To flip or buy and hold?

Question

A client of mine has a 2 bed/1 bath SFH they are wanting to sell. It needs A LOT of cosmetic work (none of which I will perform) and it’s in a C neighborhood. Low crime rate but is a lower income area and old cotton mill town. The sales price is only $10K. The contractor estimates about $15K in renovations. Rental would be around $500/month. With an approximate all-in price of $25K, would y’all suggest a buy and hold or flip? The arv will be about $50K. As an FYI, I have 6 commercial rentals and 1 sfh. I’ve never performed a rehab.

Michael Haas · Answer

@Reggie Rearden sounds like you're a accountant/tax guy, so this is stuff you already know. Holding that property long term with that cash-flow will play out quite a bit better for you than taking a $25k profit at your highest marginal income tax rate. Or hold it for one lease and sell at long term capital gains rates.

Depreciation, Deductions, and Capital Gains is the name of the game. In my book, if you're paying ordinary income tax on your real estate profits you might as well be working a job.

Reggie Rearden · Answer

To be completely honest, i only own a tax and bookkeeping business. I also own a salon. I know nothing about either. I solely own them because I know there was a market for both in the area. My strong point is managing businesses and not working them. That being said, after speaking to one of my tax advisors, we’re going to buy and hold. Thanks for the feedback.

Reggie Rearden · Answer

We decided to hold it. The property will pay for itself pretty quick. Fortunately for us, we have awesome tenants in all properties already and I have a regular w2 job. Thanks for the replies.

Keith Perkins · Answer

@Reggie Rearden Really the answer probably lies in what you need right now.  If you need the quick cash the answer is a flip.  If you are earning enough from the other 7 properties or maybe you have a good job then I would say keep it as a rental(assuming you can place a solid tenant in that area).  Good luck with whichever you decide!

Reggie Rearden · Answer

purchase price is $10K and I’m paying closing. I’ve gotten 3 quotes from $10k to $15K for renovations. At the most, I should have $30K total into the property.

Phillip Vera · Answer

@Reggie Rearden looks like you made a decision and with this one, you can't really go wrong.  I'm down the road on the Georgia side, but Aiken is a great market.

I like @Ben Dean's advice, especially if you can sell upwards of the $90k range.  It'd take a while to make $65k at $500 per month in rent.  At the $50 sales price, I'd probably keep it for cashflow.  Not sure if a refinance is an option, but the rental rate is pretty low that you most likely wouldn't get any cashflow out of the property.

If you need any help on the renovation, let me know.  I know of some folks that would do some renovations in Aiken and have for us before.

Ben Dean · Answer

@Reggie Rearden if the ARV is $60k-$90k and the rent is $500/mo, I’d say the ‘greatest value’ would be in selling. If the rent was a little higher, ~$750/mo, it might more of a toss up.

I’ve got a rental in Aiken that is in the category of a toss up. Since I’m trying to build a rental property portfolio, I’ve decided to keep it, instead of selling. This fits my long term vision and goal.

If/when I find a property that makes more sense to flip/sell, I’ll just add the cash to my account and use it for future deals.

Reggie Rearden · Answer

@Darius Ogloza I fat fingered that $50K. I was looking at the other comps and they are selling for $60k-$90k in that area. That area is starting to grow economically. Like in stated, I’m new to this side of REI, as I have commercial properties and a couple of small businesses. My personal highly uneducated guess would be $80k. This is the smallest home in that area. Im probably being pretty conservative on those numbers. I’m going to definitely do more research.

@John Vietmeyer I have no problem with dealing with tenants. I’m just stuck at should I rent or sell (which I know is 100% up to me). I can see it being a cash cow for rent. I can also see it being a good flip and really jump starting my REIs. Fortunately for me, the only cost I will have in rehab is strictly materials.

Reggie Rearden · Answer

@dennis Gould the house is 900 sqft. The area is starting to grow. It’s actually a tax client of ours that is selling it. They just want to get rid of it and be done. It could easily sell for more but they don’t want the headache. It’s in Aiken SC which is about 20 minutes for the Augusta National golf club.

Darius Ogloza · Answer

Don't know all of the facts but the $50K ARV sounds suspect.  Who arrived at that figure and how did they get there?  As Dennis says above, $500/month for a $25K house is a great investment.

To flip or buy and hold?

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