Appraisal is in....Better option than BRRRR?

[William C.]

Hi all,

We just wrapped up our latest project and boy was it a doozy.  We had an exit strategy planned going into this property, but now that the dust has settled, we see whats selling around us and the appraisal is in hand, the decision isn't as clear as we thought it was.  So I figured Id get the advice 100 strangers and see what they would do in this spot.  Here are some of the details for context.

Specs: 3bd, 1.1ba, 1464 sq. Colonial,  car detached garage, large back yard.  Not a busy street, but also not tucked away in a culdesac or side 

After Repair:6 bd, 2ba, 1900 sq ft. We partitioned the garage and rented each side separately in addition to the house.

Purchase Price:  $160,000

Closing Costs: 3,000

Rehab Costs: 45,000

Holding Costs: 2,000

Total Cost: 210,000  

Appraised Value : $310,000

Loan Amount: $248,000

Gross Rent: $3250/month

Cash Flow:

Pre Refi - $2050/m

Post Refi- $1000/m

To make a long story short we own property on the street and know the market well.  This was a foreclosure that hit the market, went under contract, fell through and now we were in a "bidding" war.  We decided to go for it and went 2k over asking   At the time, the house next door, which is pretty close to being identical had been listed for sale for a few months at $330k, but wasnt selling.  It was clear there were over priced, the question was how much.  My gut said it would sell for around 300k, maybe a little less, putting our house at a minimum of 275k with some potential for a little more.

We won the auction, purchased the home a week later, and had it renovated and tenants moved in 28 days later.

Our renovations included remodeling the kitchen and bath, and adding a shower to a half bath.  We finished the 3rd floor attic to add about 450 sq ft consisting of 2 bedrooms.  We were able to turn another room on the second floor into a bedroom, which now get us to 6 total.  We rent in a college town, so every bedroom added is another $500/m revenue.   We replaced some drywall, plumbing and electrical, and put a fresh coat of paint and new floors throughout.  We had tenants lined up before we even owned it because of the demand,  which is why we had to finish in such quick time, but really limited our holding costs.

The neighbor ended up selling for $322k.  And settled just in time to be comp #1.   

Our lender offered 80% LTV for a loan amount of $248k.

The plan was to cashout refi, hoping to cover all cash layed out, plus maybe an extra 5-10k for a rainy day.  The elevated appraisal would allow us to pull an extra $38k, which is now enough to start putting to work in another project.  Option 1 - Cash out refi, walk with 38k after all expenses paid, $1000/monthly cash flow

Meanwhile, for the 2 months we have been collecting rent and not having to service a mortgage, so our cashflow has been 2x what we projected long term.   Option 2 - Hold with no refi. $2000/monthly cash flow

Lastly, as I mentioned, the neighbors house sold, which gives me confidence in selling for over 300k with that comp along with the 3250/m rent roll. Option 3 - Sell.  90-100k profit pre tax, zero cash flow 

So what would you do?   Selling now and collecting almost  8 years of cash flow at once really seems tempting.  There's almost no chance we do option 2, although the extra cashflow has been nice for the time being.  Although, the original plan is working out better than expected, and I fear trading in long term steady cash flow for a short term windfall at a high tax rate.