Cash out Refi or Sell?

Question

Hello BP!

I am seeking some experience based feedback on whether you would Cash out Refi or Sell the following property. I understand there are variables unique to each individual (tax liability, strategy, liquidity need) and seek these perspectives.

The property was purchased July 27 2020 cash for 59.5k. Property was occupied for 3 months on month to month lease at $1200 / month and vacated end of October. House was in pretty rought shape upon vacancy. Renovation began Nov 4 and completed Dec 11.

Purchase Price: $59,500

Closing: $650

Fire only policy: $670

Taxes (paid through EOY by seller in lieu of transferring Security deposit of $1000)

Maintenance and Repair: $1350

Renovation: $15,400

Income: $3600

3rd party appraisal came back after renovation at $142,000 (3rd party not bank). My lender will do a 75% LTV cash out refi once I season for 6 months (Jan 27). Have never done a cash out refi or “BRRR” but am considering the strategy with a size-able taxable event if property is sold before Jul 27 2021.

Look forward to the feedback and if I left out pertinent information please comment on it.

Thanks!

Jaron Walling · Answer

Those are great rental numbers. It's a buy and hold all day long. I bet you could even bump the rent $50-100 more per month since it's renovated. I'd love to see the numbers and the cash-flow (only reason to hold this property). Only reason I'd sell would be due to age of HVAC systems, roof, or other high dollar building systems you didn't touch during the renovation.

Evan Polaski · Answer

@Ryan Adler, your numbers seem to be very incomplete.

Understanding you do not have full loan terms, but $1000 covered 3 months rent from what I can deduce, so your annual taxes are $4k.  You have no vacancy reserve.  Some of my properties turn over almost every year, and some I average 5 years out of.  If you are down 1 month every year, that is a 9% vacancy.  One month every other year is 5%ish.  Are you paying someone else to manage the property - 10%?  Leasing commission? one months rent on new leases, 1/2 month for renewals.

Is the fire policy an annual premium, semi annual, monthly?

But mostly, your repairs and maintenance are probably underestimates.  Are appliances new?  When was kitchen last renovated?  Bathroom renovation? Last painted interior and exterior?  Roof is about 40% through useful life, are you going to reserve for that replacement each month or figure it out when it needs replaced?  HVAC typically last 20 years.  You can keep fixing and maintaining or you can replace, but either way the older it gets the more you will be spending on maintenance and/or reserve to replace in future.  Is there a fence? Trees that you will be responsible for maintaining? Retaining walls?...  All of this costs money at some point and your option is to reserve a little each month for a long time, or finding cash to make fixes as needed, but there is no end to the capital outlays as long as you own real estate.

Then of course, you have to look at what your principal and interest payments will be.

Lastly, and likely most importantly, do you want to be a landlord?  Do you have other flips you can reinvest your profits into?

The prices in my market do not work for me to buy more rentals.  Flips, yes, but the cashflow with healthy reserves at today's prices are too thin for my time.  But, considering I can reinvest my profits into the next flip, so do not look at it as a one and done transaction, lets me make far more money flipping today than buying rentals.

Ari Hadar · Answer

@Ryan Adler. Is it a D neighborhood? You want to check the turnover and repairs you will have according to the tenants and the PM you will hire.

Dan Weber · Answer

@Ryan Adler this looks like a solid BRRRR if you decide to hold. It depends on what your goals are. If you sold, could you take those profits and reinvest in something else that has a better return? Maybe MF? If you don't have a good answer for that, I'd just refi it, let it cash flow and sit on it. If a good opportunity to redeploy those funds comes up in a year or two, then maybe sell then. But don't just sell it sell when you'll also have to pay those capital gains. Congrats on the solid rental!

Ryan Adler · Answer

@Jaron Walling thanks for the response! New Market and newly renovated rents would be $1500 / mo (hopeful) $1400 all day. Forgot to mention it’s a 4/1 1200 sq ft. I will post numbers when I get the terms from my lender. Roof is in good shape, a majority of my maintenance and repairs were spent on HVAC (cleaning coils, new condensate pump, new duct runs, new igniter) the system itself is post Katrina (2010) roof is post Katrina (2010).

Ari Hadar · Answer

You must factor in vacancy , repairs and capex to see if it's rentable(profitable) at all and not only put aside reserves.

This is a major mistake landlords make when they analyze a rental deal. Making a prior rehab can reduce the vacancy, repairs and capex...

I am in Greater Cleveland intend to put 5% vacancy, 5% repairs, 5 %capex, 10 % PM, 6 months expenses as a reserve for each unit. (i might need to add 10% to the overall variable buyer-paid expenses)

Ryan Adler · Answer

@Ari Hadar its a class B property. PM is 10% of gross monthly rent and will need to look into turnover in the market. Thanks for the heads up

Kevin Hunter · Answer

@Ryan Adler, hold it.  Cash out refinance and pull out 80K and you are into it for no money, or if you need the extra cash for the next purchase, pull out the full 106,500 and use the extra 26,500 for the next deal.

Sam Lewis · Answer

My general rule is that if selling the property would allow you to make two or more 20% down payments on two other homes of the same value (turn key), then sell - this is also assuming you would receive the initial down payment on the flip/rehab once you sell.

TLDR: If selling wouldn't allow you to acquire 2 or more turnkey houses, I say keep the property.

Hoping this makes sense.

Cash out Refi or Sell?

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