Rent it, flip it, or walk away?

Question

Hi BP folks! I came across a property and I'm struggling to decide if it is good for a buy/hold or flip, or if it is only good for draining my wallet and schedule.

$40k purchase price, $5k in repairs to bring it up to neighborhood standards. ARV $60k (likely closer to $65k, but I'm being conservative at $60k for a very quick sale). Repairs should be relatively quick (smaller scale HVAC repair, install basic appliances, replace some flooring, do some painting). I would hope to have that completed in two weeks (I've been working with several very good contractors in the area on another project that was much worse, so I am optimistic about time tables), but I'd be giving myself a month just in case. Newer appliances + recently repaired HVAC + newer roof = hopefully a less risky property from a maintenance standpoint (hopefully...).

I plan to purchase for cash, and either flip right away, or let it season for 6 months and get a mortgage for $45k (75% of the $60k estimated ARV, which allows me to cash out my initial investment in full).

Typical rent for comparable properties is between $725-800/mo, so I'm working off $750 for a round number on the lower end of the spectrum to hopefully attract a tenant without it sitting vacant for too long. Of the $750/mo rent: PITI $425, management $75, CapEx/maintenance $125, vacancy $50 = $75/mo cash flow. The cash flow seems a little under what I would like on a per door basis, but the cash flow listed is after I pull back out all of my initial investment.

So: 1) am I missing anything in my quick calculations? 2) would you buy it? 3) would you flip it or hold it?

Thanks!

David B. · Answer

Hi folks, Thanks for the replies! I should have been more specific - only two bedrooms (250 SF) of flooring (cheaper carpet) was needed, and paint only as touch-ups and maybe one room (I'd do that myself when I cleaned up a few other things on a Saturday). That's how I came in with a lower repair figure.

Problem was even waiting through the end of the day and posting the question was apparently enough "analysis paralysis" and I missed the deal - I later learned that it sold the same evening that I posted the question.

That being said, I appreciate the responses to help me validate that I'm moving in the right direction. Hopefully this will help me pull the trigger faster next time!

Thanks again!

Bill Jacobsen · Answer

If the ARV is $60K it would be a little thin for me as a flip.  As a rental at $750 it would be good at a total cost of $45K assuming a 50% expense ratio.

If an investor had to pay $65K then he would have a cap rate under 7% at the above rent and expense rate.

Good Luck.

Bill

Rocky V. · Answer

What are you waiting for?  Do the deal.  If you need the cash once it is done put it on the market for a retail buyer.  If for some reason it does not sell turn it into a rental.

IMO - Your estimate on rehab is fairly low considering paint, flooring and appliances.   Just confirm your numbers with your contractor and Go For It.

Curt Davis · Answer

To own a home that rents for $750 and your all in for $45k it a decent deal.  I understand you having vacancy/maintenance estimates so if you took those out your cash flow would seem much better.  If you were having those expenses every month then no its not a good deal.  If you can cash out refi and do it again then go for it.