Evaluating Alternate Strategies Mid-Deal

[Nick Coons]

I purchased a property about three months ago as a flx-and-flip, and I have about three months remaining on the project. It's a full gut and rehab. My long-term goal is to buy and hold rentals. However, I know the infinite BRRRR is uncommon (especially in markets like Phoenix, where my property is), so I know I'll probably have to leave cash in each deal. That's the reason for the fix-and-flip(s), buying those in between rentals to raise additional cash so that I can leave cash in a rental without running out (preventing me from continuing on to the next, or depleting my cushion).

My plan with this property was to net about $40k after absolutely everything. With the softening of the market, I'm anticipating a lower ARV was when I originally analyzed this property, and now I'm thinking it's realistic that I'll net $10k-$15k. That's much lower than what I'm really wanting from this deal, so now I'm considering alternate strategies. Namely, keeping it as a rental for a couple of years for the market go rebound, then selling for what I wanted (or, just keeping it as if I had intended to hold it as a rental).

In doing so, I'm looking at the pros of each. If I keep with my original plan and sell it once completed:

- I get all of my original cash back out, plus about $10k in profit. In this scenario, I have the most cash available for the next deal.

If I hold onto it:

- Best case, I can cash-out refinance it at 75% LTV and get back a little less than half my cash. That would still allow me to move forward with another deal, but with far more restrictions on what I can do because I have less cash.

- When I do sell it, the profits are LTCG instead of ordinary income.

- There are some exterior repairs that need to be done on the property before selling, but if I'm keeping it as a rental, some of these could be deferred (these items could be worked on and completed while I have a tenant in the property). However, not completing these things might affect my refinance appraisal.

- If I were in the market to buy a rental property on purpose, this would be a property that I'd want. It's a growing area, and rents are strong (and likely to remain that way).

- Since this is a full gut and rebuild, I shouldn't have much in the way of cap-ex, once completed, for quite some time.

So my questions are as follows:

- Are there pros (or cons) in the above strategies that I'm not considering that might help me make my decision? If I could somehow find a magical 85%+ LTV cash-out refinance on a rental property, that would pretty much solidify the decision for me, but I don't see that being realistic (also, with the associated monthly payment, it could cash-flow negative.. fine by me, but that would make it difficult to qualify).

- Are there other strategies that I should consider? This property would not make for a good STR, so I'm intentionally not considering that.

[Ryan Swan]

I think your analysis about keeping it as a LTR is the best option. 3 months is a rather long time in this current climate of continued interest rate hikes, coupled with downward pressure on sale prices. Your $10-$15k estimated profit could be $0 or even negative in 3-6 months. 

I would try do to a cash out refi (ASAP after completion, before rates go up again), and then set it up for success as a LTR. Maybe the market goes up in 12-24 months, maybe not...I think probably not, so plan for a longer term rental hold. 

The only other strategy you didn't mention is to live in the home yourself, thereby cutting your other current housing expenses. Then you would rent it by the room for higher cash flow than a typical non-owner occupied LTR.