In 2011, I was flipping homes in Las Vegas with decent returns. I enjoyed taking a dilapidated house and giving it a makeover, but more importantly, I enjoyed the profits, which if annualized, could end up somewhere in the 60-70%. I was ready to ramp up deals and become a flipper full time.
But in 2012 my plans were wrecked by the Nevada legislature, which decided to stem the flow of foreclosed homes from a flood gate to a dribble. Suddenly it became extremely difficult to find a home to purchase to flip. I was getting outbid left and right. The numbers started to not make sense to me.
The rapid rise in home prices from 2012 to 2013, I think, is mostly attributed to the banks and government’s artificially lowering the supply of homes. The subsequent lack of supply changed the dynamics as sellers now became much more powerful than the buyers. Many real estate professionals and investors saw it coming, but I don’t think they believed the change was going to be that drastic.
The Changing Market Forced Me to Change
At that turning point in early 2012 I was forced to become more of a passive investor. Certainly I wasn’t going to be selling homes anymore. If I flipped a home, where would I find the next one? Would it take months before I can get a deal? I did not have a reliable pipeline to continue flipping. On the other hand, rentals became more attractive as it provided me with cash flow all the time. It was consistent (well, as consistent as your tenant is willing to pay you). It would last forever if I were to keep on renting. Whereas in every flip, I would lose the home I have and I would have to find a new one. It lasted forever only if I could keep it going forever. As we witnessed in the crash, it would be difficult to keep a flipping game running forever.
Looking at my portfolio I knew I was not fully capturing one the bigger real estate opportunities of my lifetime. I had some rentals but not enough. So I switched gears and learned about using seller financing as a way to expand my portfolio with my capital. I found a good window of opportunity in which I bought a decent amount of inventory before the market truly shot up.
When I revisit the prices of homes I sold these days, I notice their values have shot up tremendously then. If I hadn’t sold those flips at that point and just rented the homes out, would I have achieved a higher return? The answer is yes (especially with seller financed homes, in which I put very little capital down – certain homes I have already doubled my investment).
Would I sell them now given now the market has gone up 40-60% since I started? No. I won’t be flipping my investments in the near future either. I believe the market still has a lot of room to go up. We might get some dips if the artificial low supply is reversed, but asset prices will continue to rebound far into the future. I notice some investors are already looking to exit now to lock in their profits. But if I sell all my holdings like them now, I will just end up buying new properties at a much higher price. What would be the point? Nothing. And I would get taxed for doing that!
I believe the market has another 100+% to go. If I am patient enough and keep all my real estate holdings, I can stand in for a much bigger gain. It is almost like the stock market. Why sell at $2 from $1 to lock in profits when the stock can go up to $10? If you exited at $2 but bought back in $2.50, what would be the point? In all honesty, being a passive investor takes a lot less work than being an active one. I could be flipping homes left and right and I would be hard pressed to chase the similar returns I’ve gotten from just holding the property from day one. Maybe it is because of the messy markets right now. Nevertheless, I think investing long term and not chasing deals will ultimately serve the investor with greater benefits.