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Thursday, April 19, 2012

Do I Flip This House or Do I Rent It?

In the last post I mentioned that after many offers I have gotten two of them in the final negotiations stage. In that post I went over the one house that I am considering keeping as a rental. The other house I have under contract has a 50/50 chance of being a rental or I could fix it up and try to resell it...otherwise known as flipping.

 In order to make this decision I need to consider several things:

  • Source of financing - will I be using money from the bank, money from a private lender or my own cash.
    • In order to hold the house as a rental I would need to get a long term loan (at least 15 year) from the bank. Unfortunately the offer I made was a cash offer (to be competitive) so now the only way to get a mortgage on that house would be through a refinance. Current bank lending rules do not allow refinancing until at least 6 months after the purchase. That would be a long time to wait to get my cash out of that house. 
    • If I find a private lender in all reality I could get about a 5 year loan. That would not be so bad if we can work out some good terms that still allow me to get some good cash flow from the property. 
    • If I use my own cash to buy the house then that would tip my decision to fix and resell the property instead of renting. Because I would like to be able to use my cash to buy another property and not be tied up on this one. 

  • Amount of repairs - if the house needs a lot of work that also tips the scale towards a flip. Because as a rental you do not recoup back the money you put in the house for repairs. You only get that money back when you make a profit when you resell. Sure, all houses need some work but for a rental house I would like to keep the rehab less than $10k, more like $5k depending on how good of a deal the house is. 

  • Neighborhood Activity - if I see some strong sales in nearby similar houses then that also makes it a better flip candidate. So it would come down to the profit and ROI I can make by fixing it up and reselling. For this house there is one recent rehabbed house that sold in the $130k range and another rehab on the market listed at $140k that is under contract. These are good signs that I can resell this house once fixed up.
So once I was notified that my offer had been accepted I went and took a look at the house...

That's right, I had never seen the house...whaaaat!...you say. 

Yep, I put in an offer sight unseen... I was comfortable doing this because I am very familiar with the neighborhood and the area and have been targeting this neighborhood for a while. I knew exactly what the floorplan looked like and had seen what the sales activity had been. 

I tell you that with all the offers I have been making there is no way I have time to go see the house first then make the offer. I figured that out after visiting dozens of houses, taking notes, crunching some numbers and then making an offer only to have my offer rejected. 

This way if my offer is rejected then all I lost was the 15-30 minutes that it took to research the sales online, write the contract and email it. Instead of the 1-2 hrs it takes to go see the house plus the research and contract. 

Anyway, after doing an initial estimate of repairs needed it will take about $25-30k to get this thing fixed up the way I would like. However at the price I have it under contract and the fact that it could potentially sell for around $130k range the rehab would have to be more in the $20-25k range in order to make my target profit of at least $20k

So that means that I will have to either find a way to cut the repair budget or negotiate a lower price with the bank that is selling it...yikes!

I figure it is easier to negotiate price once you have it under contract than if I didn't. Stay tuned to see how this works out.

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  1. Luis,

    Interesting dilema. As a buy and hold only landlord myself, I say rent it out and if you need the cash back out sooner then flip it at the next change in tenant or some point later down the road.

    I see your problem on the financing. This will cost a few bucks to get your equity back out into a long-term loan. However, I just love the rates right now..and consider a nice 15 or 30 year mortgage an asset as much as the house practically. Even the investor mortgages are below 5%.

    1. Chuck you are right about the rates, which is why is another good reason to buy a rental if you can buy it with a loan. The problem is that if I buy it cash it will be at least 6 months before I can put a mortgage on it. So I would have to buy the house with the "trust" that in 6 months the rates are still going to be low and I would be able to qualify for the refi. So you see , it's a bit of a leap of faith...


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