Figuring out which route to go: Flip houses or Rental Properties

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Figuring out which route to go: Flip houses or Rental Properties

Justin Christian Macabenta
San Leandro, CA · Member since 2018 · 4 posts · 4 votes

Hi BP!

My name is Justin and I am new to the forums. Been eager to post and also get started with investing but wanted anyone's thoughts/suggestions/Pros&Cons on which route to go being brand new:

Is it better to buy & flip in the SF Bay Area or invest in rental properties out of state?

After reading a few of the REI books, listening back on the podcasts, and attending a few REI meet ups, one of the main things that always stood out to me was when people would mention to "pick one niche and master it".

Personally, I like hands-on work and am very interested in construction which is why feel I would rather enjoy the process of a buy & flip but with the costs of properties in the Bay Area, I feel like it is unattainable. If a deal is good, I'm open to partnering or seeking private lending but am also considering hard money. On the other hand, there is the aspect obtaining passive income through investing in rental properties but after reading around the forums about how that can be difficult in the Bay Area, it would work better to invest out of state.

Sorry if this seems all over the place but I am pretty torn on which route to go. I know there are risks either way and different financial benefits but am curious to know all your thoughts and if you've experienced this fork in the road.

Thanks again!

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Arlen Chou
Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
7y

@Justin Christian Macabenta as @Houston Garcia has pointed out, there are deal all along the East Bay.  What you have to better define is your idea of "cash flow".  Do you mean that the property will give you money every month with you living in 1 unit for free?  If that is the case than you probably are SOL.  However, if you are looking at properties knowing that you will be "paying rent" for the space you will occupy than there are many properties that make sense.  It is all about perspective.

I helped a friend of mine put in an offer on a triplex in Hayward last night. He will live in the smallest unit and continue to rent out the others. The "rent" he will be paying will be higher than his current rent.  However, he will go from renting a room with 3 other guys to having a 1 bed/bath all to himself. Some people would say he is loosing money because his out of pocket expense have risen.  Others would say that he is "paying" more rent for a more valuable rental. Either way, he is getting debt pay down on the property through the other tenants. He is locking down his property taxes. Also he has the option to move into one of the larger units if he gets married.

If you are ok with living in the hood, deep East Oakland is also an option. My good friend @Account Closed is killing it down there with both appreciation and positive cash flow.

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  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    Hi Justin,

    Flipping will give you short term gains in a higher dollar amount but also carry a lot of risks. In my opinion, flipping now in the Bay Area is at the most dangerous time for first-timers.  Prices are very high, hard money loans are expensive and come with a lot of pressure, and the cost of construction and timetable for completion has skyrocketed.   All these factors make it dangerous for flipping.  

    Buy and hold rentals are less dangerous and are a long term play.  Investing out of state is also not easy.  The price of entry is lower but you also have to spend a ton of time scouting the area and trusting so many people from afar. Depending on what your budget is, buy and hold rentals in the Bay Area can work in the East Bay.  

    I do agree with finding a niche and sticking with it.  This way you can master it and build your business around it.  I prefer long term rentals which allow me to control risk better.  You don't need to dabble with different strategies.  Find the one that fits you best based on your goals, money, and skill set and dominate it.

    3Reply
  • Arlen Chou
    Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
    7y

    @Justin Christian Macabenta you are just getting into the game. Do a house hack and get some experience with both sides. If you do the renovations yourself you will get a feel for the amount of time and effort you will actually need to put into a flipper business. At the same time if you house hack you could potentially get housemates and try the landlord side of things.

    4Reply
  • Houston Garcia
    Real Estate Broker · San Francisco Bay Area, CA · Member since 2015 · 116 posts · 76 votes
    7y
    Originally posted by @Frank Wong:

    Hi Justin,

    Flipping will give you short term gains in a higher dollar amount but also carry a lot of risks. In my opinion, flipping now in the Bay Area is at the most dangerous time for first-timers.  Prices are very high, hard money loans are expensive and come with a lot of pressure, and the cost of construction and timetable for completion has skyrocketed.   All these factors make it dangerous for flipping.  

    Buy and hold rentals are less dangerous and are a long term play.  Investing out of state is also not easy.  The price of entry is lower but you also have to spend a ton of time scouting the area and trusting so many people from afar. Depending on what your budget is, buy and hold rentals in the Bay Area can work in the East Bay.  

    I do agree with finding a niche and sticking with it.  This way you can master it and build your business around it.  I prefer long term rentals which allow me to control risk better.  You don't need to dabble with different strategies.  Find the one that fits you best based on your goals, money, and skill set and dominate it.

     Justin - I have to agree with what Frank has said. The market is a particularly weird right now (I mean, when isn't it?). We're seeing longer DOM, and a few price reductions - but it really depends on the property. Most indicators point to March being when the local markets will pick up this year - but overall, buyers have been a bit more hesitant and wary of where they will park their money - the desperate competition factor simply isn't there.

    That being said, I have some clients working on some big projects right now (luxury SFH flips over $4m+ in SF) with very comfortable timetables and margins. Of course, there are more headaches and risks for those sort of projects. Lately, I've had a few clients buying sub-$500k residences in East Bay with great success and adding value by fixing them up and renting out rooms. This is a great strategy for the long-run.

    3Reply
  • Justin Christian Macabenta
    OP
    San Leandro, CA · Member since 2018 · 4 posts · 4 votes
    7y

    @Frank Wong Thank you for your insight! I agree that a buy and hold rental in the East Bay would be best case scenario in terms of controlling risk  and long term gain. Its just a matter of finding the best deal. What cities in the East Bay would you suggest? I've always kept an eye out for cities close to a Bart station.

    @Arlen Chou Thank you for your suggestion! My initial goal is to do a house hack in the East Bay to get the land lording experience but my preferred choice of a duplex is hard to come by at a price that works. Is possible to even find a small multifamily property in the East Bay that even cashflows?

    @Houston Garcia Thank for your response! I've seen a bunch of completed luxury SFH flips in SF and would love to work on one in the future. That would be a goal of mine to put on my portfolio but am hopeful to find a deal somewhere in the East Bay first. What cities in the East Bay are your clients working in?

    1Reply
  • Houston Garcia
    Real Estate Broker · San Francisco Bay Area, CA · Member since 2015 · 116 posts · 76 votes
    7y

    @Justin Christian Macabenta Primarily Oakland, with a bit of Richmond. Anywhere along the Bart line really. The closer to the City, the higher the premium/return so far. 

    2Reply
  • Arlen Chou
    Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
    7y

    @Justin Christian Macabenta as @Houston Garcia has pointed out, there are deal all along the East Bay.  What you have to better define is your idea of "cash flow".  Do you mean that the property will give you money every month with you living in 1 unit for free?  If that is the case than you probably are SOL.  However, if you are looking at properties knowing that you will be "paying rent" for the space you will occupy than there are many properties that make sense.  It is all about perspective.

    I helped a friend of mine put in an offer on a triplex in Hayward last night. He will live in the smallest unit and continue to rent out the others. The "rent" he will be paying will be higher than his current rent.  However, he will go from renting a room with 3 other guys to having a 1 bed/bath all to himself. Some people would say he is loosing money because his out of pocket expense have risen.  Others would say that he is "paying" more rent for a more valuable rental. Either way, he is getting debt pay down on the property through the other tenants. He is locking down his property taxes. Also he has the option to move into one of the larger units if he gets married.

    If you are ok with living in the hood, deep East Oakland is also an option. My good friend @Account Closed is killing it down there with both appreciation and positive cash flow.

    6Reply
  • Justin Christian Macabenta
    OP
    San Leandro, CA · Member since 2018 · 4 posts · 4 votes
    7y

    @Houston Garcia Thanks again! I appreciate the insight!

    @Arlen Chou The best definition I would prefer for cash flow would be the first option you mentioned but we both know that is hard to come by around here. Knowing that I do not see myself leaving the Bay anytime soon, the perspective of paying a reduced amount for a space is way better than paying it full. Personally, not really open to living in East Oakland but would seek surrounding areas.

    2Reply
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