Flip or Rent?

Question

I'm closing on my first investment property next week and am having 2nd thoughts about my strategy moving forward. I was planning to use this property as a rental but am considering flipping it instead. I took out a conventional mortgage and am putting 20% down. The house is going to cost $140,000 and I was planning to put in $10,000 for the rental renovation. With a rental cost of $1900-2000 I would be cash flowing around $400 each month. My question is about moving ahead to be able to finance future rentals. I'm very interested in the BRRRR method and could see this property as a great way to start gaining the capital to get the BRRRR method off the ground. I'm estimating my ARV is around $200,000 on this property. If I flipped this property then planned to flip 2-3 more properties over the next year, I would have enough capital to purchase something with cash. Any thoughts on the direction I should head would be greatly appreciated.

Aaron Poling · Answer

I would recommend holding the property as a rental and financing your cash back out. Seems like the cash flow would be good, and you could just repeat the process. If you decide to flip, you will make some cash but have tax implications as well. In the long run, you need to decide what your goals are, develop a strategy that supports those goals and follow that path. Either way you go, sounds like you have put together a profitable deal, Congrats on that!

Good Luck Aaron

David Ramirez · Answer

Hey @Andrea Eble,

For a flip, your numbers look very tight. Remember that when flipping you have to get your property to ARV COMPS standards.

Brittany Minocchi · Answer

Why are you set on purchasing future properties in cash instead of leveraging OPM? Wouldn't it be better to spread your funds out over multiple properties instead of putting all of your eggs in one basket?

Min Zhang · Answer

Congrats on that Andrea! Actually my suggestion would be to retain the property as a rental and withdraw your cash through financing. In this approach it appears to generate positive cash flow, which you can replicate in the future. But if you decide to flip, it can potentially generate a quick profit in a short period of time and allows investors to have creative freedom in the design and renovation process. Ultimately, you must determine your objectives, create a plan that aligns with them, and stick to it. Regardless of the path you choose, it appears that you have established a profitable agreement.best of luck! but if you still have questions, I would be happy to help.

Jason Campbell · Answer

Having done bank financing and cash buys, each has its pros and cons.  I agree with your suggestion but would also caution that wealth is extremely difficult to build “quickly”.

Jason Campbell · Answer

Call me old fashioned but I say HOLD.  Flips seem cool but the real wealth is gained by holding and growing - IMHO

Carlos Ptriawan · Answer

in this market flipping is always better because we're in the rebound market so you make profit from two possibility trajectories medium term.

Drew Sygit · Answer

@Andrea Eble what benefit do you see in paying cash for a rental?

Yes, you will have great cashflow, but what will be the ROI on your funds?

Using mortgages to leverage acquisitions is how you build cashflow & wealth in real estate "quickly".

Read Gary Keller's book, "The Millionaire Real Estate Investor" where he lays out different investment strategies.

Preston Hillard · Answer

First off, Congrats! If you are just starting I would always recommend flipping if it makes sense to build up some good starting capital. Then once you have this cushion you would start to think about holding & flipping. (If you used hard/private money on this on I would Flip to get some working capital for yourself)

On the contrary this sounds like a perfect BRRRR... If you already have some working capital built up it sounds like you would be able to pull that right back out of this one and keep your asset.

I am guessing but...

28k down + 2k closing + 15k reno (exaggerated to be safe) + 112k loan + 2k refi CC =  159k

ARV = 200k @ 75% Refi = 150k cash out

or if possible ARV = 200k @ 80% Refi = 160k cash out

Just quickly doing the math if your reno numbers are accurate worst case you might leave 9K in this deal to cash flow $400/mo?? best case @ 80% LTV you pull out all your $$ maybe more if closing cost & reno are less than factored above. If your numbers are accurate I would say you have yourself a very nice BRRR deal! Your exit strategy all depending on your needs at this time!

Jeff Roth · Answer

Hi Andrea-

Congratulations on your first investment property purchase.

I too have a goal of $400 positive cashflow after all expenses and property management each month.

It is possible to do this in the Midwest as I am just up the road in Ann Arbor, MI.

Now, here are my concerns:

1. The renovation costs are more than you project. Common.

2. The rent is less than you project. Common and more rental units are becoming available this year nationally in the multifamily space with new construction to compete with your rental.

3. The After Repair Value is less than you project. This is also common and in a housing market with elevated rates and buyers and sellers taking a wait and see approach I would hesitate to be so confident on that number.

Any one of the three could cause an issue.

Personally, I would not think about flipping as you will owe taxes if not done in a 1031 exchange and in addition to taxes you will have the transaction costs even if you sell the property yourself.

You can do a cash-out-refinance to get your money out tax free or get a Home Equity Line of Credit if you want to keep part of your debt with the existing fixed rate mortgage.

I guess, in short, I feel it is less risky for a new investor to rent and refinance than to flip into a shifting market. I personally to the BRRRR method as best I can as well to reduce risk and build up positive cashflow and equity over multiple properties.

To your success!

Flip or Rent?

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