Renting vs. Flipping- Pro's and Con's

6 Replies

Hi all,

I am just getting started and am ready to get some properties under my belt.  I am a little unsure of what direction I want to head.  Could you please tell me the pro's and cons of flipping vs. renting?  How to build wealth?  Risks of each?

@Benjamin Andrew Pogue  That is a huge question.  Simple preference aside, renting is easier and scales more easily than flipping.  It is easier to find cash flowing properties than flips.  You don't need to know as much.  There is less risk.  You generally need less money.  It can scale from one to hundreds.  It can be passive.

Flipping, if you do it right, can earn you more cash faster.  You really need to have some cash, though if you have a slam dunk deal you could partner or get a private lender and do it without any of your own cash.  But it is less predictable then monthly rents and is difficult, though not impossible, to scale.  It also takes a lot of work.

Thanks for the reply! My thought is to do flips to help fund my rentals. I would rather pay cash for my rentals and have the high monthly cash flow rather than having mortgages on all of them. But, I know nothing about flipping houses and realize that rentals would be much easier.

As an attorney who handles evictions for many homeowners, I can tell you that if not done properly, renting has the potential to be a total nightmare.  Tenants tend to be "judgment proof" making it difficult for Landlords to collect from non-paying tenants.  Depending on the Courts in the State and County the properties you are in, it could take many months to properly evict a non-paying or troublesome tenant.  

As such, I would always recommend employing a strict application and screening process when considering tenants.  Make sure to get copies of tenant's IDs (so you can properly name them in the event of an eviction) and retain copies of work pay stubs (in case you need to collect a money judgment from them if they do not pay).  

If done right, rental income from tenants can be the easiest income you ever make.  

Leslie Sultan, Esq.

[email protected]

Originally posted by @Benjamin Andrew Pogue:

Thanks for the reply! My thought is to do flips to help fund my rentals. I would rather pay cash for my rentals and have the high monthly cash flow rather than having mortgages on all of them. But, I know nothing about flipping houses and realize that rentals would be much easier.

 Utilize reasonable leveraging for rentals.  Having one rental that you own free and clear is "neat", but it comes at the expense of 5-7 other rentals.  You can acquire 6-8 rentals using leverage for every one you purchase in cash.  Under this scenario, you would have mortgages (currently 740+ credit gets you 4.875% on a 30-yr), but you would also have 25% - 30% equity (or more if borrowing created anxiety for you) to alleviate much of the risk.  Unless you had too much money and were forced to diversify beyond what nearly all of us here could comprehend, I couldn't imagine tying up money in rentals when the cost of capital is historically cheap.

If you are intent on having high monthly cash flow, wouldn't it make more sense to have cash instead???

Play the Cashflow game and you will understand that the goal of financial independence is to acquire enough income producing assets that generate enough monthly income so you can afford to live the way you want without having to work.  Everyone has a Financial Independence Number (FIN).  It is a dollar amount that is based on how you want to live and you Risk Tolerance.  Mathematically it is the following:

Income Producing Assets = Annual Expense Budget / ROI on those assets

For example, if a $75,000 annual expense budget is an amount that will allow you to afford to live the way you want (without being greedy) and your risk tolerance allows you to generate a an annual Return On Investment of 10% without working, the your required Income Producing Assets = $75,000 / 10% = $750,000.

Once you know what your Financial Independence Number is, next you develop an Asset Accumulation Plan (AAP) to get to that number.  Your AAP is based on three factors:

1. What amount can you invest on an annual basis consistently

2. How many years can you invest that amount consistently

3. What ROI can you get each year

Based on the example of the FIN = $750,000, you will need to invest $6,300 annually for 20 years at an ROI of 15% to accumulate $750,000. Change any of the two variables and the third one will automatically change based on the FIN.

So to answer your question: Use flipping as a means to generate high ROIs in order to accumulate the money you need to acquire your FIN and you income producing assets.  Just my two cents from a person who successfully manages a $106 million annual operating budget for Santa Barbara County's Mental Health Department.

God Bless You!

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