Deal Analysis: Would you flip or hold this one?

Question

This single family detached property was built in the 80’s and is in a B+ area of So Cal. I purchased the property cash though a short sale for 202K, put 15K into it and have multiple full price offers at 295K. After expenses, a flip would net me about 57K.

The other option is to rent it out for roughly $1900.  Not quite the “2% rule”, but good luck getting that in a decent neighborhood in CA. The property is about 45 minutes away and I would manage it myself. I have a reliable and fair priced handyman that lives around the corner and would keep an eye on the property. After expenses, it should have decent cash flow. Although, I have been reluctant to purchase based on appreciation, this would be the main reason I would hold onto this property.

In my opinion this property works well as a flip or hold. So 57K now or roughly $950 (50% rule) a month cash flow and possible future appreciation? What’s your opinion?

Will Barnard · Answer

You paid cash, thus are tying up over $200k for an expected 6% cash flow return, and a projected 20% appreciation return. Lets say you hit both and hold for two years. You make a 26% annual return as a landlord. Not bad, but what kind of returns are you passing up with that $200k that could have been reinvested into other flips multiple times over two years, plus compounding the profits, I think you could do a ton better.

I would sell it now. However, if you could use conventional financing and get a large majority of your capital back, and break even on cash flow, then you would still have access to those funds plus the OPM growing at 20%!on appreciation.

Angelo Monday · Answer

Never leave a guarantee for an uncertain. The rental process would be better if you weren't so much invested. Take the money the market could take another hit an then you would be still waiting or at a lose.

Steve Babiak · Answer

If you've done "flip quality" rehab and have no prior experience as a hands-on landlord, don't try to gain that experience with this one.  There are good tenants out there, but they are out-numbered by the not-so-good ones.

Chris Weiler · Answer

Thanks @Will Barnard for your analysis. I would definitely get financing and pull as much equity out as possible. The problem is most of the lenders I speak to will only give me up to 80% of the purchase price. So I could pull out about 160K now and maybe another 80K on a 2nd or refi when the property is seasoned.  @Jon Klaus, I also appreciate you bringing up the tax situation. With taxes going up next year, a flip is going to net considerably less. One strategy would be to hold and then 1031 into a larger property after some appreciation. I also have to weigh whether I want the additional hassle landlording myself. I have a number of out of state rentals, but my business partner does most of the heavy lifting.  I thought the local one would give me some practical on the ground experience.

Xing Zhu · Answer

I'd hold it for appreciation. 
Depending on your tax bracket in the future, you may have to pay 50% of your gain as taxes every time you flip.

Jim Lien · Answer

If it's as good an asset as you describe it to be I'd be keen to refinance with relatively low leverage and redeploy the cash without tax penalties if there are other opportunities out there for you.  You should be able to get a very low interest rate even with a traditional residential bank loan if you keep the LTV at or below 70%.

Jon Klaus · Answer

Good points above.  How about having it both ways and refinancing 70% out after it is seasoned.  Or whatever the bank will give you.  Also weigh in your tax situation into your decision.

Brandon Turner · Answer

I wish I had your problems, Chris Weiler! :) Personally, I think I'd keep it - but I'm a buy-and-hold guy more than a flipper. I'd rather have that equity and cashflow. But I don't think you can go wrong either way.

Jeremiah B. · Answer

Great topic - thanks for sharing.

Will makes a great point about conventional financing if you decide to keep it.  Even if keeping that much cash tied up doesn't negatively affect your ability to do other jobs, the ROI will increase if you refinance.

With that said, assuming that you went into this house expecting the flip it, I think selling is probably the right call.  You have done a great job and either options sounds viable, but I don't view either option as lop-sided enough to second guess your original plan.

Will Barnard · Answer

Great scenario by the way, something beneficial for all to learn from this option.

Deal Analysis: Would you flip or hold this one?

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