Thread: Need some advice from seasoned property investors: Rent or Flip?

I'd like to get some different perspectives on my current situation.

I recently bought a home in the San Bernadino for $60,000. As per the public records, the home is 3 bedrooms and 1200 square feet. However, after inspections, I found that there is a fairly large addition of over 500 square feet that include a large family room and bedroom that was done without permits (however, it still looks like it was done very professionally) -- leaving the home to be 1700+ square feet and 4 bedrooms. I spent an additional $12,000 on renovations on all the rooms, leaving my total investment at $72,000.

My initial goal was to purchase this property with the intent to rent it out -- conservatively, this home would rent for $1100 per month, netting me around $800/month after all expenses -- again, a very conservative number. This would bring me to a 13%-14% return on a $72,000 investment.

However, I've been also pondering the idea of selling and flipping the home. I believe I would be able to net around $87,000-$90,000 from the sale.

I purchased the home cash, I don't have any loans or mortgage.

With that said, I'm looking for some different perspectives. Flipping would make me some quick cash, although it took me 6 months to find this deal after writing over a dozen offers - so I factor that into the equation, as well...$16,000 over 6 months seems like a pretty lousy amount. I'm also expecting it to take another 4-6 months to find another property at a price where money could be made, especially when a standard sale competes with REO's and short sales.

So what would you guys do -- rent or flip? Thoughts?

Graham

I assume you mean net proceeds of $87-90k, from which you would net $15-18k. Even at the high end of value of $90k, you are making nearly 11% on your money if your rental scenario is correct. Why not rent it out and do a cash-out refi, which will give you the money to do the next one, and positive leverage since your loan constant will be well under your COC return as a rental? Then again, managing a property in San Bernadino from Beverly Hills may be a nightmare, unless you score the dream tenant. Maybe rent it at least a year to put you into capital gains rate vs. ordinary income, worst case. In the meantime, look for an exchange upleg, and if you find one, sell and exchange.

Originally Posted by DialM

I assume you mean net proceeds of $87-90k, from which you would net $15-18k.

Correct.

Originally Posted by DialM

Even at the high end of value of $90k, you are making nearly 11% on your money if your rental scenario is correct. Why not rent it out and do a cash-out refi, which will give you the money to do the next one, and positive leverage since your loan constant will be well under your COC return as a rental?

I'd like to do this, however I have no credit history. I've always done things cash and just got my first credit card a few months ago. I doubt I'd be able to refinance anytime this year?

Originally Posted by DialM

Then again, managing a property in San Bernadino from Beverly Hills may be a nightmare, unless you score the dream tenant. Maybe rent it at least a year to put you into capital gains rate vs. ordinary income, worst case. In the meantime, look for an exchange upleg, and if you find one, sell and exchange.

I'll absolutely get a property manager, unless I somehow find a tenant I wouldn't mind working with myself. Doing a 1031 Exchange is a very good idea!

Graham

I need more details to make a call, but your rental figures seem off. What about property taxes and how are you reporting your income from the rental, also how are you calculating your return. I get a 13% return if you sell in 5 years at $80,00 @$800 a month profit.

I can't believe how lucky you guys are. Where I live you can rent most houses out for 1100-1500max, and sell in the 300k mark.

You can bring in 3 times the rent on the same initial investment!

Originally Posted by VII

I can't believe how lucky you guys are. Where I live you can rent most houses out for 1100-1500max, and sell in the 300k mark.

You can bring in 3 times the rent on the same initial investment!

Yes, some markets are more favorable than others, buts its also relative to other expenses, some regions have high operating expenses, so the high rent quickly offsets the profit, and makes it seem more lucrative than it is. There is a lot of factors into rent, investing, house value, etc.

Originally Posted by GStephan

I doubt I'd be able to refinance anytime this year?

Graham

If i am not mistaken you have to wait about a year before any bank will do a cash-out refinance. It is a great idea going that route. If i were you:

1. Meet with a local small bank and tell them what you have just done. Show them pics of the before and after at the property (save all your receipts) Tell them your intentions of doing a cash out refinance. Let them pull your credit and let them tell you what you will need to work with them.
2. Rent the place out to bring in cash flow. Join a local landlord association and they can help you with running back round checks and which leases to use.
3. Build your credit in the meantime
4. Start lining up your next deal, as you know this could take a while.

I have flipped some properties and own rentals. The problem with flipping is you get nailed come tax time and you no longer have that performing assets. I like the cash out like DialM suggested because you can pull your initial out often times with a little extra. Then you pop a tenant in there to pay off the loan and you have the best of all worlds. Only downfall to this method is managing tenants. If you do your homework though and are in a decent area you can get lucky and get a good person to rent from you.

Good-luck & let us know which way you go.

Chris

Sorry for the late reply, I've had a lot going on recently and hadn't had a chance to respond.

Because I didn't want to get hit with taxes from selling without a 1031, I decided to go the rental route. I ended up getting full price ($1150) for the first tenants that saw it -- great rental history, great jobs, good references, and decent credit.

SMW -- you may be correct. I was accounting 30% total for expenses.

Chris -- Good advice, I agree with you. I'm in the process of purchasing a multi-unit at the moment, fingers crossed I'll have that in the next few months. I'll start speaking around then at the refi process, that's a good route.

Thanks again.

Graham

Congratulations on making it happen!