How to determine when to Hold vs FLIP

[LaRhonda M]

Those of you that do a combination of long-term investing and short term flips? I am fairly new to investing, but I always thought I'd hold everything I bought and simply build out my rental portfolio.

I have a property that I am in the middle of purchasing which is located in a great location/neighborhood of Atlanta. My first instinct was for it to be a live-in rehab for me. Which puts me in a better location, slightly larger home, and a yard. I'd then rent out my current townhome which I can rent out for monthly cashflow of about $800+. My long term goal is to buy and hold - creating passive income. This would be my 3rd property all together.

Today I started thinking of what the benefits would be to flip the home instead of living in it, as I was able to purchase the property at $245,000 which is WELL below market value of the homes in the area. After approximately $50-$60K in rehab the home would have an ARV of , $550,000+, and for approximately $150K (upper level addition) could hit an ARV 700K+, based off of the comps in the area

Or hold later use as a rental or Airbnb, which it is a great location for each of those options as well.

How do you guys typically analyze the better option?

[David M.]

@LaRhonda M

For you, I think it will depend on your personal goals and financial situation.  Yes, that was somewhat rhetorical since you've stated it above.

I would look at each deal.  Some properties and areas (for my market) lend themselves to being rentals, in my opinion.  In your above example, it looks like you've generated a good deal of wealth.  Right now I'd cash in that ~$250k and pay the taxes (remember, flips are taxed as earned income at your ordinary tax marginal tax rate including self employment taxes).  Of course, if you live it in for the 2 years you can use the Sec121 exclusion.  If you need access to the wealth but want to keep the property, you could refi it instead.

If its a strong (yes, relative term) rental and you have little risk of it losing value or having huge expenses (e.g my area has septic and well extensively and now I've got pay around ~$25k for a new well), keep it as a rental as that would fit your investment strategy.

In many ways, there is no easy answer.  For that matter, there really isn't a "right" answer in my opinion.  Hindsight will always be 20/20.  More so to what @Joe Villeneuve was saying, what do you want to do next?  For the sake of argument, maybe you are in the middle of doing your Sec121 exclusion.  So, you can't do that --- now...  Maybe you rent it for a couple years, then you move in to plan again for the Sec121 exclusion.  Or, you decide to cash out refi it and rent it out so that you can build your wealth as the rent pays off the mortgage so that you have your end goal of cash flow later.  Meanwhile, you take that cash to go after other properties.

Yes, having "too much" money is good problem.  Pick the strategy that works best for you at the time.  Does this make any sense?  I've mentioned two courses of action above (go for the Sec 121 exclusion or just rent it) that will net you money in one way or another.  Choose which one you will be happy, or happier, with at the end of the day.  In my example above, one is a "quick" tax free gain and the other is a long term wealth building strategy (maybe with cash flow depending on the numbers).  Either should give you cash in hand with a cash out refi.

What do you need?  What do you want?  ... now and to go forward...

Hope this helps.  Good luck.