Tell me if I'm being a chicken.....

[Denice S.]

Hello everyone!

I’m a single family investor who has always paid cash for my investment properties. My typical formula has been to spend 10-20k on the house, another 10-15k in repairs, rent it out for $800-900…rinse and repeat. This formula provides me with returns around 30% and a tremendous cashflow of between $500-600 per house and I’ve grown comfortable with the process. These properties are all in decent, working neighborhoods.

However, a few months ago I closed my first seller financed investment property. It’s in the ‘burbs and has a bit more land. Now that the rehab is complete, I’m having a difficult time deciding whether to continue with my plan to rent it out, or just flip it (1031 exchange) and move on. I think I’m hesitant because I’m not used to such high carrying costs...using other people's money is simply unfamiliar territory Having admitted that, I don’t want to chicken out just because I’m “not used to something.”

As a rental, the cashlfow on this property would be (conservatively) $125/MO

OR

If I sold it now, a quick sales price is 105,000. After all selling expenses this would leave me with around 30-35,000 profit….which I could use for my above mentioned formula. However, I realize having a tenant buy the majority of this house is an incredible opportunity too…albeit 15 years later.

I’d like some outside opinions as to whether you’d carry this house as a rental or sell it and move on to a higher cash flow opportunity.

Here are the #’s if interested…..thanks everyone.

Purchase – 55,000

Down – 10,000

Rehab-7,500 (all completed – new roof, all new mechanics, the place is tight)

Terms –45,000 at 5% for 15 years no balloon

Monthly Mortgage $350.00

Monthly Operating costs $450 (Tax,ins,PM,Water,repair fund)

Total monthly costs - $800

Rent – $925 (easily)

-Carrying the monthly cost between vacancies would not be a huge financial hardship.

[Bill Exeter]

I thought I would jump in here and comment regarding the 1031 Exchange issue. Your strategy has always been to buy and hold. It sounds like this property was also going to be a buy and hold, but now you are questioning that intent.

The Treasury Regulations require that you have the "intent to hold" for rental, investment or use in a business. If you get audited and you can prove that you had the intent to hold - but - your intent changed due to economic, business or investment reasons, you may still qualify for a 1031 Exchange.

It is not automatically a "flip" just because you had a short-term hold. And, since you generally buy and hold any way, it will be an easier argument to make.