Starting out: Flips or Rentals?

4 Replies

I've started looking at a variety of deals to try and figure out the first step I want to take to get things going.  My ultimate goal is cash flow for financial freedom, so I know my end-game is for sure going to involve rentals, but I've read a lot of advice to start with flips.  

I've got about $175k cash to invest.  I've scoped out a collection of units that will cash flow $2,000/month for about $600k. The BP calculators considered this a pretty strong deal.  My concern is that buying this will leave me too ill-liquid to roll the snowball any further in any reasonable amount of time.  

Would it be better to do flips until I get a bit larger egg?  Would it be better to purchase perhaps lower cash-flowing properties that won't require as much capital in parallel?

For what it's worth, I get that every situation is different and ultimately everybody has to make the decision for themselves... That said, as a newbie looking to surround myself with as much sage advice as I can before I jump!

@Jon Stephens Flips can get you a nice pile of cash if you do it right. If you know rentals are going to be your ultimate strategy, then why not just start there?

What is your specific financial goal in order to reach financial freedom? In other words, what cash flow do you need? 

The capital does not always have to come from you when investing. You can consider partnering with others who have complementing skills to take down properties. 

Best of luck!

@Jon Stephens

As you noted, every situation is different and unique to each individual. The thing I like about Fix and Flip is that I can turn $50k cash into $75k or $100k quicker than doing a rental. The other advantage is that after rehab, if I don't reach the ARV I anticipated, I can refi out of the Fix and Flip loan, hold the property, and turn the property into a rental. This is also a learning experience as to where I went wrong on the my upfront ARV calculations.

If I go in as a rental and get things wrong, I don't have as many options for exit. Selling is pretty much my only option. Even when being new to REI, I didn't get it so wrong that I had to sell at a loss, but I did run into situations where my deal didn't perform as well as I anticipated. Again, opportunity to learn.

I work with many investors who progressively get into bigger deals as they gain experience and confidence.  Many started with a single $75k property, then made positive cash flow, then bought a $150k, then $250k, etc... I've got a few who are getting ready to broach the $1MM markets now.  it all depends on how much you want to grow your business.

Cheers!

Nick Belsky

Fix and flip for first-time flippers is not going to make a lot of money and in most cases, you are going to lose money because of high purchase price, bad choice of contractors, poor management, unexpected expenses, and much more. I think the best way to learn and grow is to get a high-value door or doors to manage and own and see how you like being a landlord. Don't think short-term that you can't get all you want now, the doors build that. Once you are officially an investor and holding property, network with other local investors and see who is flipping and see if you can swing by and see how it really works. When new investors do a flip first, they almost always fail. You can get lucky, but I would be safer getting into it.