Flip with no profits or hold and rent for no cashflow.. what is a better strategy?

Question

I have a property that I have remodeled that is ready to hit the market, unfortunately after crunching the numbers, I will not be making any profit or only just $5000 on a cash investment of about $190K. I bought this property in June.  In this market and with the interest rates rising, does it make sense to hold unto this property and rent it out instead of selling it and walking away with no profit?, For the experts out there, what will you suggest? Should I refinance and rent it out (hard loan balance is about 400K and possible rent in the area is $3000 - $3500. or should i just sell it and recoup my investment without any profits..... please weigh in on this and let me know what you guys will do if faced with a situation like this.  Comments will be greatly appreciated.

Andy Sabisch · Answer

Not the optimum position to be in on a property . . . . did things change in the project that have your numbers where they are; i.e., did the market drop in terms of ARV or did your reno budget go over estimates?  Remember, you make your money when you buy not when you sell so hopefully you are looking back over the entire process from analyzing the purchase to the reno phase to see where your profit went.  With that, the interest rates have totally changed the landscape when it comes to selling, buying and renos.  HML costs can eat up profit in a heartbeat when you have a delay in getting material or labor is hard to get on the job.  More people are opting to stay where they are and fix up their place rather than sell and buy at the higher interest rates which then tightens the trades availability even for us with a history with them.

As far as your current situation, refinancing a non-owner occupied property with the balances you have will be about a break even proposition and that is excluding the $190K you have into the project.  With interest rates staying up there for probably the next 12 months at least, do you see the market turning and the property increasing in value in that period?  If not, I would treat this as a lesson, sell and move on to the next project incorporating the lessons learned on this one.  Flips are about profits (which you do not have) and rentals should be about cash flow and invested capital (which in this case will be far less than what you could make on a CD today).  As the saying goes - "Damned if you do, Damned if you don't" - so with neither option being where you want to be, getting out from the project and learning from it would be our recommendation.

Chris Seveney · Answer

@Ann Mclean

Sell it and move on. Eliminate further risk by doing so.

Ann Mclean · Answer

Thanks to all who have responded to this post and given me their recommendations.  I decided to keep the property because it is really a very nice one in a very good location and i thought it is definitely going to appreciate in the future. I was reading about cost segregation and accelerated depreciation... dont know much about it yet but that may help me some.  The property is on the market for a long term rental but i am still praying for a tenant. I will keep you posted. Thanks all.

Cameron Hesker · Answer

Not a super ideal situation, but breaking even/profiting $5k isn't a complete nightmare in the world of investment real estate. At the minimum, you can utilize the lessons learned on this one to apply to your next investment, thus making the next more profitable and mitigating risk through experience. If you don't have a rental portfolio/property management team built out already, it may make the most sense to take this one on the chin and move on.

Theresa Harris · Answer

Unless you will cash flow and you think the market will increase next year, I'd sell.  Look at it as a learning experience.  If you think the market will go up, rent it for a year and then sell at a better time of the year.

Ben Einspahr · Answer

@Ann Mclean If your primary strategy is fix and flip and you do not have any interest or experience managing rentals, I would sell and move on to the next.

If you already have a couple rentals of your own, I would keep and turn into rental (assuming you will be slightly cashflow positive or greater). Great for future wealth building and can use the equity to purchase future investments.

Julio Gonzalez · Answer

@Ann Mclean here are some FAQs on cost segregation that you may find helpful. Feel free to reach out if you have any questions!

https://www.biggerpockets.com/forums/51/topics/1113749-cost-...

Pavel Pluhar · Answer

Currently, the risk free rate (ref. Warren Buffett) is 5.5% on Fed treasury bills. No work, no state or local taxes. I wouldn't venture into any investment unless it promised much more.

Bill J Fay · Answer

Very dependent on your goal. Do you need the cash from the sale to use on your next flip? You can test the market and see what happens. If it doesn't sell for your price, rent it out for 1 year and see where the market is. With that being said, very dependent on your financial situation. Call around to some lenders to see what your cash flow would look like after refinancing out of your hard money loan.

Darius Ogloza · Answer

@Ann Mclean

This seems to me a straight up numbers word problem.  You provide some information from which a few numbers can be derived but we need your full PITI after you refi to offer any sound advice.  Since the property have been remodeled as of yesterday, you should expect no or virtually no capital expenditures over the next 12-24 months ergo comparing the rent to your PITI should give you a good sense of the maximum gain/loss you should expect as you attempt to wait this market out.  Moreover, if your housing market seasonal?  If so, try to arrange the length of the rental (if you go down this path) so that the property becomes available for sale during the high selling months.