This Year, I'm Focusing on Rentals Over Flips: Here's Why

I bought three rental properties in 2014, but my goal was to buy six. I am not super disappointed that I only bought three rental properties because I was able to accomplish many more things. I flipped 12 houses, sold over 150 houses on my real estate team, continued to grow my blog to over 170,000 views a month and I bought a Lamborghini.

After reviewing my year and my goals, I decided I needed to focus much more on buying rental properties. Flipping is great for short-term income, but once you sell a house, it is gone and no longer makes you money.

Why Rental Properties Make a Great Choice

I love rental properties for a number of reasons, but the main reason is the cash flow. I have 11 rentals and about $6,000 a month coming in from those rentals after all expenses are accounted for. That $6,000 is after accounting for vacancies and maintenance. It has been awesome to see my bank accounts grow from my rentals. Now that I have my team managing the properties for me, I do almost nothing for that money.

Early in 2014 I paid off my first rental property by using “the snowball effect.” I took all my cash flow from one rental property and used it to pay off one mortgage. After I paid off that house, I decided to save up my cash flow instead of using it to pay off another mortgage. I did that to increase the amount of rental properties I could buy. I was able to save much more money, but I ended up using much of that money to flip houses instead of buy rentals.

Why Did I Use the Money for Flipping?

I used the money to flip more houses because I was finding great deals to flip. I have strict buying criteria for my rentals; I want them in certain areas, for certain prices, with certain cash flow, and they have been hard to find. I have been able to find more flips because I am not as concerned about the location or cash flow since I am selling these homes. I also thought it would be a great idea to build up capital with flipping so I could buy more rentals in the future.

The problem was I kept buying flips! I had 10 at one time, and I have 8 now. When I had 10 flips at once, I simply did not have the contractors to fix the homes in a timely manner. My financing is cheap for flips at 5.25% and 1 point, but it only covers 75 percent of the purchase price. That leaves me to pay for the down payment and repairs on the flips, which at one time was almost $500,000. Luckily I had some private money and a line of credit to cover some of these costs, but I still had a ton of cash locked up in these houses.

Flipping is a great way to make money, but the longer you hold them, the more risk there is that the market could turn. Flipping has made me more capital, but I am just now realizing that capital, and I am making myself hold off on buying more flips!

A Quick Buck Now or Two Bucks in the Future?

Even though the flipping made me a quick buck, the rentals make more money over time. I may make $25,000 on a flip, which is more than $6,000 a year one rental property may make me. But that difference is not as large as it seems. For one thing, I have to pay ordinary income taxes with the flip, and on the rental I have many tax advantages working for me like depreciation. I may be paying 30 percent or more in taxes on the flip, but less than half that on the rental property. Now my profits are $15,000 versus $5,000.

I also am paying equity down on my rentals, seeing appreciation and rent increases. Another big factor is the time it takes to flip versus the time it takes to own a rental. Hands down, the rental property wins.

Will I Stop Flipping?

I am not going to stop flipping, but I am going to tone it down. I think I want to have a maximum of seven flips at one time because it takes too much time to fix up houses to hold more properties than seven. I wrote about wholesaling a couple of weeks ago, and if I see an influx of deals come my way, I will have no problem wholesaling them to keep from spending all my capital on flips.

My Goal for 2015

In 2015 I want to buy at least seven more rental properties. If I can buy seven more rentals in 2015 with similar cash flow to what I have now, I will be making close to $100,000 a year from my rentals. To me that is quite a milestone and with the income from my blog, I could actually quit flipping, quit selling houses and focus on a much less stressful work life. However, I tend to like expensive things like cars, and I don’t foresee myself slowing down too much in the future.

Now it’s your turn to weigh in: What avenue of real estate are you focusing on this year? What goals have you set for yourself in 2015?

Let’s talk in the comments section below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.