Closing on our 1st FLIP/BRRRR tomorrow

[Joshua Schmidt]

Well, we done it!  We finally got out of analysis paralysis and made the leap!  So I want to break down the deal below, and get a few of your suggestions on what our next move should be AFTER the rehab.

Found the deal at an auction

It is a single family home, 2935 sq ft, 4 bd, 3 bth in and absolutely FANTASTIC neighborhood

Paid $150,000 for the house

Paid about $6500 to close

Appraisal came back at $187,500 and it hasn't been updated since the 90s as far as inside appearance

No major flaws, mostly cleanup, cosmetics and updating

Factored in $30,000 for the repair costs (roof, flooring, paint, kitchen/bathroom updates)

We put $30,000 down for down payment

$120,000 will be financed at 4.5% PITI is $1030 (after remodel PITI will go down as we are switching to a landlord policy)

After remodel will rent between $1500-$1700, maybe more but doing a little digging on corporate rentals

Worst case will cashflow right around $300 per month 

ARV will be in the range of $250,000 on the low end.

Paid: 150K

Money in deal counting closing: $66,500

Mortgage owed: 120K

Equity out the gate: 67,500

Equity after repairs & refi: 130K

ARV: 250K+

Now here is my question and where I wanted to get a little input from everyone.  Our end goal is buy and hold deals where we can work our way into multi-family properties and eventually bigger properties.  I don't know EXACTLY what to do with this one as we have several options and I don't know which of them is the best option.  Below are our options (at least the ones I know of):

1. We can not refinance and stick to renting out a completely renovated property that cash flows nicely.  My only problem with this is the amount of equity we are leaving tied up in this deal, which would cause us to have to save up to buy the next deal instead of using the money in this deal to purchase the next deal.

2. We can BRRRR the house, but the biggest problem is there will be absolutely minimum cash flow (like $50) after the refi, however, we would be able to move on to our next deal, still have this house producing some income, and still have some equity left in this house after the refi. ( I would only pull out what we needed to get us set up for the next deal). I have ran all the numbers, including PITI, vacancy, maintenance and CapEx, and it would just barely cashflow. Now, in the end, our goal is cash flowing properties at around $200 per door, but I still think this could be a viable option just because of the amount of equity we will have in this house, if it was ever needed, the house is in a hot neighborhood and we could sell it quickly.

3. Sell it outright, pull our cash out of the deal and move to next deal...probably a multi-family.  My biggest problem with this is the potential to pay capital gains taxes.  However, I have recently found out that you can 1031 tax exchange into a multi-family property from a single family property as long as it is 4 doors or less.  This makes this option much more appealing as we could increase our doors to 4 doors rather quickly by doing a FLIP on this home.  Also, if we are going to just FLIP it, we would spend a little more on the FLIP and we could make this house worth almost 300k.  So, feasibly we could really springboard our momentum by selling it and buying a property with 4 doors and we would avoid the taxes until down the road.  I'd like to add that I am a Realtor, so there would be potential gains in the sale of the property for me as well.

4. Line of Credit...with the amount of equity in this property after the remodel, we could just hold onto it and use the equity to get a line of credit.  Admittedly, I haven't done a lot of research on this method yet, so I don't know if this is a viable option or not.  

5. Corporate Rental....also just now starting my research on this method, but there is GREAT potential here for this property.  

Okay, thats it!  Any input that anyone can give us on any of the above methods or any other methods that you want to suggest, I am all ears and open to suggestions!  We just want to do what is best for the business and what will help set us up for what is in store next.  I think we did pretty good on this deal for our first one.  Guess we will see once all the repairs are done and we have made a decision on what is next.  Thanks BP for pushing me to take the leap, I can't wait to see what is in store for us next!

[Dave Foster]

@Joshua Schmidt, Other factors are still more important in the sell/no sell discussion.  But i wanted to clear two factors around the 1031 exchange.  Yes, if you do a 1031 exchange you will defer all tax on gain and depreciation.  But you can actually go from any type of investment real estate to any other type of investment real estate.   The number of doors doesn't matter.  You can exchange from residential to commercial or raw land or any other type. So that opens up more options than you thought.

However, property that qualifies for 1031 treatment is property you purchased with the intent of holding for productive use.  If your intent was primarily to immediately resell then you would not qualify for the 1031.  There is no statutory holding period but you need to be able to demonstrate your intent.  It sounds like your leaving your options open so I wouldn't say the short hold period was a deal breaker.  But you'll want to be able to demonstrate your intent if you want to sell and 1031.  Or just hold it and sell next year using a 1031 then.  Meanwhile do a refinance and use that cash for your next acquisition.