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Fixing and Flipping vs. Buying and Holding

by Marty Boardman on August 18, 2011 · 24 comments

  

Peanut butter and jelly.  Surf and turf.  Burgers and fries.  Milk and cookies.  Coffee and donuts.  Beer and wings.  Wine and cheese.  Alone these things are desirable.  They will certainly satisfy my taste buds and quench my thirst.  But together, these foods stuff my belly and leave me feeling warm and fuzzy inside.

Fixing and flipping and buying and holding have a similar affect on my senses.

It may seem like these two exit strategies are mutually exclusive.  They don’t really go together.  Either you’re a fix and flipper or a buy and holder right?  Well, yes.  And no.

I operate my fix and flip business for the sole purpose of creating enough revenue to pay my monthly expenses and purchase long-term rental properties.  In short, the fix and flips are my business; buy and holds are my investments.

My goal is to keep buying rentals until there is enough cash flow to cover all my bills (and a little extra for regular trips to the beach, mountains and golf course).

Contrary to what the popular real estate investing gurus say you do need some money to get into this business.  Not a lot.  But some.  For you that source of revenue may be your job.  For others, it could be a successful business.  If you’re happy doing what you’re doing (and get paid well) then keep on doing it.  Just be sure to set aside some extra cash to buy a rental or two.

However, if you’re crazy about real estate like I am (and hate your job) then maybe fixing and flipping is for you.  Just remember, starting any new business requires cash reserves.

When I got into the game full-time in 2002 I didn’t have a revenue stream of my own.  I had something better – a Sugar Mama.  My wife had a great job and supported me until I could get the business off the ground.

So what’s better, fixing and flipping or buying and holding?  The answer is, it depends.  Most of the full-time investors I know are doing both.  Those that aren’t would like to do both but need more cash.  And a few of my friends with regular jobs do the occasional fix and flip for extra money to purchase rental properties.

As for me, I think fix and flipping and buy and holding go together like ice cream and chocolate sauce.  Now I need to go.  I’m starving.

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{ 24 comments… read them below or add one }

Nick Johnson August 18, 2011 at 9:03 am

Does your sugar mama have a sister?

Joking of course! I’m a firm believer in exactly what you’ve said. I take my short term strategies and use them to fund my long term investments. I couldn’t imagine living solely on the income from short term strategies. What happens when you hit a dry spell or that strategy is no longer profitable enough to fund your living expenses and you never bought a long term investment………scary to think about.

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Marty Boardman August 22, 2011 at 3:30 pm

Nick, yes my wife has a sister. But, she’s married too. Sorry. I consider the fix and flip business my job. The rentals are my retirement. Thanks for the comment.

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Kyle Hipp August 18, 2011 at 3:12 pm

A long term perspective really clarifies one’s near term decisions. We must begin with the end in mind and our potential is then limitless. I currently am employed and purchase properties that would be great for fix and flip but I purchase them as buy and hold in order to learn how to do all the repairs and improvements. With the improvements, my tenents are happier and I learn a great deal. My rate of return is increased with the ability to raise rents in improved properties. Also by paying for improvements in cash, my equity increases. As my cashflow increases to cover all my expenses, I can then get buy and hold investments faster. Then I can build up cash reserves and have enough to be comfortable to start in on the fix and flip side of the business. The experience in doing a lot of work myself allows me to know what a project takes and helpa keep costs down when hiring jobs out. Maybe as these two worlds intersect I can retire from my current employment sooner than 14 years from now at 40. It is amazing what is waiting out there for us to earn…

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Marty Boardman August 22, 2011 at 3:33 pm

Kyle, that’s a great plan. It’s very tempting to flip a house you know you got a great deal on instead of holding on to it for cash flow. I run into this a lot myself. As you wisely pointed out it’s important to being with the end in mind.

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Christi Gilhoi August 18, 2011 at 4:00 pm

I agree about the buy and hold for long term investments. We cashed out our 529 plan for our daughter and purchased two rental homes instead. Since they cash flow, we have short term income and a mid to long term (10) year plan to help her for college.

Great article, thanks!

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Marty Boardman August 22, 2011 at 3:35 pm

Christi, it still amazes me how many people don’t know they can use their lazy assets (old 401Ks, IRAs) to buy real estate. It’s a much better bet than the stock market. My Dad used his IRA last year to buy a rental and is getting a 16% cash on cash return. He was earning 4% in a mutual fund.

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Jeff Brown August 19, 2011 at 12:10 am

Sweet — and very effective.

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Julie August 19, 2011 at 12:42 pm

How do you think this plays out in certain markets, especially in today’s economy? There is a cheap bank-owned property next store that I would love to buy and keep for a rental property, but it is quite scary in today’ economy.

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Marty Boardman August 22, 2011 at 3:39 pm

Julie, that’s a tough question to answer without more information. Where do you live? Are there other rentals in your neighborhood? Is it a condo or house? How long has it been on the market? How much is the bank asking and how much would it rent for? There’s never a wrong time to buy real estate, only a wrong way to buy real estate.

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Julie August 22, 2011 at 3:43 pm

The house is in a suburb-ish area of Colorado Springs. There are a few rentals in the area. It has been back-owned for awhile but they fixed it up well – new roof, new paint on the outside, etc. It is about 30% lower than most houses in the neighborhood.

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Marty Boardman August 23, 2011 at 11:28 am

Julie, have you ever owned a rental property before? I suggest you talk to some investors that are buying and holding in your area. If you can’t find any call a title company. They’ll know someone that’s investing in your area. Good luck!

Margaret August 21, 2011 at 4:49 pm

Your article just put into words what I’ve been thinking all along. As a new investor I have one rental property and just made a profit on my first Fix N Flip. Now, I’m just trying to decide which way to go for the next one. I like milk and cookies AND wine and cheese!

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Marty Boardman August 22, 2011 at 3:42 pm

Margaret, I suggest you determine your income goal and work backwards from there. I flip houses in order to buy rentals. You can have your cake and eat it too (or milk and cookies and wine and cheese).

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Lynn August 21, 2011 at 5:50 pm

I brought a condo in Texas when the market was the highest, 2005 hoping to make it big.
I held on to it too long and now down 100,000. Now I have to hold and wait. no choice.

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Marty Boardman August 22, 2011 at 3:45 pm

Lynn, actually you have lots of choices. You can do a short sale, walk away, or try a loan modification (a long shot but worth a try). It could be 20 years before you’re at break even on that condo. Why are you hanging onto an investment that is underwater 100K?

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Lynn August 22, 2011 at 6:45 pm

Thanks Marty. I am using it as a rental now. Hopefully I won’t have to wait 20 to break even. Do you really think the market won’t come back?

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Marty Boardman August 23, 2011 at 11:22 am

Lynn, let’s just say that the real estate market in your area has stabilized. And from today forward your market begins appreciating at an annual rate of 4%. If you owe $200,000 on your mortgage and the value of the home is $100,000 it will take 18 years for you to be at break even. I have an Excel spreadsheet I use to calculate this – I can send it to you if you’d like. Just email me at marty@risingsun[email protected]. Is this property cash flowing?

Lynn August 23, 2011 at 11:41 am

It is a beautiful condo on Lake Travis in Texas, It is in a great area and as they say,
Everything is big in Texas…!! Austin is one of the town that is still growing.. I am hopeful
that it will come up again… I brought it at 285 and now going for 190 ish.
I don’t understand what you mean by cash flowing ? I always have a tenant in it :}
TG !!!

Charles August 22, 2011 at 7:50 am

Great article. I totally agree that these two strategies work well with one another.

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Jason August 22, 2011 at 9:48 pm

The strategy will depend on your capability to handle and manage your money or investment. You can do both if you know for yourself that you can do it. But if you can see that you need to focus only in buying and holding just focus on buying and holding.

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Marty Boardman August 23, 2011 at 11:24 am

Jason, I meet a lot of real estate investors that treat their fix and flip business like a hobby. Hobbies are expensive. Your odds of success are drastically increased with a solid business plan and short, mid, long-term goals.

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Marty Boardman August 23, 2011 at 11:48 am

Lynn, after you pay the mortgage, property taxes, insurance, HOA dues and any other costs is there cash left over?

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Lynn August 23, 2011 at 12:13 pm

Not too sure, I mistaenkly refin the cost to my home’s mortage. I should have taken out a separate mortage to buy it, big mistake. :{
I also own another townhouse in NJ that is now paid for and I am renting it out. So I am getting a postive cash flow from that one, I have owned it for 15 years. Won’t I get killed in taxes now if I sold that ?? Don’t I have to pay back all the depreciation costs ?? Not sure how long to hold something and when to sell ????

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Marty Boardman August 23, 2011 at 12:38 pm

Lynn, so you own the condo free and clear then? If so then I assume the underwater mortgage is on your personal residence?

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