Deciding between buy & hold or buy & flip

[Mitzi Castiglione]

We have a house that when we bought it, our strategy was to hold it. However, it would also make a nice flip given the market right now. We have done both in the past. The purchase price was $58k. To rent it out, repairs would be approx $10k. For a flip, we would do higher end finishes with repairs at closer to $20k. ARV $175-190k.

It will bring in $1200/ month in rent. The house is in a hot, trendy little area of town. My husband and I both work full time jobs currently with aspirations to do REI full time, therefore we would like to have enough cash flow to retire. Hence, we are beginning to hold more rather than flip. What to do? What to do? :)

Thanks in advance for your feedback!   

[Mike Makkar]

@Mitzi Castiglione! This is nothing more than a math problem!

Flip: 

Cost: 58+20 + Holding Costs of Money (4%) = 81k

Money back to Seller: 175k - (selling costs) 6% = 165k

Profits: 87k, CoC % (assume 6 months):103% @ 6mo

Annualized return of 330% for 1st year (assuming you sustain similar flips)

Annualized return for next 5 years, based on 1 flip = 15.3% return

Annualized return for next 10 years, based on 1 flip = 7.4%

Buy/Hold

Cost: 58k+10k = 68k

Rent: 1200/mo * 12mo = 14.4k

Profits = 14.4k - 35% of Rent = 9.5k

1st year return = 14%

Annualized average return for next 5 years (assume modest 3% increase in rent) = 14.8%

Annualized average return for next 10 yrs = 16%

There you go! Most flippers look for immediate returns and don't weigh it against a 5 yr return of a buy/hold. Surprisingly, your one flip (at 15.3 % return) holds extremely well against a 5 yr buy/hold of the rental (14.8%). However, I've not deducted the longer term capital gains associated with the flip. My personal long-term strategy is buy/hold. But with this particular property, I would actually flip and use the immediate profits to get more buy/holds, :)