Should we keep it or kill it?
How would you like to go over a real-life deal we are working on today? Would that be beneficial? Actually, you might even be able to help me with it. Because we are having a hard time deciding if we should keep it or kill it.
I get the idea of “keeping it” versus “killing it” from Aesop’s Fable about the Goose and the Golden Egg. And if you aren’t familiar with that story, you should go read it. But a very abbreviated summary of it is there was a poor farmer who discovered he had a goose that would lay a golden egg every day. The farmer all of sudden becomes wealthy, and then becomes greedy and impatient. He decided he no longer wanted to wait on the single egg each day and decides to kill the goose and get all the eggs out at once. When he does, he finds out that no more eggs are inside. And now all he has left is a dead goose.
For our purposes, keeping the golden goose alive means keeping a house as a rental property and letting it produce golden eggs over time in the form of passive income. Whereas killing it means we decide to sell the house, lose out on the passive income, but enjoy the one-time meal that our dead goose produces as proceeds from the sale of the property.
Sometimes when you are evaluating a deal, the decision to keep it or kill it looks one sided. For instance: if there is tremendous cashflow and little equity then it’s a no brainer to keep it. Or, if there is a huge equity and no cashflow, then killing it makes a lot of sense.
But what do you do if the answer is not so cut and dry? Well, that is what we have going on right now.
We are under contract on a great house. It is a 3-bedroom, 2-bathroom, brick ranch with a two-car garage in an established neighborhood (This is called a 3/2/2). The seller’s situation is that this was a rental property that they previously had for many years that they needed to liquidate quickly because of an unforeseen life change event.
The reason they contacted us was we had bought houses from them previously, and they knew if we got under contract we would get it done quickly… meaning two weeks or less.
I went out to go look at the house. It really is a great house in a great subdivision. The house had some deferred maintenance. The biggest being the HVAC had issues and the house was in need of a roof. By in need I mean I have no idea how it was not leaking like a sieve in some places. The shingles were well worn and missing in some areas. But the biggest thing was the plumbing boot that is supposed to seal the main vent on the back side of the house was almost gone. This meant water could flow freely into the attic the next time it rained.
But all-in-all, the house was in pretty good shape and most things were simply cosmetic.
Now, what to do with this house?
Currently, the house is rented to long-term tenants who do not wish to move. So if we want to keep it as a rental, we need to figure out if the house will make money.
Taking the current rent rate into consideration we’ve deduced that after paying all expenses, including a mortgage, that we should have a positive monthly cashflow of $400 a month.
I should have said this earlier but having a 3/2/2 brick ranch is a very desirable rental property. It is a home size and layout that most tenants like. It is ranch, meaning there are no stairs to climb, which is also desirable to tenants. But being brick means the upkeep of the outside is very minimal. This reduces maintenance costs on the landlord and increases cashflow by keeping expenses lower.
So having a 3/2/2 brick ranch in a great subdivision that produces a $400/ month cashflow as soon as you buy it makes keeping this house sound very attractive.
But what if we kill it?
Similar houses have sold in the area in the $240,000 range. In order to get that house flip ready, we figure it will cost about $40,000. Taking into account realtor commissions, closing costs, the rehab and purchase price, this house has a $50,000 profit potential.
$50,000 on a flip ain’t bad money.
To some, the $50,000 flip sounds very attractive. To others, the $400/month cashflow does. To me, they are both excellent opportunities.
So how do you decided if you should keep it our kill it? We could go down the tax hole and reverse the numbers to see which one of these two deals works best. For us that would bring the flip profit down to more like $35,000. Now divide that by the $400/month and it will take over seven years before the rental makes more money than the flip. That assumes uninterrupted rents as well as no rent increases.
So which one works best? That answer really comes down to life situations, personal circumstances and preferences. Are you in need of cash to live off of now because you are just getting your investing business and you have no other income? If that is the case, kill that joker and eat well from it. If you are working to get your passive income up high enough to pay for all your living expenses and get out of the proverbial rat race, keeping it makes a lot of sense.
For us, we are leaning towards keeping it. Sure, we could use that flip money. But our main goal is to create and maintain passive income. Because when you don’t have to go to work, and money keeps coming in, is when you have attained true financial freedom. And the best way I know to do that is with good cash flowing rental properties like this one.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.