If you’ve been reading the past week, you know that we have another house under renovation (The Haggle House) and have been trying to determine the appropriate exit strategy for it — Hold As Rental or Rehab & Resell. If you’ve looked at the financial analysis I’ve done for each of these options, you know that either exit strategy is reasonable and should generate a good return on my investment…
After doing a bit more number crunching, I’ve found what I consider to be the optimal exit strategy for this property (barring any surprises). And that is to hold the property as a rental for the next 3-5 years, and then resell.
For those interested in the financial analysis, here is the IRR I can expect if I were to refinance (based on the numbers I provided in the Rental Analysis), hold as a 3 year rental, do a more complete rehab in 3 years (on the order of $15K), and then resell for an anticipated net sale of about $110K (which I believe is reasonable):
That’s greater than a 50% compounded return over 3 years! While a quick fix-and-flip would generate a higher IRR, the total profit would be much lower, and in this case, I’m happy to trade lower return for much higher profit over a relatively short period of time…
Looks good, but why sell in 3-5 years. Why not hold for 10? Thanks!
Hey Mike –
I may consider holding the property longer than 3-5 years, depending on the market conditions, the rental rates, etc. I have a feeling that I’ll see more appreciation in the next 3-5 years than will be typical after that time, so it’s likely that my rate of return will drop the longer I hold the property. Additionally, if I hold for much longer than 3-5 years, I’ll start to face a number of capital expenditures, like new roof, new HVAC, new water heater, etc.
All that said, I’ll re-evaluate as we go along, and certainly won’t lock myself into anything at this point…