What would you do in this situation?

Question

I have a property I bought a few years ago as my personal property. Me and my family have lived there for 5 years. We are purchasing a new home and I am debating renting out the old house or selling it and buying another house. I owe 63k on it and had a realtor tell me to list it at 135k. Payments on it are low at 650 a month including taxes and insurance. Similar properties like mine rent from 1100-1350 per month. I would like to rent the property but my wife says we should sell the property to look for houses to flip. Any suggestions as to what you all would do in this situation.

Thanks

Lee

Thanks

Lee

Joe Villeneuve · Answer

There are three types of funding, all 3 defined on how you pay for them, and how you use/spend them...thus what the cost of each are.

1 - Cash:  No cost, one use...but if your plan is correctly laid out, you should have an infinite number of uses of your cash.

2 - Leverage/Debt:  Cost to you, but you get only one use per cost.

3 - Cash-like substance:  This combines #1 and #2.  One cost, but infinite number of uses.

HML's fall under #2, but a very expensive #2...and a very short term of that one use.  It can't be substituted for either #1 or #3 since you have to pay for it...and you only get one use out of it.  HML's don't work in my system.

Joe Villeneuve · Answer

Flip it.  Look at the numbers with "$" in front.

1 - At best, after Tax/ins, you'll only cash flow at around $250/month = $3000/year

2 - You have around $70k in equity.  Even if you subtract for RE commission, closing costs and discount the property for a fast sale, you should clear around $50-55k.

3 - It would take you around 17 years of perfect tenants to reach $51 k in cash flow.

4 - If you invest the $51k in flips, make only 10% per flip, and do two a year, and don't reinvest your profits...just keep reinvesting the seed money ($51k), you could profit over $5k/year...double what you would be getting in CF if you left it as a rental.

5 - Now, if you reinvested your profit back into the flips, you would be compounding you profits.

6 - 10 years of compounded profits, at 10%/flip...2/yr = over$280k in profit

7 - After your accumulated profit reaches the point when added to the original seed money equals enough  to when flipped, you can use just the profit to buy rentals.

8 - keep flipping the enlarged seed money.  Each new flip buys you another ash flow property...you become your own bank.

9 - Flip until the cash flow is enough to not need more cash flow

10 - Stop flipping, and now keep the original profit (plus the grown expanded seed money)...never having spent any of you own money...ever.

Jordan Sizelove · Answer

Joe, I've seen some of your other posts about doing this method. However, you recommend using your own capital to get started. What if you don't have your own capital to get started, but you want to start right now?

Wouldn't a HML work if I continued to use them and saved my personal profits from the flips until I had enough capital to do this method without using a HML?

Really interested in your feedback.

Lee Crews · Answer

@Winn Merwin

I sent you a Pm with more detail

Winn Merwin · Answer

@Lee Crews

Sorry for the late response. I have been quite bust lately with the purchase of a 4 unit property that requires extensive rehab. It is our first rehab.

What did you decide to do?

To me it really depends on what your goals are. And where the property is located. I am familiar with the market. I have 4 properties currently in Augusta which have appreciated in some fashion. It would be nice to sell them and collect the appreciation, but I do not believe I could purchase something better in this market with the cash collected.

My goals is cashflow currently so that will skew my opinion. I do have 2 properties I am willing to cash out refinance if I find a deal that will increase my cashflow. Again I am trying to stay in this market currently.

What area of Augusta is the property? Selling it vs. Renting it may depend on the local trends due to the budding nature of many areas of Augusta.

Good Luck!

Twana Rasoul · Answer

@Lee Crews listing price and the price it will sell for are 2 different things.  Do your homework and see where you think it will most likely sell.  Also, this flipping thing, why are you guys interested going that route? cause it sounds cool or is this something you guys want to seriously get into? it takes lots of hard work to make money on flips especially in a frothy economy and there is a lot of money being thrown around.   You could always do both as well.  You can cash out refi to pull some money out to purchase a flip while still keeping your property, just making less cashflow.  But maybe look out a few years and decide on what the goal is and what you both want to do and why then the answer should be fairly black/white.

Best of luck!

Ehsan Rishat · Answer

@Lee Crews This looks like a decent flip to me as well. It is uncertain that you will get steady cashflow from renting out this property and steady or not, it will be years before your returns can amount to what you could potentially profit from selling this property now.

Hope this helps!

Paul Choi · Answer

Agree with Sam, margins on flip is shrinking, meaning its saturated with buyers and flippers.  Run the analysis for a rental hold and see what pops out.

Sam Shueh · Answer

Get on this site do an analysis like others see the results and comments.....

Flip margin now is low and can be risky.

What would you do in this situation?

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