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How to Build Long Term Wealth From Flipping Houses

by Michael LaCava on April 6, 2014 · 15 comments

  
House Flipping Wealth

When you first get started flipping houses, you only think of the short-term cash influxes flipping brings you.

But in your quest for cash by selling your flips quickly, you may want to think about longer term wealth building strategies like building a base of recurring income.

I do this through the acquisition of rental properties.

In fac, on a bout 10-20% of my flips, I decide somewhere during the process that the flip I had in mind would actually be a better long-term buy and hold rental property.

This is how you can plan for  the future by creating a stable of assets that  pay you each month while using the influxes of cash for running your flipping business.

But before you do that, you should familiarize yourself with the various types of rental agreements to engage in.

Related: Get The Book on Flipping Houses from BiggerPockets Today! 

To Rent or Flip: How to Know

Once you familiarize yourself with the different types of rental agreements you will be able to change your strategy to suit the dynamic real estate market.

How do you know which ones to flip and which ones to buy and hold?

This all comes down to looking at the current market situation. If it’s plateauing or on a down turn, consider buying, rehabbing and selling the property as fast as you can.

If the market is doing well, consider doing a buy and hold. It’s all about changing your strategy to suit the current market situation.

This is not a hard and fast rule, but you need to use your best judgment.

The idea of buying and holding property is a great strategy because you can rent out the property while you wait for it to appreciate in value.

Never buy a flip based on market appreciation as your sole marker for profit, but if the market all of a sudden tanks, the home may be a better fit for renting.

This way, renting it out will help you keep up with expenses such as maintenance, property taxes and insurance.

Consider trying these different ways of renting out property.

Different Types Of Rent Agreements

When it comes to rental agreements there are really three types.  Here they are below.

1. Fixed Term Lease Agreement

A fixed term lease agreement lasts no more than two years.

Once the tenant signs the lease, they are obligated to pay rent even when they no longer live in that house. So if they sign a two-year lease, they will have to pay rent for two years even if they decide they no longer want to live in that house after one year.

The only exception would be if you want to sell the home so the tenant has to leave early.

The good thing about this arrangement is that you will still make a profit without selling the property. Unfortunately, if you want to sell the property, the tenant might refuse to leave the property until their term is finished.

2. Periodic Lease

This can be a weekly or a monthly contract. If you are short on cash, a periodic lease would be ideal for you because your tenant will pay rent more frequently.

It’s also beneficial because if you decide to sell the house, you can evict the tenant in a month or a week, depending on when their contract ends.

3. Tenant At-Will Lease

This arrangement does not involve contracts. The tenant can leave whenever they want and you can evict them whenever you want without notice. This is a risky arrangement because the tenant can leave without making payments. Not recommended but many people do it.

It’s always good to go with options one or two above.

Lease Purchase Agreement

This is a contractual agreement where you agree with the tenant that after paying rent for a certain amount of time, they have to purchase the property. If they refuse to buy it, you can take them to court and hold them accountable for the costs.

Many real estate investors favor this type of arrangement because they do not have to re-list the property or look for another tenant once the lease term expires.

Lease Option

A lease option and a lease purchase agreement are two different concepts. With a lease option, the tenant is not obligated to purchase the property at the end of the lease period. They, however, have to pay an “option consideration” fee.

They have to pay the fee upfront. If the home is valued at $300,000, they will have to pay around $20,000 to $30,000.

You must, however, return this money to them if they decide to purchase the property at the end of the lease term. If they don’t, it’s yours to keep. Many buyers like this option because it offers them a certain degree of flexibility.

Related: Rent to Own Homes: How to Profit from a Lease Purchase

Subletting

Another type of buy and hold is when you don’t always have to purchase the property in order for you to rent it out. You can rent property from a landlord and sublet it to a buyer.

We don’t do this much, but its worth mentioning here as a recurring cash strategy. This can be done with two types of leases:

1. Standard Sandwich Lease

Instead of charging the same monthly rent, you can charge more for a profit. In this arrangement, all the landlord’s responsibilities still remain his and they are not in any way transferred to you.

2. Sandwich Lease Option

This is similar to the standard sandwich lease only this time round you add the purchase element. You are technically the middleman in this arrangement. You can choose to lease purchase the property from the landlord and sublet it to another tenant as a lease option. You can still make a profit from the difference between the rent and the purchase price and the option consideration fee.

 

If you’ve made it this far, please leave a comment below. I’d love to know what you think about the different ways of renting out property and any other ways to build longer term cashflow strategies!

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{ 15 comments… read them below or add one }

Geoff Van Dusen April 6, 2014 at 1:50 pm

Great article Michael,

Reply

Michael April 10, 2014 at 3:40 pm

Thanks Geoff.

Reply

David Krulac April 6, 2014 at 4:38 pm

Michael,
So its not the flipping that generates long term wealth, its the buy and hold that happens maybe 20% of the time. Just think what long term wealth you could build if you did it 100% of the time?
Best wishes,
David Krulac

Reply

Michael April 10, 2014 at 3:43 pm

If you can do that David it sure would as long as you buy smart and at the right times. I see you do business in Central PA. I own some properties in Western PA that cash flow nicely. How is the market in central PA. What is the distance to Pittsburgh where you are from?

Reply

David Krulac April 10, 2014 at 5:11 pm

Hi Michael,
I’m about 200 miles from Pgh. near the state capital. The area here is a good investing area. The #1 employer is the state and the #2 employer is the Federal gov’t, so the area is not tied to industry as some other places.
I appreciate your blog and podcast efforts, thanks.

I do fix & flip and even some straight flips, but do more so with buy & hold and land development.

Reply

Michael April 10, 2014 at 6:37 pm

sounds good David. I will look you up if I venture out that way.
All the best

Mehran April 6, 2014 at 5:28 pm

I’m a big fan of fixing & holding. Great article Mike!
What I want to do is try an actual flip sometime soon, to generate more buy & hold capital.

Reply

Michael April 10, 2014 at 3:45 pm

I hear you. If you don’t have the capital you can’t reinvest. The flipping helps me keep buying more buy and holds. All the best. Set some goals and take action and you will make it happen Mehran.

Reply

Tim April 6, 2014 at 9:14 pm

Having the option to segue to a flipping scenario only works if you paid cash for the property and rehab, or financed it with a super low rate, otherwise, like most of us who aren’t always liquid and had no choice but to use a HML, you’re stuck having to flip only.

Reply

Michael April 10, 2014 at 3:48 pm

Not always Tim. You may have to put a longer term plan into play to get there but no successful business starts off with instant results. Depends on your income coming in, credit, assets and debt to income and other factors before the bank will just lend you money. When I first started I had more banks than I care to mention say no. It didn’t stop me and now they are competing for my business 5 years later.

Reply

Eric D April 6, 2014 at 9:20 pm

Rental property can be very lucrative, assuming you have bought right, and understand how to get great tenants. Poor tenant quality is why people have horror stories.

Reply

Michael April 10, 2014 at 3:50 pm

That is so true Eric. You should spend the extra time to get good quality tenants. You should also improve your properties to attract better tenants.

Reply

Adrian Tilley April 7, 2014 at 1:00 pm

Just FYI, I’m not aware of such a thing as an “at will” lease. At least in residential settings, if there is no lease in place, the default is month to month. I don’t think a Court would look kindly on a lease that allowed you to kick out the tenants in 12 hours.

Reply

Sharon Tzib April 8, 2014 at 12:14 pm

Yes, I think he meant to say an “At Will Tenancy,” since by definition a lease is a contractual arrangement. Many, many landlords do this though, amazingly enough. Normally it’s not the tenant getting burned but vice versa.

Even if you don’t want to have a lease tying up your property, you should at the very least use a Rental Agreement so both sides are protected, expectations are set, and 30 days notice is a requirement.

Reply

Michael April 10, 2014 at 3:52 pm

Thanks for clarifying Sharon.
;-)

Reply

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