What would you do: Make $400K on a flip, or $2500/month cash flow

Rehabbing & House Flipping
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What would you do: Make $400K on a flip, or $2500/month cash flow

Sean Peters
Developer · Portsmouth, NH · Member since 2013 · 24 posts · 6 votes

I'm Wondering what people might do in this situation. I was able to find  a multi-family property in a good market that has potential to be converted into condos, or held as a solid income property.

If I decide to sell the property, After extensive renovations, ARV on the condos would be around $1MM total, I would be into the property for roughly $500K (purchase plus rehab), So the profit potential is huge!

If I decide to keep the property, I would rehab and refinance with a commercial lender. Annual NOI will be around $64K ...with a 10% CAP rate would value the property at $640K I would be all in at $500K which would leave $140K in equity. I would hypothetically not need to come up with any of my own cash to close the deal. Then I would own this asset which would produce around $2500 + monthly cash...

Either option sounds good to me, Just wanted to see if anyone has opinions/advice on which direction would be better suited for a young real estate investor building a business.

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John Aranton
Real Estate Investor · Hau’ula, HI · Member since 2015 · 17 posts · 8 votes
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Take the $400k and be a Private Lender @ 10-12%. It will be backed with the security of the property and you could potentially make $48k in 6-9 months, then continue... If your flipper is efficient enough and turns it around you could make $90k in 12-14 months. I have multiple REI here in Hawaii that can do that for you and have one of the best track records.

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  • Parker Detweiler
    Investor · Bonita Springs, FL · Member since 2015 · 102 posts · 37 votes
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    Sell it, but it back in the next crash for pennies from the bank that forecloses the guy you sell it to. Just my two cents but that is the exact reason I am currently selling off all rentals. I will buy them back in the next crash for pennies on the dollar though.

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  • Account Closed
    Real Estate Agent · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
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    It would take 13 plus years to make $400k at $2500 a month profit .A lot can change over those years 

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  • Trevor Ewen
    Rental Property Investor · Weehawken, NJ · Member since 2014 · 1k+ posts · 704 votes
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    @Sean Peters

    The difference only matters if you do something else with that profit. If, for instance, you plan to spend it on lifestyle inflation then either option is good, and I would err on the $2500 side just to put a cap on the monthly bleed.

    Assuming you re-invest the money, $1 today is really better than $1 tomorrow. $400k today is way better than $400k in 13 years (agree with @Account Closed).

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  • Wayne V.
    Investor · New York City, NY · Member since 2015 · 122 posts · 67 votes
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    Unless you're sitting on a lot of cash,  I would definitely take the $400k and use it to build my business and fund other projects. Strictly IMHO.

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  • Aaron Mazzrillo
    Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
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    Dividing $400k by $2500 is too much math for me. I'd take the $400k today over a potential, but not guaranteed $2,500 / month.

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  • John Aranton
    Real Estate Investor · Hau’ula, HI · Member since 2015 · 17 posts · 8 votes
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    Take the $400k and be a Private Lender @ 10-12%. It will be backed with the security of the property and you could potentially make $48k in 6-9 months, then continue... If your flipper is efficient enough and turns it around you could make $90k in 12-14 months. I have multiple REI here in Hawaii that can do that for you and have one of the best track records.

    3Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
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    I would stretch the sale out to day #366 either way.  Your silent partner (the IRS) is gonna take 40% now or 25-ish% then.  Year 1+ day one, I"m a sellin'!

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  • Mark Freeman
    Real Estate Investor · Clovis, CA · Member since 2014 · 195 posts · 194 votes
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    Originally posted by @Steve Vaughan:

    I would stretch the sale out to day #366 either way.  Your silent partner (the IRS) is gonna take 40% now or 25-ish% then.  Year 1+ day one, I"m a sellin'!

     I like Steve's idea.  I would also be interested to see if I could pull out a lot of the equity within the same time frame, say $200k+, and keep it - if it would still cash flow some.  Then the money you pulled out would be tax free until you sold it. (This way you get the cake and get to eat most of it too).

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  • Jeffrey Marciano
    Investor · Staten Island, NY · Member since 2015 · 18 posts · 2 votes
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    I would sell it and do a 1031 exchange this way you don't have to wait the 366 days to sell.
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
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    @@Sean Peters, Your comparison is not 2500/mo vs 400K. @steve vaughn is right it's more like 2500/mo vs 250K after taxes. If you fix up and enjoy the 64K NOI for a year and then slowly sell and 1031 them into new cashflow opportunities your net benefit would be almost $250K first year (saved tax +NOI).

    The key was in your last statement - "opinions/advice on which direction would be better suited for a young real estate investor building a business.".  The IRS is willing to invest around $150K with you for as long as you want as long as you play by the right rules.  That's a powerful partner for a young investor.  Don't refuse that investment rashly.

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  • Michael Leffelholz
    Lender · Westfield, NJ · Member since 2010 · 85 posts · 23 votes
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    @Sean Peters Could you possibly condo the building but not have to sell all the units to recoup the equity you invested. Then you could still rent out the remaining units and have monthly cash flow. That would give you the best of both worlds. If not I would agree with the other posters and take the $400k today.  Good luck whichever way you decide to go.

    Michael

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  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
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    Before you can even ask the question, you need a completed feasibility study. If the building needs as extensive of a rehab as you say, condo conversion is anything but easy or given. Lat two guys I know personally trued and failed...still paying for it.

    You could spend 30% of the money necessary for a conversion, and possibly the capitalized value of the NOI would be $750,000. Yes - it's $250,000 less, but because the expense is less and you can do it faster, the IRR might be higher. And since you don't change the profile to owner-occupied, meaning you can retain some income as you are doing the re-position, the risk profile might be lower...

    Good problem to have, making this decision, but it could easily bite you if you make the wrong choice. You are wise to wonder, Sean.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Sean Peters  I agree with those above

    condo converts can cost far more than one might think

    you sell these off as inventory and your a dealer and taxed as ordinary income and self employment tax unless you C corp I think

    contingent liablity of selling attached units as the developer.. this is a real issue and proper insurance is advisable for future litigation for construction defects.

    So the number really is the 250k  number VS the cash flow and what would you do with 250k  if you use it to spring board your business then I think thats a good move.

    other wise you can jsut rent it knowing you can condo convert at a time in the future if prices rise and it becomes even more advantageous to sell off.

    Now check with your accountant but you might be able to condo convert and keep these as rentals put them on schedule C and then sell them off over time.. and get cap gain or preserve 1031 potential.. either way sounds like you have a nice deal

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  • Sean Peters
    OP
    Developer · Portsmouth, NH · Member since 2013 · 24 posts · 6 votes
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    wow, thanks guys for all the awesome feedback! I'm excited to move forward with this and I now think I have a better idea of the reality of the situation. I will definitely keep you all posted with how I decide to proceed with the project. I am leaning towards trying to do a combo of selling off 1 condo and maybe keeping a couple as rentals..( I will be talking to a local real estate attorney to see how that could play out, and how much the conversion might cost)

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  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
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    @Jay Hinrichs is right on as usual.

    Its not $400,000.

    Its $400,000 minus cost over runs, additional permits, and approvals, as well the IRS.  Depending on your tax bracket the Federal Tax could be 43% of the profit.  assume no cost overruns, and no additional permits etc, and $400,000 pre tax becomes $228,000 after tax.  Big difference!

    I've done a condo conversion on a building over 100 years old, its more difficult and expensive that you might think.  Code compliance, safety issues and parking are all concerns.  Somebody else I know developed a church and rectory into luxury condos and had to build a $500,000 parking garage for the building.  Sprinkling old buildings and providing for two separate drainage systems in a building build with one is also a costly challenge as is storm water control.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @David Krulac  my most successful condo convert was on a storage facility I owned.

    it was very straight forward and since there we no inhabitants or utls other than power it was a slam dunk.. now that did not factor in those that sneak in and live in storage units LOL.. had a few of those over the years... 

    I also have a hanger that is a condo plat I did not develop it ( wish I had..)  but those are also very straight forward and your tenant buyers tend to be great  ( one needs a place for their 5 million dollar jet )  LOL. We just needed a hanger for a our little bug smashers but got to rub elbows with the Jet setters   

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  • John Cohen
    Rental Property Investor · Mineola, NY · Member since 2014 · 838 posts · 212 votes
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    @Sean Peters I would sell it! If your young and looking to build a business I would use the money for that. Taxes are the nature of the business, but it will give you a huge leg up against the competition because you have the cash to close on more deals. 400k today is worth more then what could be. 

    The only way I would keep it for cash flow is if the $2,500/month would allow you to offset some income to free up time to pursue real estate if you want to.

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  • Cameron Skinner
    Investor · Panama City, FL · Member since 2015 · 378 posts · 183 votes
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    @Steve Vaughan is wise to bring up the tax consequences of selling,  you would end up giving half your gain to IRS if you sell.  This was a hard thing for me to learn since I build houses, I build at wholesale and I can make  money selling the homes I build at retail but if I keep them I still made the money. Because my net worth is higher I just keep my money in the equity in the home not my bank account so I don't have to pay tax on it. So in other words you get to eat your cake and keep it too because you did make 400k you just have it in real estate not in cash and you can still get your 2,500 a month.  Lastly, just my own experience, but during the housing bubble I made a tone of money building and selling speculative homes for some reason all that money seemed to evaporate but the homes I kept as rentals are still there spinning off cash every single month. I bet if you take the cash now in 5 years you will have little idea of where it all went. But if you keep her, you'll look up and know exactly where your 400k is and a little more as you pay down the loan and more than likely she will have appreciated in value.  Good luck!

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  • Chris Field
    Investor · Milford, CT · Member since 2015 · 200 posts · 69 votes
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    I'd keep it and take the rental income.

    I'm going threw something similar with my business which is construction. When you do a deal you make a lot of money, pay a lot of taxes, and no matter how hard you try your lifestyle will inflate. 

    $400k which is really $250k after taxes is great but it will come and go.

    Now the building if you keep it will generate income and build your wealth for the next 30 years. 

    Buying and selling is a great way to generate cash, but buying and holding is how you build wealth.

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  • Sean Peters
    OP
    Developer · Portsmouth, NH · Member since 2013 · 24 posts · 6 votes
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    Thanks everyone, the insights are very helpful! Sean

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