Flipping Houses

Trying to Buy & Hold in a Hot Real Estate Market? Stop! And Consider THIS Instead.

Expertise: Real Estate Investing Basics, Real Estate News & Commentary, Personal Development, Flipping Houses, Landlording & Rental Properties, Personal Finance
103 Articles Written

Everyone wants to be a landlord.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

OK, blanket statements like that don't hold any water, but the majority of people who participate in this site are interested in buy and hold properties. That's awesome — that's what I want to do, too.

If you live in a hot market where housing prices have far exceeded rent, it can be a losing proposition to be a landlord. Cash flow means you make money every month after you account for expenses. If your rent doesn't even cover the mortgage payment, you just bought yourself a job.

This is the case in my local market. You know that 1% rule? The one that says you should be charging 1% of the purchase price of the home for rent every month? I’m seeing .66% on the HIGH end.

Have you ever thought about flipping?

Landlords would rather buy homes that are already in great condition. Properties don’t start making money until they are rented out, and good luck finding a tenant who will pay for the privilege of living through construction.

Homeowners want that already-finished house, too. Living through a rehab is dirty and quickly saps your spirit.

When buy and hold numbers don’t make sense, analyze your market to see if flipping is a better option.

Know Your Market

Your local market is different than any other market. Location, location, location — remember? People want to live next to the ocean and will pay a premium to do so. They are less apt to pay high prices to live in the middle of the country — at least the parts with nothing cool nearby.know-submarkets

Related: 7 Things I Desperately Wish I Had Known When I Started Flipping Houses

If you find yourself living in those higher-dollar areas, rental numbers just don't seem to make any sense at all. You're not supposed to count on appreciation, but sometimes that's your only hope.

My own local market in the Denver area is insane. On my street in the last three months, two properties have come on the market. Let's ignore that they went for over list price and sold in days to cash buyers who were going to rent them out and didn't need to perform an inspection. The duplex sold for $330,000. Rent totals are $2,050.

The other house is a single family. It sold for $265,000 and rent is $1,200. A 30-year mortgage at 4% with 20% down shows payments of $993, not including taxes. Our taxes are really low, but this thing is losing money every month when you factor in CapEx and property management.

Keep an Open Mind, But Follow the Rules

Buy and hold seems to be the top real estate suggestion for building passive income streams. But buy and hold isn't 100 percent passive, even if you hire a management company to do it for you.

Flipping isn’t passive, either. I’m not suggesting that it is. But hiring the right person to run your job — or running it yourself and hiring true professionals who know what they are doing — can be a great, mostly passive source of income.

There are all different levels of flipping, from basic paint and cleaning to full gut rehab down to the studs.

There are three keys to flipping that will determine your success or failure.

  1. Buy right. If you pay too much for the property when you purchase it, you find yourself behind the 8-ball from day one. Run your numbers based on what comparable properties already fixed up have sold for recently. Make sure you are using comparable properties. Location, remember?
  2. Make (and stick to) an accurate budget. After you have the property, you need to rehab it before you can put it back on the market for big bucks. The easiest way to erase all profits — and even find yourself in the red — is to go over budget. If you budgeted $3/sq ft for flooring, choosing a flooring material that costs $5/sq ft is going to throw that line item out of whack. Your budget should be able to withstand tiny overages here and there and still bring you a profit. But if you go over budget on every single line, your profit just flew out the window. Remember, you don’t have to love the finishes — you’re not going to be living there. The finishes just have to be stylish and installed correctly.
  3. Hire quality contractors. This most important factor of your success is also one of the most difficult to accomplish. Many a post has been written on the best way to find a contractor. One of J. Scott’s top tips is to talk to the guys who are at Home Depot at 6:00 and 7:00 a.m. Those are the guys who are up early, preparing for the day’s work. He also recommends not talking to the guys who are there at 10:00 and 11:00 a.m. Those are the guys who are either just crawling out of bed or who forgot some key component for that day’s job.


Related: The Top 30 U.S. “Hipster Hotspots” for Profitable Home Flips

Go Big

Houses in hot markets need bigger work to make a profit. Ugly but livable homes don’t look nearly so bad to people who can’t find anywhere else to live. In hot markets, the value you add needs to be significant.

In my hometown, there's a guy who is an agent and flipper. In the past couple of years, our market has really taken off, and small-scale flips aren't worth the effort because the homes in their "ugly" state are selling for top dollar.

Enter our local hero, who purchases these top-dollar ugly homes and then adds value. A LOT of value. He routinely puts $75,000-$100,000 into each home, but then turns around and lists the property for at least $200,000 more than he paid just a short time before.

Of course, the houses look completely different. High quality finishes in the latest styles force his homes into bidding wars. He knows the comps intimately — mostly because he created them!

Not every property makes a good candidate for flipping, but if your market prices have outpaced the rents, perhaps it’s time to shift strategies and look for new sources of income.

Have you successfully jumped form one niche to another?

Share your experiences below!

Mindy Jensen has been buying and selling homes for more than 20 years. She buys houses, moves in, makes them beautiful, sells them, and starts the process all over again. She is a licensed real est...
Read more
    Scott Trench President of BiggerPockets from Denver, CO
    Replied over 4 years ago
    One thing about all that appreciation vs cash flow stuff. Take the duplex I bought a few years ago for $240,000. At the time, it generated rents of $2200 across the two units, on a mortgage (PITI) of $1500. That’s cash flow here in Denver. Structures comparable to my duplex exist in Memphis, etc generating $500 per month per side that cost $50-75K. I have to imagine that maintaining those structures is ALMOST as expensive as maintaining mine – from a CapEx and maintenance perspsective at least. Labor might be slightly more expensive here, but are hot water heaters, furnaces, and other materials really that much different elsewhere on the continent? Therefore if we assume average monthly expenses of $500 (50% rule on the same property in Memphis, and probably pretty accurate for my place here in Denver, even with CapEx and vacancy here in Denver), I still cash flow $200 per month. This property today might sell for $350,000, and rents for $2,500 in aggregate. At a $290,000 note, you might have a monthly PITI of $1800. Sure those rents are now just .69% of the purchase price (down from .92%, but you can’t then all of the sudden say that my expenses have risen proportionately! The only expense that rises proportionally to rents (besides taxes and maybe property management) are vacancies! So, the guy who buys today might get just a LITTLE bit less cash flow per dollar invested – not WAY less as the rules of thumb might lead new investors to believe. By the way – it’s a joke that property management is 10% of rents. It is not harder to collect rents here in Denver than it is in Memphis. As a $250 per month job in my example that takes maybe an hour a month max, I’ll bill my tenants and collect every month instead of hiring that out, thank you very much.
    Bryan O. Specialist from Littleton, CO
    Replied over 4 years ago
    Hi Scott. You basically said that the only reason your property is good is because you bought it before the market got to where it is (a few years ago). Buying that property today would be foolish because it would not cash flow so you would be hoping for either higher rents or more appreciation to sell. Would you buy that same Denver duplex at today’s cost? You wouldn’t get a “LITTLE bit less cash flow” you would get negative cash flow!
    lin van
    Replied over 4 years ago
    Again…its all about knowing your hood. Just saw a beautiful new listing in my town,, with top of the line everything the big mystery, this street is in the midst of heavy gang activity and hi crime. It most likely was purchased at foreclosure. I rent and hold here with my eyes wide open. Not everyone has the guts to be a land lord, in a Sanctuary City in California,. But my neighborhood, offers, cash flow and appreciation.
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied over 4 years ago
    Atlantas pretty hot, yet we’ve gotten good at finding cold areas up major freeways close enough for access to jobs, where it will stay cold only for a short while. Buy, fix, rent, then move to the next cold area on the edge of an expanding hot area. IE buy in the path of progress. I now feel this tactic finding the lull in the market is a skill, a business strategy that is learnable. But one needs to believe it’s possible then make it happen. Reflecting on the stories of low cap rate deals in hot markets, I’d move to marketing for low equity sellers and building a porfolio of sandwich lease options or buy via subject to and sell on lease + option and have very little cash tied up and make the same cash flow per deal and much higher cash on cash. One does not find these deals on MLS. I feel safety is in a decent cap rate, cash on cash and DCSR. Isn’t the purpose of this article to cause us to think about taking on risk just to be in deals in a hot market? Look for other deal types in a hot market that have less risk, less cash (or debt) in the deal.
    Michael Sadler
    Replied over 4 years ago
    Thanks! This just opened up my eyes as to why it’s so hard to find deals in hot markets with the 1% rule.
    Justin R. Developer from San Diego, CA
    Replied over 4 years ago
    I thought your post was going to go the route of combining flipping and B&H to reach this supposed “everyone wants to be a landlord” outcome. Every rental we’ve bought in our high-priced locale has gotten at least $50k (some more than that) in modifications. It’s the only reliable way I’ve found to get my desired returns at an acceptable risk level (meaning, a reasonable portion of profit coming from current free cash flow).
    Bob Crane from Sugar Grove, IL
    Replied over 3 years ago
    What to do in a hot market that’s not known for being “hot?” I’m all cash in on a property in a C class town. One of the rust belt lands that time forgot. I’ve got $65k in. I could refi most of my cash out, rent at $800, and cash flow $100 per month. Or I could sell it for $95K and walk away with $20k profit. It’s a dilemma. If this were a healthier town I’d BRRRR and hope for appreciation over the next few years then sell. In a town like this what would be a quick sale today could end up taking a long time to sell down the road. Makes changing on this one from buy/hold to flip then using that money for a healthier market awfully tempting.