Should I sell or rent?

Question

On my second home purchase currently. My first home I was able to purchase for $120k plus $30k added to the renovation loan, so all in for $150. Ended up selling 3 years later for $255k.

Took the profits to dump into another renovation project.. this one was a purchase price of $210k with approximately $50k when it’s all said and done in renovation costs. We’re one year later, and Comps are showing up in the low $300k range.

My question is maybe not quite so simple with that much of a foundation, but let’s give it a shot. Do I keep the buy and live in renovation house game going, or begin holding as a rental as a part of the Monopoly game of collecting as many rentals as possible?

With that, is there a better price point or property type for that matter to begin the rental game?

Thanks in advance for the feedback!

Cheers

Brandon

Jaysen Medhurst · Answer

@Brandon Williams, turning live-in flips into rental properties can be a great strategy. In your case, though, I don't think the numbers will work out.

Typically, you want to get at least 1% of a property's cost/value in monthly rent. So, in your case that would be $3k/month. The problem is anyone who can afford $3k in rent can easily afford a $300k house. The market for rentals at that level is incredibly small.

One option would be to sell this place and apply the profits towards a multi-family property to house hack. Live there for a bit, then move out and rent the final unit. Hopefully, you can BRRRR the place and pull out all of your capital when you're ready to refi and move. Keeping the property as a pure investment.

Brandon Williams · Answer

Thank you gentlemen. I think based on the feedback it makes sense to sell this one at some point and acquire something more ‘renter friendly’.

Sounds like pulling equity at the right time to use in the next purchase may also be a play since I still have a garage apartment at this property that supplements while we live here.

Appreciate the feedback all.

Theo Hicks · Answer

@Brandon Williams yes, based on the money you have in the deal. But the 1% rule is just a quick "back of the napkin" calculation. I would recommend using the BP cash flow calculator to determine what the cash flow and ROI would be if you were to rent the property based on the current expenses and what you put into the deal initially.

Theo Hicks · Answer

You would have had more success renting out the first deal than the second deal. It is hard to know without knowing how much rent you can demand, but if it is less than $2.6k (per the 1% rule), it probably won't make sense. I would consider selling and taking the proceeds to invest in a small multifamily (2 to 4 units).

Brandon Williams · Answer

@Mike Acri, thanks for the reply. I’m thinking I could bring in $1,200 for the main house (2 bed 2 bath), and $700 for our detached garage apartment we have. That’s $700 over the mortgage.

I failed to mention we renovated the garage into an apartment we rent out for between $650 and $850.

Do you have any property types you lean towards, and would be inclined to put the $90k back into if we sold?  I.e. duplex vs Quad vs SF..

Thanks for the reply

Brandon Williams · Answer

Thank you Mike, I will look more into the syndicating and reach out if I think of specifics. Thanks for the time!

Allyssa McCleery · Answer

@Brandon Williams You are in a great market in Jacksonville. You could definitely find better deals than 1%. I shoot for 1.3% or the ability to achieve 12% cash on cash return within the first year. I agree that you should look into house hacking but you can also keep the property you have once you have built up more equity and then borrow against it to buy another property, then borrow against the equity in that property/do a cash out refinance and keep repeating that process while holding the rentals rather than selling them. It is true that lower priced properties make better rentals so you may not want to live in these types of properties but that doesn't mean you can't acquire them. I have never lived in any of my rental properties or have even purchased a personal residence so this is definitely something you can do which will enable you to scale up.

Allyssa McCleery · Answer

@Brandon Williams Yes exactly!

By paying an extra $25k-$50k you mean because the loan amount is higher now that you've pulled out cash? Yes I don't sweat that because I am paying less than 6% on the money that I am pulling out and am reinvesting it for 12% so I am still making money on that debt. You will be good as long as you will still have plenty of room to cashflow every month and you are achieving higher returns than what you are paying for.

With what @Chris Hake says, it is true that your pool of tenants is smaller with more expensive housing. However, there are plenty of people who choose to be renters, whether they can afford to own a home or not. There are renters at $500/month apartments as well as $10k/month mansions.

Chris Hake · Answer

The 1% rule has always been a pretty good measuring stick of monthly rent / purchase price. I know in my area (and i suspect in many areas across the US) that anyone who can pay rent of $3K month can probably afford a $300K place. I would research what the average rental rates are in your area and develop an acquisition plan around buying doors that will allow for the largest pool of renters to want to olive in your property, which in turn will probably give you a solid rate of return (of course depending on what you have to put down). Good luck

Paul Perez · Answer

I'm in a similar situation. I'm moving out of state,  and I'm debating if i should rent (instead of sell) my primary residence in Metro Atlanta, GA. It's  only 10 months old (recently built); its cost is in the $350k and the house in a country club neighborhood (pool, gym, summer camps, and the rest).  After expenses, i can cash flow some $1,200 a year. It doesn't seem like a lot, but i'm thinking that the house will go up in value (as time passes) plus taxes and depreciation may end up being a nice benefit.  On the downside, it's an expensive house and so it presents some risks. It's a bit scary for sure, and i'm worried about large monthly payments when it's not occupied. But, what if i could have long term tenants? Any words of advice would be appreciated.

Should I sell or rent?

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