I just purchased a property at auction and wanted to get some advice from the pros on holding or selling this one.
Purchase price 175,000 ARV 240,000 , 2 unit SF, 1-3 bed unit rented for 950, 1-2 bed unit rented for 650. Recently updated so nothing is needed to keep for a rental. If resold maybe 5k to clean it up for resell.
If I keep to rent then I would use traditional financing at a higher LTV to get some if not all of the deposit back. I would manage the property myself and handle any repairs to keep expenses down. All majors have been done to the property so I don’t expect to deal with much on that end just the insurance and vacancy rate. The area is hot with rentals and they typically don’t stay vacant more then 60 days.
If I flip the property then I would use a hard money lender at 8 pts, 10% to settle loan and put 5k cash in and resell.
With those rents its not going to cashflow, you’ll have a neg cashflow to contend with. If you truly can sell it easily at $240k I would definitely toss a few bucks in to clean it up and sell it fast. You can also option it at $175k, throw an ad in the paper as shown below, release the option for the difference and keep moving with more money in your pocket and not much effort or risk.
FIXER UPPER! MUST SELL THIS WEEKEND!!!
Priced 20% under value and only needs a little elbow grease to make it shine! Bring your checkbook, deposit must be made this weekend. Open house 2-4 Saturday. 122 Main St Anytown.
Obviously 80% of $240k is $192k. Start the negotiations there, if you have a good turnout you might be able to have people bid it up…even if you only get one taker at $192k you walk away with $17k for not much trouble. Get your attorney to whip up an option agreement and a release of option agreement, should be simple for him/her.
Now for the open house be sure the seller isn’t there, give them some money to go get lunch and use that 2 hrs to get the deal done and the buyers through the house.
I don’t understand the part about using an option. Sounds like he already has a contract to buy through an auction and now has “x” days to get the rest of the money together and go to closing.
As Rich said, the property is not going to cash flow. If you don’t want to be out of pocket each month, then you’re going to have to sell it.
You should be able to exercise a 1031 exchange for a better cash flowing property, but case law dictates that you would have to hold for one year to avoid capital gains tax. Calculate cash flow losses vs. capital gains losses.
It looks like you are making a decision about which debt instrument to use based upon how long you intend to keep the property. That's smart. I hope all the new investors pay attention to that strategy.
How is this GRM compared to others in your area? If you can find better GRMs how about doing a 5/1 ARM and leverage the thing to generate reserve capital?
If this GRM is about the best you can hope for, maybe you should just go 30 year direct amortization. If the tenant base is good (ergo young people simply cannot afford to buy a home) your vacancies and expenses could be very low. If the tenant base sucks (ergo the only people who rent are drug addicts and old ladies with 8 cats) your cash might have to flow a bit better than this to make it a worthwhile long term hold