When Should a Planned BRRRR Turn Into a Flip?

[Andrea J.]

Hi BP! I'd love to get your opinion on our current situation:

We bought a unique duplex three years ago in Los Angeles that is made up of a large 2400sf house with a 400sf guest house on a 7500sf lot, zoned R1.5. (Which I'm interpreting to mean that it could be developed into 5 units) It was our first property, and we house hacked and rehabbed it, and pulled our money out via a HELOC last year (now fixed at 6% over 20 years). We are renting individual rooms in the house now, and the property is cash flowing between $500-$1100 per month, depending on occupancy, and assuming we don't have to do any repairs. My real estate agent thinks that if I sold it now, I would net close to $400K, and we could take advantage of the tax exemption since it was our primary residence.

The house was built in 1921, and is in good shape, but not restored. It would need a new kitchen, windows, floors, the addition of a master bedroom, hardscaping, or some other major construction if we were going to force any new appreciation on it. The cash flow projections just don't seem to support any other large projects, even accounting for a 3% increase in rents every year. 

Our original plan was to keep this property for the next 20 years and then sell it to a developer who would capitalize on the zoning and build up. It's in an up and coming Mid-City area, between two older apartment buildings. Looking at the numbers now, and how unfriendly California is to landlords, I can't help but think that we should take this money and get into another market. We already bought another primary residence in LA and have started the process all over again. 

Should we just take this money and run, or are we crazy? What small investor has a cash flowing property in Los Angeles, and how would we ever afford to get another one?? Why would someone sell one, considering the potential appreciation in the area? 

In short, when should a BRRRR become a flip?

[Seth Borman]

I would hang onto it. California may be landlord unfriendly but lots of people are getting rich doing it nonetheless.

What I would do, however, is start asking the neighbors if they are interested in selling. Even if you can't afford the property you can option it or wholesale it to a developer.