How do you know if a property is better as a rental or a flip?
Member since 2022 · 33 posts · 9 votes
How do you know if a property is better as a rental or a flip?
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Lender · Member since 2021 · 100 posts · 164 votes
4yA good rental is always a good flip. But, a good flip may not be a good rental.
36 Replies
- Real Estate Agent · Worcester Ma · Member since 2019 · 118 posts · 117 votes4y
Hi Ethan,
Run numbers on both scenarios and see which one has a better return on your investment for what your goals are. Also if you want a faster return then there's the flip but if you want a return over time theres the rental side. Benefits to both strategies but the numbers determine which one might be better.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Math...with $$$$ in front, and not %%%% behind. REI is nothing more than that...that's why it's called "investing". If it was about buying properties, it would be called "collecting".
Assuming a property that is good for both, one simple way (the best way) to see which is best is based on comparing the potential profit from a flip to how many years it would take for the potential cumulative CF to equal that potential profit. Part of this is also seeing how long it takes for the cumulative CF to equal what you paid for the property. Remember, the only cost to the REI is the cash that comes out of their pocket...the rest of the "total" cost, is paid by the tenant, so the cumulative CF must recover that cash outlay to be come profitable. The shorter the time period the better. It amazes me how many times I see REI OK with a property that has negative CF (meaning the cost of that property keeps adding up, and profit never happens), or the payback period to cash recovery hovers close to 20-30 years...then they justify it by saying the property will appreciate over that time period, so that's OK. No it isn't. If it was, how many of them could you afford to carry. Worse, how much exponential profit are you losing from that negative CF that should have been invested in other properties? I don't care how much a property appreciates, it can never catch up to those "exponential" losses. Math doesn't lie...unless you're using percentages that is.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesFlip will always bring faster results over time. It's basic math.
Quote from @Sabrina Sanchez:
Hi Ethan,
Run numbers on both scenarios and see which one has a better return on your investment for what your goals are. Also if you want a faster return then there's the flip but if you want a return over time theres the rental side. Benefits to both strategies but the numbers determine which one might be better.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes4y
Flipping houses is a job. You work for a period of time, you sell the house, you get a chunk of money, and then you are done.
A long-term rental will bring money for the rest of your life and continue to grow in value.
One makes fast money, the other brings long-term wealth.
The DIY Landlord Book4.7247 Reviews - Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes4y
If it doesn't cash flow it's a flip, depending on your market as well. I try to hold as much as possible
- Member since 2022 · 25 posts · 8 votes4y
Quote from @Eliott Elias:
If it doesn't cash flow it's a flip, depending on your market as well. I try to hold as much as possible
How long do you hold a property to assess how well it's actually cash flowing, before you decide to flip it instead?
- Real Estate Consultant · USA · Member since 2014 · 1k+ posts · 751 votes4y
Quote from @Ethan Lahav:
Hey everyone
I'm curios to know, when analyzing a property, how do you determine if it's better as a flip or as a rental.
Thank you
@Ethan Lahav in my experience, it's always better to flip SFHs. Having had over 100 single-family homes at one time, I'm not a fan of holding SFHs as a long-term rental strategy. You want to focus on short-term money generating strategies such as wholesaling, fix and flips, etc. You use the money from these deals to invest in long-term wealh building assets such as aparetment buildings. And you can do that as an LP or syndication, etc.
- Member since 2022 · 33 posts · 9 votes4y
Quote from @Eliott Elias:
If it doesn't cash flow it's a flip, depending on your market as well. I try to hold as much as possible
Well, most of the assets I will buy will cashflow. Does that mean all of them would be a better rental than a flip? :)
- Member since 2022 · 33 posts · 9 votes4y
Quote from @Sabrina Sanchez:
Hi Ethan,
Run numbers on both scenarios and see which one has a better return on your investment for what your goals are. Also if you want a faster return then there's the flip but if you want a return over time theres the rental side. Benefits to both strategies but the numbers determine which one might be better.
Well usually a rental property will never generate a fast profit as a flip so not sure I understand :)
- Member since 2022 · 33 posts · 9 votes4y
Quote from @Nathan Gesner:
Flipping houses is a job. You work for a period of time, you sell the house, you get a chunk of money, and then you are done.
A long-term rental will bring money for the rest of your life and continue to grow in value.
One makes fast money, the other brings long-term wealth.
Does that mean that all cash flow sfh will be best for a rental?
- Member since 2022 · 33 posts · 9 votes4y
Quote from @Joe Villeneuve:
Math...with $$$$ in front, and not %%%% behind. REI is nothing more than that...that's why it's called "investing". If it was about buying properties, it would be called "collecting".
Assuming a property that is good for both, one simple way (the best way) to see which is best is based on comparing the potential profit from a flip to how many years it would take for the potential cumulative CF to equal that potential profit. Part of this is also seeing how long it takes for the cumulative CF to equal what you paid for the property. Remember, the only cost to the REI is the cash that comes out of their pocket...the rest of the "total" cost, is paid by the tenant, so the cumulative CF must recover that cash outlay to be come profitable. The shorter the time period the better. It amazes me how many times I see REI OK with a property that has negative CF (meaning the cost of that property keeps adding up, and profit never happens), or the payback period to cash recovery hovers close to 20-30 years...then they justify it by saying the property will appreciate over that time period, so that's OK. No it isn't. If it was, how many of them could you afford to carry. Worse, how much exponential profit are you losing from that negative CF that should have been invested in other properties? I don't care how much a property appreciates, it can never catch up to those "exponential" losses. Math doesn't lie...unless you're using percentages that is.
Can you give me 2 real life scenarios from your experience? 1 for flip and 1 for rental?
Thank you
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Yes...of what? I mentioned a number of scenarios.
Hi @Ethan Lahav,
I think your question is missing something... I'm confused because ideally, you have a strategy and target what you're going after. When you ask how do you know what's better (rental vs flip) that makes me think you have a property that maybe you inherited or something, and you're trying to figure out what to do with it.I looked at your profile, but you didn't have any info. Can you let us know your strategy or what you want long-term?
@Sabrina Sanchez talked about the speed of returns, faster for flips but longer for rentals.
Like @Nathan Gesner said, flipping is a job, but long-term rentals are about cashflow.
@Jim Pellerin talked about how you can use SFH flips to build up funds to get into multifamily.
That's all good stuff...
I'm curious though, what do you want from real estate investing? Are you considering getting into flipping or buy-and-hold?Rene G
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Here's my 2 deciding factors. Once both occur (in any order) in a property, I sell, because from that point forward I'm losing money on both the CF and the Equity as it builds. The 2 factors are:
1 - I buy a property with 20% DP. When the equity gain from appreciation (only...not including mortgage paydown) equals the equity I paid for (the DP).
2 - When the cumulative CF, equals what "my" cost was to buy the property (not the "total" cost,..."My" cost). This is when I have recovered all cost and I start to make a profit from the CF.
When both of these events occur, the property starts losing value and I sell...and yes, when the property appreciates more, and the CF is coming in, from this point forward, I am losing money. It's a simple math (Geometry/logic and Algebra/execution) problem.
- Member since 2022 · 33 posts · 9 votes4y
Quote from @Rene G.:
Hi @Ethan Lahav,
I think your question is missing something... I'm confused because ideally, you have a strategy and target what you're going after. When you ask how do you know what's better (rental vs flip) that makes me think you have a property that maybe you inherited or something, and you're trying to figure out what to do with it.I looked at your profile, but you didn't have any info. Can you let us know your strategy or what you want long-term?
@Sabrina Sanchez talked about the speed of returns, faster for flips but longer for rentals.
Like @Nathan Gesner said, flipping is a job, but long-term rentals are about cashflow.
@Jim Pellerin talked about how you can use SFH flips to build up funds to get into multifamily.
That's all good stuff...
I'm curious though, what do you want from real estate investing? Are you considering getting into flipping or buy-and-hold?Rene G
I would eventually want to do both altough my focus is in buy and hold. I'm asking more on a specific property I come across with and crunch the numbers. What numbers will fit a flip and what will fit a buy and hold. Hope my question is clearer
- Member since 2022 · 25 posts · 8 votes4y
Quote from @Joe Villeneuve:
Here's my 2 deciding factors. Once both occur (in any order) in a property, I sell, because from that point forward I'm losing money on both the CF and the Equity as it builds. The 2 factors are:
1 - I buy a property with 20% DP. When the equity gain from appreciation (only...not including mortgage paydown) equals the equity I paid for (the DP).
2 - When the cumulative CF, equals what "my" cost was to buy the property (not the "total" cost,..."My" cost). This is when I have recovered all cost and I start to make a profit from the CF.
When both of these events occur, the property starts losing value and I sell...and yes, when the property appreciates more, and the CF is coming in, from this point forward, I am losing money. It's a simple math (Geometry/logic and Algebra/execution) problem.
Interesting. Do you apply this to any property of any type? or just SFH?
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Math is math. SFH can be turned over much faster than commercial or Multi. I don't buy multi though, so I've never applied it to it. I use commercial, specifically NNN, as the end of the line where I do the long term holds...because of the cost/income consistency. The process is to flip the cash (you don't flip properties, you flip cash...and make no mistake,...the property isn't the true asset, you cash is) through SFH as described above, then build your cash to roll it into the NNN for the long hall.
You have to have a plan, and that plan must be based on numbers with $$$ in front. Not numbers with %%% behind (they lie, and tell you nothing of value when the just "fib"). Not emotional goals like becoming financially independent, or quitting the Rat Race. These are not goals, because without the numbers, they can not be measured. The goals are the numbers with $$$ in front that allows you to achieve that independence.
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes4y
Quote from @Bradley R Stillabower:
Quote from @Eliott Elias:
If it doesn't cash flow it's a flip, depending on your market as well. I try to hold as much as possible
How long do you hold a property to assess how well it's actually cash flowing, before you decide to flip it instead?
I'm never on the fence, I'm either flipping it or BRRRR'ing it. You can follow this rule, for every 2 you flip BRRRR one
- Lender · Member since 2021 · 100 posts · 164 votes4y
A good rental is always a good flip. But, a good flip may not be a good rental.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes4y
Quote from @Ethan Lahav:
The more you are leveraged, the more money you make.
Buy a $100,000 house for $100,000. If the property appreciates $25,000 in five years, you've gained $25,000 in equity.
Buy four $100,000 houses with $25,000 down on each. If each roperty appreciates $25,000 in five years, you've gained $100,000 in equity. Your money is growing four times faster than if you had purchased just one home.
If you buy a house for all cash, you obviously have more cashflow. However, the cashflow is unlikely to make up for the increased equity gains, reduced vacancies, tax deductions, and other benefits that come from diversifying.
I recommend you build a strong foundational understanding of real estate investing.
1. Start with BiggerPockets Ultimate Beginners Guide (free). It will familiarize you with the basic terminology and benefits. Then you can read a more in-depth book like The Book On Rental Property Investing by Brandon Turner or The Unofficial Guide to Real Estate Investing by Spencer Strauss.
2. Get your finances in order. Get rid of debt, build a budget, and save. The idea that you can build wealth without putting any money into it is a recipe for disaster and the sales pitch of gurus trying to steal your money. A wise investor will not try to get rich quick with shortcuts. If you can't keep control of your personal finances, you are highly unlikely to succeed in real estate investing. Check out my personal favorite, Set For Life by Scott Trench , or The Total Money Makeover by Dave Ramsey.
3. As you read these books, watch the biggerpockets podcasts. This will help clarify and reinforce what you are reading. You can hear real-world examples of how others have built their investment portfolio and (hopefully) learn to avoid their mistakes.
4. Now you need to figure out how to find deals and pay for them. Again, the BiggerPockets store has some books for this or you can learn by watching podcasts, reading blogs, and interacting on the forum. There is a handy search bar in the upper right that makes it easy to find previous discussions, blogs, podcasts, and other resources. Biggerpockets also has a calculator you can use to analyze deals and I highly recommend you start this as soon as possible, even if you are not ready to buy. If you consistently analyze properties, it will be much easier to recognize a good deal when it shows up. Find Brandon's videos on YouTube for the "four square" method of analyzing homes and practice. It doesn't take long to learn how to spot a good deal.
5. Study the market. You can learn to do this on your own or get a rockstar REALTOR to lead the way. I highly recommend a well-qualified REALTOR that works with investors and knows how to best help you.6. Jump in! Far too many get stuck in the "paralysis by analysis" stage, thinking they just don't know enough to get started. The truth is, you could read 100 books and still not know enough because certain things need to be learned through trial-and-error. You don't need to know everything to get started; you just need a foundation to build on and the rest will come through experience and then refining your education.
You can build a basic understanding of investing in 3-6 months. How long it takes to be financially ready is different for everyone. Once you're ready, create a goal (e.g. "I will buy at least one single-family home, duplex, triplex, or fourplex before the end of 2019") and then do it. Real estate investing is a pretty forgiving world and the average person can still make money even with some pretty big mistakes.
The DIY Landlord Book4.7247 Reviews - 4yDave SpoonerPro MemberRental Property Investor · Cincinnati, OH · Member since 2020 · 870 posts · 823 votes
Flipping will be a short-term chunk of money while rentals will continually bring in cash flow. Doing the numbers on which one would be beneficial for your goals would ultimately position you to be in the best chance.
- Member since 2019 · 7k+ posts · 4k+ votes4y
everyone has good answer here. But in general:
-in cash flow markets, rental is sometimes better than risk/reward of flipping. With 60k repair I can make 10k in profit only.
- in appreciation market with cheap money/low interest rate condition, flipping is much much better than renting. With 25k repair I can make 100k. If I rent it, cash flow is only $500-%1k per month.
So there're lot of 'what-if' ; the BRRR/flipping market is only mainly working when it's seller market. If interest rate is high like in current market then flipping is extremely risky as inventory is very high. - 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesYou're right about math, but not about your math. Long range income sounds better than one lump sum, but you have to look at how long it would take that continuous income to equal that one lump sum...and what added costs happen while you're getting that continuous income. If you could flip a property for a profit of $40k, or hold it for $10k in CF/year, it would take you 4 years for the CF (not including any added costs) to equal the flip profit. Now before you say the CF continues beyond that point and the lump sum doesn't, I will ask you what you think you would do with that lump sum? Do you think you might invest it into more profit and eventually have a larger lump sum to buy for CF?
Quote from @Dave Spooner:
Flipping will be a short-term chunk of money while rentals will continually bring in cash flow. Doing the numbers on which one would be beneficial for your goals would ultimately position you to be in the best chance.
- 4yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Quote from @Ethan Lahav:
Hey everyone
I'm curios to know, when analyzing a property, how do you determine if it's better as a flip or as a rental.
Thank you
One main thing is that you may (and probably) won't know the answer at the beginning, but will only find out once the rehab is done. Seeing a lot of success when people have an unemotional optionality for the project and simply run the numbers when the project is complete - put it on the market for sale and for rent and then plug it into a pretty basic spreadsheet!
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