First Investment: To Flip or Hold & Rent?

Question

Hi Everyone! New investor here. I'm so excited that my first investment home is crossing the finish line in the next couple months after 8 long months of renovations. My husband and I purchased this home as we felt it was a good deal (jury is still out) -- but we go back and forth DAILY on whether to sell or rent it out.

Our long-term goal/retirement plan is to have several rentals. We already have one -- our old home in Atlanta (which isn't cash-flow positive per month, but our mortgage will be paid off in 12 yrs so we're okay with that...at least for now). We also want to start doing a few flips per year for income. So with this new house, we could really go either way and achieve either a short-term or long-term goal.

The new investment prop: purchased for 162k and have put in 77k cash total (ouch) which includes the down payment, closing costs, repairs and carrying costs.

If we were to SELL, after factoring in commissions and closing fees, we would make roughly 20-25k. New market value is 270-275k and we'll be "all in" at 250k after fees to sell. (Not too bad, but we've put A LOT of our own hours in, so the hourly rate is not great if you look at it that way.) We'd roll the profit into another house.

If we were to RENT, we would do a cash out refi for 205k, get 50k back at closing, but only make about $150-200/mo -- rent would be around $1600. (Seems low to me as we'd still be out 27k -- our 77k cash in minus 50k back at closing).

I have always felt like this is a better flip than rental just due to the large amount of money we've had to put in, but I don't want to be short-sighted since we ultimately want several rentals, and we've already put in all the sweat equity into this one. The area is up and coming and experiencing high growth -- but it is a very small cottage so I worry that values may not increase a ton on this house.

I'd love to get input from seasoned flippers or investors on what you think. Thanks so much in advance!

Julie W. · Answer

Thanks @Ryan Thomas! I appreciate the input. We've come to terms that this is a bad rental scenario with so much of our money poured in. Now our fingers are crossed we can get a decent price this spring.

Ryan Thomas · Answer

@Julie WimberlyI would sell it and cash in. According to the analysts I’ve spoken with, housing prices are going to head lower (Idk if it’s true or not but seems to be a popular opinion at the least). Flips are great in this scenario because they are a shorter term investment that you can profit from quicker and ride with market fluctuations more steadily throughout the year. It seems like it will be a while before you start producing positive cash flow so it might be worth it to continue flipping just for the time being. Collect some cash!

Julie W. · Answer

Thank you for your input, Thomas. With our first property -- the Atlanta home -- we have seen huge gains in the property value. We almost sold for 280k five years ago (making a very small profit; we bought this house at the peak of market in 2006) but decided to rent it out. Our mortgage payment was much lower and we were initially making $400/mo from rent. Now it's worth 425-450k, and the city has taken notice of that (huge taxes raises every year) plus we switched to a 15-yr mortgage back when rates were in the low 3's so our mortgage payment is higher, but we're paying it off faster. We have 225-250k in equity now so we're happy we've held onto it. Our thinking has been that we'll have 400k+ in 12 yrs for college/retirement. Once we learn more about investing, we may change our viewpoint on that -- so any input is very much appreciated.For our current project, I appreciate the input and agree that the numbers do not seem favorable to keep it as a rental -- and it has not been a great investment overall. I've heard you don't make money on your first one, and we're no exception!

Thomas S. · Answer

Your basic business approach to hold and rent is not going to work. Your first property is a very poor investment as a hold since you are losing money. Paying off the mortgage is irrelevant at this point in time. Your new project will be another very poor investment with rent at $1600 on a $275K property will never produce positive cash flow long term. I would be selling both immediately and be investing in positive cash flow investment income properties. You are presently heading down a road to bankruptcy when markets turn. Additionally, based on the numbers on this present property as a flip it is also losing money. Taking 8 months to profit $25K with mostly your own labour is not working for you. The real numbers based on opportunity value, cost of holding etc. works out to next to nothing.I strongly advise you re-evaluate your long term business plans. They are presently not working.