Hold on longterm, or hold then rehab/flip

[Jake Rayburn]

Hey BPr's! 

My name is Jake, and I am a seasoned construction manager, but a rookie when it comes to buy and hold deals.  I have been a project manager on the building side for 12 years, so very familiar with costs, and the local market where I work in Houston, TX.  I recently purchased 2 properties from an investor as my first 2 buy/hold properties, and I have some questions, and or seeking advice, and would like to get some input from some more seasoned pros in this business.

The following information relates to the purchase of these 2 properties:

2 patio homes right next to each other

- Purchase price of $110K each

- Appraisals of properties were $127K, and $126K

- 15% down on a 30 year conv. loan @ 4.125% (Did 15% so I could purchase 2 properties vs. 30% onto one property)

- Rents were $1100 per month each when we closed (at least they were supposed to be...  more on that later)

- One lease is up and being renewed as of 11-1-16 at $1175 for 12 months ($1100 when I bought it)

- The other lease was renewed 30 days before the purchase for 2 years, and is stuck at $1000

- Mortgages including escrow/taxes are $975.42, and $966.83 respectively, so I am cash flow positive a total of $240 for both properties roughly, not including any repairs.

Some other interesting information on the purchase:

- At the time of purchase, the wholesaler we worked with fed us bs on what the rent rolls were.  One property was correct, but when closing on the 2nd property, I discovered at the closing table that the lease that had just been renewed was $100 per month less than the information we were provided prior to the closing.  I told the seller that I was not going to close on the deal unless they came to the table with the shortage.  I was able to get a cashiers check for the additional $100 over a 24 month time frame at closing, and it was not part of any of the paperwork, so they cut me a check for $2400 which was essentially my profits for 2 years on one of the properties, and because it was not part of the contract, I am not planning on claiming it for tax purposes.  This turned out to be not a bad deal, but now I am much more exposed to liability on this particular property, since it is only netting me $30 a month for the remainder of the current lease (18 months).

My questions are:

1) Should I pay down the mortgages another 15% to get rid of escrow/pmi, and therefore increase my cashflow per month, and increase my tax deductions for the year?

2) Should I dump the one property since I've realized the profit on it already to another investor (if I can find one) and get my down payment out to find a better property?

3) Should I keep these properties and up the rent when leases come due?  The market rate for rents in the area currently are $1300-$1400 so there is upside potential there in the longterm.

4)  I estimate I could rehab these properties for $10-$15000 each, and put them on the market for sale (when leases come due) for $145K.  At this sales price, I would be looking at a healthy $30-$35K profit on each property.  If so, should I do that after a 2 year time frame to avoid short term capital gains tax?  This method would turn my $40K downpayment into $100K in less than 3 years, not including the hopefully positive cash flow I would receive.

5)  In regards to option 4, I will most likely rehab the properties while the tenant is living in the property so that I don't have any holding costs when they move out to do the rehab, and I can take my time doing it.  It will also be ready to go on the market the day after the tenants lease is up.  The rehab consists of finish items only, and no structural changes to be made.  (paint, counters, cabinet update)

I know there are probably several options I have not considered.  I would love to hear thoughts/opinions from some seasoned pros that have been through this before.

Thanks for your advice on this!  This is my first post here, and looking forward to many more interactions with all of you!

Jake