To Gamble or not to Gamble?

Question

Aaron Montague · Answer

@Kevin Fletcher

Do you see your rents dropping as well as values?

If you see yourself sitting on top of the value bubble, get out now... assuming you are running a value play.  If your property has increased in value through appreciation, and you foresee the salable value dropping, get out.

On the flip side, you are getting paid to build equity in that property.  ALL of your expenses are taken care of by your tenants.  At some point you will own the property outright and get paid even more each money.

Striking the balance is a tough part of the investing game.  You feel like a fool if you take 25k in profit and then the value of the property goes up another 50k.  But I like the look at it like this:

"I made my numbers on this one, I'm happy.  Time to move onto the next."

If I was sitting in your shoes, I'd make sure I had some of my next deals lined up before exiting your current investment.

• If the sale of your house is going to put enough cash in your pocket to fund an entire flip you are in great shape.
• If you are selling with the hope of making a down payment on a flip, I'd hold onto the current investment.
• Learning to flip with someone else's money is awesome.  If you can turn 5k into 15k AND learn your local flip scene, I'd call it a win.  Lousy ROI, but a valuable lesson.
• If you turn your investors 100k into 200k on a flip, they're going to love you.  Prove that you can do that a few more times and people will be lining up to shower you with cash.

Aaron Montague · Answer

@Eric Siu

If I have an MFH asset that is making me money at the minimum rate I want it to ($100/door/month AND 15% cash on cash return) I'm not going to get rid of it in the course of normal business unless I can turn it into a bigger investment making better numbers.

I.e. am I going to turn $250/month cash flow and 16% ROI into 18% ROI, probably not.  BUT if that 18% ROI also have $450/month cash flow I'm going to make the move.

From a pure "what you want to do with your RE career" point of view:
	 If what you truly want to do is flip, then sell the place and start flipping.  Though I truly believe you should go through a flip yourself before selling a profitable asset.

@Kevin Fletcher 
	Look up "skin in the game" here on BP for the general consensus on putting your own money into a flip with partners.  Find a way to make everyone money and you'll be able to find someone to fund your flip.

Kevin Fletcher · Answer

@Aaron Montague Thanks for your help, The sale of this property would give me enough to purchase a flip outright, but I do see the value in finding partners and private money. My line of thinking was do a few on my own with my own money then it'll be easier to find everything i need in the future. (private money, hard money, partners

Kevin Fletcher · Answer

@Aaron Montague I agree its a good way to hedge the possibilities of a bad flip, but one of the reasons i am thinking about selling in the next year is to be on the right side of a bubble I see in the market. I am still not really sure how I want to navigate this. I just wanna avoid losing a ton of equity. So I was thinking, if I cut and run now, when there are more buyers for a multi-unit, then i wont be stuck with it in a falling economy. And I will have the ability to do more flip deals (short term investments) until I see what will happen with the market. Ideas?

Aaron Montague · Answer

This is one of the most interesting topics in all of investing. To borrow, or not to borrow, from family.  The IRS is kind to money moving between family members, you can move 15k/year WITHOUT incurring capital gains on the money. (IRS - Family Gift)

My parents are a good source of low budget ( < 20k) loans.  The interest rates aren't great, but it is my parents so I don't mind helping them out.

Put everything in writing.

Put everything in writing. And then go back a week after you got everything in writing and make sure all parties are comfortable with the loan.  If they aren't, rip up the documents and search elsewhere for money.

Aaron Montague · Answer

@Eric Siu

@Kevin Fletcher

I wouldn't recommend giving up any asset that is producing a strong profit.  If the profit isn't high enough, and you want to get out from under it, by all means get rid of it.

Flipping is a great way to make money.  Having a back up plan in the form of your current rental goes a long ways in hedging against a bad flip.  It allows you some wiggle room if something goes south with the flip finances.

Keeping your rental also allows you to show a high income for purposes of conventional financing.  Once you've owned it for 2 income tax filings, that income allows you to borrow more money.  Conventional mortgages may be slower to close, but are significantly less expensive than hard money.

I recommend partnering up with some private money.

Offer:
	5% down (at least some of your skin in the game)
	6% preferred return
	50/50 profit split at the end

I'll bet you can find a few investors immediately.  Make sure the flip is actually going to make some money for everyone involved, run your comps and start asking for cash.  If you've held these places for a while, your war chests should be fairly well stocked :)

Happy Flipping!

Kevin Fletcher · Answer

@Eric Siu

I'm actually doing the same thing. Ive had a 3-plex for the last 6 years and now that I'm starting to invest more I needed to free up some cash, so I can fund my own deals. I wanted to do a flip or two on my own, to learn and show to a potential lender in the future that I have the ability to make them money. The 600 dollars a month cash flow I had on my units was great but, it'll take me around 3 or more years to make the same amount of money ill make in one flip.

Timothy Riley · Answer

How much are your expenses on average?

To Gamble or not to Gamble?

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