Importance of Equity on Flip and Hold

[Robert Vieira]

Hey Everyone,

When purchasing a rehab property with intent to fix and hold, is Equity as important as the Cap Rate and NOI?

Example: Multi-family property is purchased for 10K, and 50K is put into rehab. Local Comps are between 60-65K. After running the numbers, the Cap Rate, NOI, and Cash Flow are all strong, but there is little equity.

Would a situation like this be a smart investment for a fix and hold? Thanks in advance for your input!

[Brant Richardson]

The main reason for buying a property that needs a ton of rehab is so you can get it for under value and end up with some sweat equity or increased cap rate. If your purchase price plus rehab comes out to market value with typical cap rate then you are better off buying a place that does not need rehab at full market price. That way it can be rented out right away. If the cap rate ends up "strong", as in over the typical in the area, then you have added value by doing the rehab.