Most property flippers buy a property with the intention of renovating and selling but sometimes the decision to refinance and hold may be a better strategy.
Experienced investors often view a completed rehab as an opportunity to generate long-term wealth rather than make a quick profit.
The best exit strategy relies on a number of factors:
- the property itself and its potential yield
- market conditions
- cash flow
- equity position
- personal investor goals
Sometimes, selling is the right call.
But in some circumstances, refinancing into a rental or long-term hold can create significantly more wealth over time.
Sophisticated investors evaluate both options before making a decision.
The traditional flip model
Traditional flippers follow a basic formula.
They buy, renovate, sell, realize profit and repeat.
The strategy offers benefits such as:
- immediate returns
- quick recycling of capital
- lower long-term management responsibilities
But it does present some challenges and drawbacks:
- capital gains taxes
- transactions costs
- the constant need to find new houses to flip
- loss of future appreciation of sold properties
What if that house you just renovated soars in value by 50 per cent over the next five years but you miss out because you sell and move onto the next flip?
When refinancing may be the better option
There are a number of scenarios where it is worth considering whether to refinance and hold might be a better option than to sell.
Strong rental demand
A renovated property may generate attractive rental income while continuing to appreciate.
Locations such as Sacramento, the Inland Empire and Central Valley are high growth markets that promise strong rental returns.
Average monthly rent in the Central Valley lies at around $2000/month for a three-bedroom house, rising to $3000 in the Inland Empire.
Equity creation
Housing renovation may create significant equity and it may be beneficial to refinance and hold a property to extract and potentially reinvest that equity while retaining ownership.
For example, Jason buys a house for $500,000.
He spends $75,000 on the upgrade bringing his total investment to $575,000.
But the property is now worth $750,000.
He has gained $175,000 in equity which can be diverted towards new investments.
Market timing
Property markets can fluctuate quickly due to a variety of factors.
If a market weakens during the term of a renovation, it makes good sense to refinance and hold a property rather than sell it and fail to capitalize on its potential value.
Holding a property allows investors to:
- wait for better economic conditions
- benefit from appreciation
- generate rental income
Building long-term wealth
Not every house flip will be worthy of a refinance and hold.
And it simply isn’t feasible to hold every house flipped.
But consider the fortunes of two different investors, flipping 10 houses over five years.
Investor A flips 10 properties and retains none.
Investor B uses profits gained from flipping eight properties and decides to hold two exceptional assets.
Using the example above, Investor A would make a profit of $1,750,000 on those 10 houses.
Investor B would make $1,400,000 on eight houses sold and spend $575,000 apiece to retain two of those houses.
It would leave Investor B with a net profit of $250,000 plus ownership of the two assets.
Let’s assume those two houses were bought at the two and three-year marks of the five-year project.
At an average rent price for the Inland Empire of $3,000/month, that equates to five years worth of rent across the two properties, totalling $180,000.
Investor B’s net position is now a profit of $430,000, as well as ownership of two properties generating a total of $60,000 in rent per year.
This is the essence of the BRRRR strategy – Buy, Rehab, Rent, Refinance, Repeat.
It allows investors to recycle capital, build their portfolios and create recurring income.
Many California investors adopt this strategy or variations of it.
Questions investors should ask before refinancing
Not every property will be particularly suited to the refinance and hold model for the following reasons:
- some house flips are optimised for sale rather than rental performance
- the opportunity cost of tying up capital may prevent future property purchases
- capital gains tax considerations may be preventative
- ‘revaluation risk” where lenders may not immediately recognize renovation gains
Good long-term hold options feature good rental yields, low maintenance costs, tenant appeal and cash flow.
Questions to ask before refinancing are:
- What is the property’s current market value?
- What rent can it realistically achieve?
- Will cash flow be positive?
- What are current interest rates?
- How much equity can be accessed?
- What are long-term market fundamentals?
The role of private money in refinancing and hold strategies
Private money and in particular hard money isn’t simply a tool facilitating house flips by financing the purchase and rehabilitation of properties that traditional lenders would never consider.
It is far more versatile than that and can act as a bridge between acquisition and whichever long-term exit strategy a flipper chooses:
- Sell immediately
- Refinance into a long-term rental
- Convert to a short-term rental
- Lease and wait for better market conditions
- Refinance and extract equity for the next project
This means a flipper doesn’t have to predict the market before buying.
Multiple exit strategies reduce risk and allow flippers to maximize profits based on their own financial position, ambition and market conditions.
Flippers seeking to refinance and hold can use hard money to build equity in a property and then convert to a conventional investment loan.
Or they can choose to build their portfolio by following the BRRRR strategy.
But it all relies on accessing private money.
Get finance and support today
Not every flip should be sold.
Nor should every flip be retained.
There are reasons to consider both options.
The smartest investors don’t simply ask how much profit they can make.
They ask, “What is the most profitable use of this asset?”
Sometimes the answer is selling. Sometimes it is holding.
The key is knowing how to evaluate both options before coming to the best decision.
That’s why Equidy makes such a valuable finance partner – one that understands the full property investment cycle, not just funding acquisitions.
Equidy is a hard money lender that offers fast, reliable funding.
They can finance flippers and developers in as little as 48 hours.
But Equidy has another very valuable string to its bow.
Equidy has an intimate and personal history with all aspects of property development in California and has done so for well over 40 years.
They will work closely with you to understand your personal goals and help you choose the right exit strategy for your acquisitions.
Their sole focus is to help you maximize the return on your investment without putting yourself at unnecessary financial risk.
They stand by their core belief that anything is possible and they strive to prove it every single day.
Even in stressful economic conditions, they are determined to reward entrepreneurship and resolve to help their clients crystallize their wealth creation dreams.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimize the risk to all parties.
Contact Equidy today to book your free strategy call.
