: interest payment deductions, depreciation over 27.5 years, leveraging your equity to purchase other properties, and dont forget about the potential appreciation of both future rent prices and the property itself.

JD Martin · Answer

Well, time is generally your friend when it comes to base asset price in real estate, so in theory you could "overpay" on something you are going to hold for a long time as a rental. That said, since you never know if/when you might want to/have to sell, you should really avoid overpaying at all. But if you really wanted into RE, and you wanted to stay local, you have to customize your strategy for that market. I live in one market and work in another. In the market I work, buy and hold makes no sense because the margins are too small, and flipping is difficult because the spread is too small. Building from scratch, however, is a gold mine. Where I live, buy and hold is great, flipping is marginal because of the top end limit, and building from scratch is low margin because of high land prices (lack of flat, buildable land in the mountains). So everything depends on where you want to invest.

JD Martin · Answer

Ps: I won't do a flip for less than $30k clear at the end of the sale, unless I was literally selling from one day to the next with no effort on my behalf. Otherwise, it's just a reasonable paid job, and I already have a job. Buy and hold is part of my long term strategy for my company.

John Thedford · Answer

Either approach has the same rule: you make your money when you buy. How much you want to make is up to you.

Steve Vaughan · Answer

Some houses and areas are or aren't good rentals.  If you can only get $1k per month in rent for a $200k house?  No way.  Will this make a good rental @Vic Vega?  Will it bring in closer to $2k/mo in rent?

In general you won't have to go with tile, granite and stainless for rentals as you might for flips, so your rehab budget can be a lot less.  Maybe you can 'make up' the $18k in higher price from your lower rehab budget.  Durable and functional.

The 70% model would sure be a tough sandbox to play in these days I would think.  Better an 80% buy and hold, leave the rat race deal than no deal at all sometimes. A buy and holders $.02   Cheers!

Vic Vega · Answer

@Garrett M. thanks for the feedback. Now do you utilize the BRRR strategy ongoing, or simply just a fews times to build up some capital then allow yourself to tie up capital in rentals longterm?

JD Martin · Answer

Well, there are things to consider when it comes to tieing up capital in anything. Technically, capital tied up in hard assets is opportunities lost, especially in today's ridiculously low cost borrowing environment. On the other hand, capital that is not deployed is a safety hedge against disaster. I am a big fan of Brrrr, but I am also financially conservative and thus prefer to leave a significant amount of capital unused, either as numbers in an account or as an unencumbered (no mortgage) asset. This is a balancing act that no one but you can answer. The older you get, the less exposure to risk you are likely to want. If I was 25 again, I would be going full bore with everything in play. Getting older and close to retirement in my day job, I have less need to take greater risk.

Vic Vega · Answer

I was also wondering if some people like to have a certain amount of capital before they start tying up money long term in rentals. A gentleman I spoke to a while back said when first started it was flipping only to build enough capital to allow himself to start tying money up in rentals.

Personally I have 100k in cash which certainly is enough to tie some up in a rental. However, I'm a business owner and due to new Government regulation, we'll likely begin executing an exit strategy about 12-18 months from now. So I'll likely need some capital to start a new venture, possibly.

Vic Vega · Answer

Understood and all good points.

Kind of like what you're talking about @Jd Martin. Say you initially wanted to flip a home and needed to get it at 100k to make your required 30k profit in the end. But the bank is firm on 118k, so at this point it is no longer a worthwhile flip. So you scrap the flip idea and instead you decide you're okay with accepting the current bank price and take it for 118k to then buy hold and rent. Now with this you will likely make 30k and potentially much more in the long term.

So overall and in general would you say it makes sense to pay a little more for buy hold purchase compared to a buy flip purchase?

Pay more to buy and hold?

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