Should we Flip or Rent?

Question

My wife and I are entering into our fourth investment property, a single family home as opposed to our other properties which are condos. We're under contract for 115K on a 2/1 800 sqft home built in the late 40s. Doing 90% of the rehab work myself we're estimating a reno budget of 18k, this reno is mostly cosmetic (yard work, fence, paint, floors, countertops, adding dishwasher, and insulating/finishing out a utility room into a laundry). Rentals in our area are moving very quickly but as this isn't our normal condo market, we're unsure what we'll be able to charge. There is a house on the same street currently for rent at 1600/mo that is not as cosmetically nice as ours will be, but we think that it might be over priced (however we're keeping a close eye on the property). We've brought an investor along in this deal under the following terms: We bring 25K the other party brings 90K cash to the deal. If flipped we split reno costs 50/50 and we walk with 60% of the profits after taxes. If rented we charge 50/hr for our time during the reno and split reno costs (including our labor cost) 60/40 (40% is ours) however we owe a 0% loan on the remainder of the 50% property purchase cost (115K/2=57.5k-25k=32.5k) for a term of 15 years and are unable to charge our standard management fee to the other party which is 10% of their monthly income until the loan is paid (no penalty for early repayment). We estimate that once subtracting out 60% our personal labor costs from the loan we'll owe 23K to the other party. Last bit of background info, the other party is a family member who can be/is a large pain during the purchase and reno phase, but once in rental mode is a nonfactor (we own another property 50/50 with them).

Flip Numbers:

Total Investment: 133k

Target Sale: 175K

Closing (carrying, closing, and buyer's agent): 7k

Pretax Profit: 35k

Taxes: 7.7k

Post tax: 27.5k

Our 60%: 16.5k

estimated reno is 10 weeks (30 hours of work a week by us an unskilled helper (90 man hours))

So with our capital input we expect a 51.7% return on our cash invested (including our sweat)

Rental Numbers:

Monthly Rent: 1.5k

Monthly Expenses: 350

Net Income: 1.15K

50/50 split: 571

Loan repayment: 107

Our monthly cash flow: 514

Yearly: 6.15k

Cash on Cash return of 18.24%

Additionally, we can get another 0% loan from another family member so that we can begin charging a management fee however this loan is a shorter term (less than a year) and would have us having more cash in this deal. Our other properties have been cash deals so this would follow our normal process however we've been thinking we need to use longer term loans to increase our cash on cash return instead of our normal which is just the properties roi. If we changed to this loan upon rental it makes our yearly cash flow go up to 7.7k but brings our cash on cash return to 12.03%.

So after being very long winded, which should we do? Flip? Rent with option A or B for the loan? Thank you up front for replies and insight.

Brett Tvenge · Answer

Why bring in an investor to split the profits? Why wouldn't you borrow hard money?? Let's say at a 115k purchase price, 12 % interest only payments if you borrow 100k flat from HML, that's 1,000 a month for 10 weeks of Reno plus another 6 weeks for buyer to wrap up closing. Gives you $4200 bucks to borrow the 100k. A 10 week Reno where your in the trenches every day doing the Reno, ordering materials, plus your skin is in the game and making 16k is a no brainer pass for me.

Brett Tvenge · Answer

Every investor criteria will be different. It just seems like a lot of work for 16k if your there everyday, doing the material runs, etc. Focus on the business and not in the business.

Bradley M. Roberts · Answer

@Jeffrey Donis our normal model with our condos is to use the profit as added income, so that my wife will have income replacement when we retire (as she won't have worked as long and I'll have a fully funded pension at a younger age). However, if we did the flip the immediate cash profits would go likely go towards a STR in another city (near by) as that is another area we would like to expand to. If we had excess profits, we would also potentially buy ourselves a reward for our work (an in ground hot-tub at our house). I also think that a flip could be a good learning experience. However, I think we're both leaning towards a rental, because it's in our wheel house of current knowledge. @Brett Tvenge we brought the investor in because we felt that for the added 5k in profits after paying for the HML it wasn't worth the stress of that process and potentially carrying the loan for longer. By using this loan we feel more comfortable in the flexibility of renting the house out instead of flipping if it did not sell for what we wanted. Also- is there a target number where it makes more sense if 16k is too low? The flip project brings in a higher profit but the other party gets about 10k.

Jeffrey Donis · Answer

@Bradley M. Roberts I'd say it depends on what you want out of it. Do you want to make cash? Or do you want the passive income/cash flow?