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

Question

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.

Steve Vaughan · Answer

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'!

John Aranton · Answer

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.

Trevor Ewen · Answer

@Sean PetersThe 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).

Aaron Mazzrillo · Answer

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.

Cameron Skinner · Answer

@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!

Jay Hinrichs · Answer

@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

Dave Foster · Answer

@@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.

Jeffrey Marciano · Answer

I would sell it and do a 1031 exchange this way you don't have to wait the 366 days to sell.

Mark Freeman · Answer

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).

Wayne V. · Answer

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.