Should I buy and hold or sell to increase capital?

Question

Hey everyone! I have a deal where I'm trying to decide if my next project should be kept as a rental or sold to increase capital.

Info on the deal: It is a double in Metairie, Louisiana, right outside New Orleans.

1615 sq ft. The first unit has 3 beds, 1.5 bath. Second unit is a 1/1

PP. 157,600- includes closing and taxes for the year. Paid in cash

Rehab- 45-55K which would be all in for 202K-212K

ARV would be  280K-300K

Option one would be to sell to take advantage of the hot market and profit 68K minimum which would be my largest profit for a flip so far.

Option 2 would be to BRRRR the property which would align with my long term goals.

Gross rent $28,200 a year or $2,350 a month

NOI is $18,780 or $1,565 - expenses include taxes, insurance, vacancy, maintenance, and capital expenditures.

Assuming loan amount is $213,750 (75% of 285K).  Rate is at 4.75% over 30 Yrs. Mortgage 13,380 or 1,115Cashflow at $5,400 a year or 500 per month

I would not be able to make a profit on refi, however I will be able to pull out the money to use on other flips in the future. My long term goal is to accumulate multiple rental properties and I believe this would be a good first property. It is next to a major hospital and the neighborhood is experiencing many new builds and renovations.

If I were to sell, I would use the profits to increase my capital to do larger fix and flip projects. I average 20%-30% return on my fix and flips and I could later acquire rental when the market cools off.

I have been a REI for 14 months and I have completed a few flips and a few wholesale deals. I am leaning towards keeping it but I'd love to hear y'alls opinion.

Thank you in advance

Greg Jeanfreau · Answer

@Stewart Campbell I'm liking this deal to hold. If you can get the 75% LTV and pull most or all of your capital out, get monthly cash flow and move on, then that is the wise way to go. Another factor to consider is where it's at in Metairie. Any chance for appreciation? Also, are the rents your are projecting very reasonable? I personally have a hard time making buy and hold deals work in Metairie because the rents and often not as strong as New Orleans proper to make the numbers work (1% rule). I wish I could because it would certainly be far less headaches dealing with JP services! If you decide to go for the cash, please feel free to PM me the details.

Mike Dymski · Answer

Congrats, it sounds like a good one.

Well written post.  ($5,400 cash flow + ~$3,600 principal reduction in the early years) / $71,250 capital left in the property = 12.6% return + ??% appreciation = ROE.  Back of the napkin...IRR would be better.  Compare this to alternative uses of the capital and you have your answer (coupled with aligning your business strategy with your goals).  Make sure your $500 is accurate...I could not cash flow $250/door with that rent to price ratio and 3rd party management in my market.

Keep some, flip some, and pivot as you go.  If you have plenty of opportunities like this one, you're in good shape.

Travis Steinemann · Answer

@Stewart Campbell I agree with @Jason Shackleton especially regarding the taxes. Anytime you can get a cash flowing property with an unlimited return, I take it. There will be more flips, and more taxes. You'll never get off the hamster wheel if you don't buy and hold.

Also, consider using other people's money if you are not already doing so. It sounds like you have a good track record and are able to find good deals, so you should be able to get short term funding.

Travis Steinemann · Answer

@Kevin Scott that is a valid point regarding taxes. I just assume he can get capital from other sources so having an extra 60k of his money to put towards deals wouldn't make a huge difference in the quest towards building a buy and hold portfolio.

If it cash flows and he can get all his initial money out, I would take the infinite return.

Stephen Keighery · Answer

Definitely keep it, that is the best way to build wealth and it is your goal so I think the answer is obvious. I know the market is hot but so is the market for loans (i.e. There are low rates). I am all in on BRRRR right now and have 4 Cash out Refi's this month and am going to keep recycling that money and get as many rentals as I can why the rates are so low.

Kevin Scott · Answer

@Travis Steinemann  Totally agree.  I probably should have framed my response a little different.  Basically if not having the extra money doesn't slow his growth/expansion (if that is what he wants). Then by all means it makes sense to keep everything.  If the goal is expanding into several flips or fix and holds at the same time. Or moving into multiple markets etc. Then it probably makes sense to have the extra money for operating capital and reserves.

Jason Shackleton · Answer

@Stewart Campbell

I am not a fan of selling for tax reasons. I would BRRRR it personally. This allows you the best shot at long term wealth creation and tax free money now to help fund your flips. With 20%-30% returns on your flips it makes sense to access the capital. You sound like a long term thinker. Over a long enough time horizon a BRRRR is likely the best play assuming a long term boost in prices and a long enough hold period. I am really happy I never sold my first "flip", I BRRRR'd it, selling it to myself and then used the proceeds to expand further. I also caught a hot market. Impossible to say for sure what's the best play now, it really depends on the unknown of what's to come.

Best of luck!

Stewart Campbell · Answer

Hey everyone! I wanted to give yall an update on the deal. I decided that it would be best for me to keep the property and BRRRR it out. It is my first BRRRR and went extremely well.

Renovation cost were right around 49K which put my all in cost around 207K. Renovations included 2 new kitchens, new floors throughout the property, new fixtures, new door and hardware, 2 bathroom renovations, and new paint throughout.

The property appraised for 272,000 which was a bit less than I wanted it to. I was able to pull out 75% of the Value for a total of 204K. I was able to find tenants while we were still renovating and they moved in the day we finished. I was able to rent the larger unit for 1600 and the smaller for 750 for a total of 2350 a month.

I want to say thank you for everyone's input

Stewart Campbell · Answer

Thank you everyone for taking time out of your day to share your thoughts and opinions. Selling the property would help me get into larger projects however I want to start acquiring rentals and start building my portfolio.

Jim Stout · Answer

Sounds like BRRR is the best way to go, but as Mike mentioned make sure to look at what holding it costs you in "Opportunity Cost".  I you could take the cash now and buy 2 rentals that may bring in more rent in the long run then selling may be better even with the tax implications, but I doubt selling to roll into another fix-n-flip would be better for opportunity costs because of the taxes.  At some point you will want to hold on to the cash flow to stop the capital gain pain.  Great problem to have though!