Flip, Rental, Rent to Own, or WHAT for a Dallas Suburb Property?

[Amber Zelaya]

Dear BP family,

I received a lead from a middle-income neighborhood and I am trying to figure out the best strategy considering the following:

Empty-nesters tired of home owners dues every six months, have a few recreational toys they are tired of paying storage so they may want to move if the price is right.
158K is still owed on the home but has been assessed for 204K
Comps show that the ARV is 250K
We are overestimating that the repairs would be 20K max as it is only 9 years old, granite countertops, hardwood and porcelain tile floors in good condition, crown molding, etc.
4 bed/2 bath
2681 sqft
Built in 2007

We personally don't see this as a flip according to our numbers and while doing the numbers for a rental, it looks to be a negative cash flow…and that was without adding the HOA fees every six months.

We are trying to look in the best interest of both the investor and seller. There is 80K in equity and I know there has to be a strategy that would make this a win-win situation for both the investor and seller.

Any thoughts are greatly appreciated! 

[William Powers]

This is a challenging analysis. I think it depends on the investor and creating balance in a portfolio. We purchased a similar property for our portfolio recently…we have 75 cash flow property - 2%+ overall, but not in areas that provide strong gross dollar appreciate opportunity since they are low cost areas - purchase for $30-60K and ARV of only $100-150K.

When you are looking at something with $80K of "instant equity" and the opportunity to appreciate further, I think you have to put a value on that within your rental formula.  Here is our recent purchase from which you can gleam some information.

•Property Purchase Price $220,000 (MLS – January 2016)

Total Rehab $45,000

Total Invested $265,000

•Current Market Value- $350,000 - $85k+ of instant equity

•Monthly Lease Payment $2400 – Rent to Own, $379,900 (Pre leased – first, last, security - $7200 to move in)

•Debt on this Property - $176,000 (5%, 15 year amortization)

•Total Capital Invested in deal - $89,000 (unusually high)

•Monthly Debt Payment - $1391

•Monthly Taxes - $520

•Monthly Insurance - $78

•Maintenance/Accounting/Management Fee - $360

•Monthly Total Cost - $2349

•Net Cash Flow/Profit - $51 plus principal reduction of $680

•Return on Investment – 9.9% (low) and $85,000 of instant equity (high)

I self manage on all 76 properties, so I am paying myself.  The property is in a area with great appreciation opportunity - 3-5% for the next few year 9my estimate), so that makes the investment deliver a 23% return if we see 3% appreciation.  

And as you see, we offer Rent to Own (RTO) which could lead to a sale at a price point that delivers us a great return in a "long term flip" with capital gains tax rate rather than ordinary income tax rate.

Hope that helps.  

Good Luck,

Bill Powers (BP)