Flip, Rent, or BRRRR?

Question

Hey Gang,

So with this one I'm basically wondering what you'd do as I'd like to have an exit strategy plotted out before moving on it, and I see several options all with early implications. I plan to send an offer off tomorrow for my girlfriend (she'll be the O/O for a year) at asking price, so we have a good shot and according to listing agent I'm the only one that's seen the property yet.

Details:

SFR

Asking price: 34,9k

ARV: Conservatively 110k, but depending on type of rehab I think you could push 120k or even list at 125k. (I want my numbers to work at 110k, but there's plenty of margin).

B to B- neighborhood. A mixture of O/O and young adult rentals.

I think it could rent for at least 1,000, but I plan to follow up with some other owners tomorrow to see how well their properties rent at 12 or 13. (I saw old posts on craigslist at these prices).

So, the rehab. If I wanted to make a decent rental property of it I'm looking at 12,5-17,5k. A higher end flip probably around 30k - 35k. These are somewhat ball park, but I'm not normally way off. Going through with a contractor buddy tomorrow to get a better idea.

With respect to possible exits, here's a rental breakdown by month:

GSI: 1,000

Tax: 341

Utility: 75

Vac (@ 8.3%): 83

Maint: 100

Manage: 100

Insurance: 50

NOI: $251 p/m

Debt: 35k @ 4.5% @ 30 yr = 177

Cash Flow p/m = $74 p/m

Needless to say, this is fairly unimpressive. And my research tomorrow with respect to possible rent of $1200 p/m could make a massive difference here.

These numbers don't even mention the rehab cash will also be borrowed at 3%...

On the other hand, the flip looks quite impressive. All in, w/ holding costs, at let's say for the moment 85k and a sale price of 115k. I guess I'll have to run numbers on cap. gains and additional closing costs, but still.

So, apologies, this is a bit rambling, and I know it's a deal if I get it under contract, but I've been brainstorming all day about what the heck to do with it. My general plan is buy and hold, but an impressive margin on a flip looks appealing.

Other takeaway is that taxes in Milwaukee can kill your cash flow...

Also, BRRRR looks doubtful given unimpressive W2 income and unverifiable income elsewhere. So for the moment, that'll have to hold off, though I love the strategy.

A big part of the question though is about the rehab. Obviously if I want to push the higher comps I'd do something like refinish the bath and put in hard wood floors on the main level. If it's going to be a rental, clean up the bath and maybe floating floors. Several thousands difference between the two...

I guess any input is helpful. Hopefully by tomorrow night I can review some comments and also update with what I learn about SFRs in this neighborhood tomorrow.

Thanks in advance,

Best,

JTM

Joe Villeneuve · Answer

Well said "grasshopper".

Joshua D. · Answer

@Joshua Martin

After quickly looking through everything I would keep it as a rental, but as @Joe Villeneuve said to me recently, it is more about where you are at in the investing game that dictates weather you should flip or hold. Sometimes you sell a good hold deal and make th flip money to keep capital rolling. Just depends what your goals are.

As far as rehab goes, I would lean more too a simple rehab. If you can get it up and going for 12k and have a 110k ARV, then that to me makes way more sense than a 30k that is worth 120k. Numbers don't make sense to over rehab.

Joshua Martin · Answer

@Daniel Hanson Its only offered to O/O at the moment. I think investors will bid the price up a bit when it goes on the market.

So we sent an offer on it at 37,5k. We'll see what happens, and I'll evaluate all options when we get a yes or nay.

Went through with contractor friend today and he thought 12,5k tops for rent ready, 25k for flip. He's got good cheap labor and been doing this a while, but his numbers still sound low to me.

I'll let you guys know. Thanks for weighing in everyone!

Best,

JTM

Daniel Hanson · Answer

@Joshua Martin

I'm thinking you need to evaluate this as more than 2 options, each looked at independently in a spreadsheet.

• rehab, rent, refinance
• rehab, sell
• owner-occupant short term while rehabbing to rent
• owner-occupant 1 year while rehabbing to sell
• owner-occupant 2 years while rehabbing to sell with Cap gains exclusion

I was struggling to see the value of any of the owner-occupant options, but I assume that helps you get the purchase loan on the place.    Still, it seems like it delays any investment income for at least a year if you go that route.

Joshua Martin · Answer

That's not what I'm saying. My girlfriend will occupy the property for a year. Still, that is insufficient to avoid paying capital gains. I should look into what the gains taxes are though, low income tax bracket it maybe not be that significant...

Brent Coombs · Answer

Are you saying that even if you don't live there during a year's "hold time", so long as you haven't rented it out, you could sell it (up until) then, with NO threat of capital gains? If so, interesting...

John Leavelle · Answer

@Joshua Martin

I did not see you accounting for CapEx.  That along with other miscellaneous expenses (lawn care/snow removal, pest control, legal, etc...) could burst your Cash Flow bubble.

I like your flip option the best.   Good luck.  :)

Joshua Martin · Answer

@Brent Coombs There's a one year O/O restriction, or hold time where I carry it, after that it's up in the air...

Brent Coombs · Answer

Er, that 2 year "capital gains exclusion" is only if you've LIVED in it for 2 years, right?

Isn't the one under discussion purely for investment/rental?

Of course, Joshua could re-name this thread: "Flip, Rent, BRRRR, or Primary?" Cheers...

Flip, Rent, or BRRRR?

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