When to hold a flip?

[Nick Coonis]

Hello BP, I'm planning my business and designing my strategy, which will be to primarily fix and flip while holding on to a unit here and there to keep as a rental. This is the model that most excites me. I know a lot of people debate about fix and flip being "investing" or just a job, but frankly I don't really care. I like to work, just not at my current job or for any employer for that matter. I especially love residential designing, construction and remodeling, but I also want to build a longterm investment portfolio and eventually be able to retire from rehabbing. Currently I'm putting together my business plan and it is full of systems and criteria, because this is how I work best.

My questions is, I want to design some criteria on what would make me decide to keep a property after rehabbing it, instead of reselling it. What makes fix and flippers hold a property? Is it strictly decided upon from a financial stand point? Do you base it on the neighborhood and rental market? On the house itself? I want to spell out a clear system in my plan that has specific parameters for cherry picking buy and holds. Thanks for your insight.

[Moses Kagan]

The longer you hold, the closer the internal rate of return will fall to the yield. So, if you have 100% forced appreciation now, but the yield on the cash invested is, say 10%, then, the longer you hold, the closer the total return will come to 10%.

So, if you're a purely rational investor, you probably sell.

However, it's important to consider a few other factors:

1. Transaction costs. Each time you buy or sell, you're paying brokers, transfer taxes, etc. These take a big bite out of your equity (usually 7-8% of the gross in CA).

2. Future appreciation. My note above about the yield assumes no appreciation going forward. In real life, you need to decide whether you think that there will be appreciation. My personal view is that there's not a whole lot of room for additional appreciation in CA going forward, but I could easily be wrong. (Also, as a personal preference, I refuse to include appreciation in any of my forecasts, because that amounts to speculation and I am not a speculator.)

3. Opportunity. One way to think about the situation you're in is to consider the yield you're getting on your equity (as opposed to the cash invested). Say you buy and renovate for $100k in cash (eg no debt) and are getting $10k / year in free cashflow, a 10% yield. Say that the property is now worth $150k. You're actually getting a 6.7% yield on your equity ($10k / $150k), not 10%. If you could sell for $150k, net $150k x 93% (to account for cost of sales) = $139,500 and then invest that amount in a deal which yields you more than $10k, then you might be better off doing so.