Best Strategy for 1 year Wealth Building for Buy&Hold, Fix&Flip and Wholesaling

13 Replies

I was trying to do some analysis on different RE strategies between Buy&Hold, Fix&Flip and Wholesaling. The assumption i made was

- 10 house with equity capture of 25K for both Buy/Hold and Fix&Flip.

- For Wholesaling, i assume that the amount of deals are 3x (30 deals) with 10K per deal fee.

- The analysis period is 1 year which means at the end of 1 year the Buy/Hold houses are sold to realize the equity capture.

- There is 100K of initial capital for Buy&Hold or Fix&Flip for acquisition, rehab and closing cost.

- Average cash out of pocket is 10K per house. Each house is 100K.

- Appreciation is 7% per year. Equity pay down is 1% since tenant will paying down the Buy&Hold houses. I assume 6% realtor fee and 2% closing cost for both Buy&Hold and Fix&Flip.

- The investor is paying around 30% tax rate currently.

- The taxation for selling Buy&Hold houses after 1 year is 15% Long term capital gain tax. Tax for Fix&Flip and wholesaling is around 40%. I assume 40% because the investor is paying 30% now and few more hundred thousands of active income (Fix&Flip, Wholesaling) would put the investor at max 40% tax rate.

The results

Buy&Hold

10 Houses, 25K/house equity. Total Accumulated after 1 year = 250K. After 1 year with 7% appreciation and 1% loan pay down by Tenant minus Realtor and Closing cost of 8%. After 15% Tax the cash out is 212.5K

Fix&Flip

10 Houses, 25K/house equity. Total Accumulated after 1 year = 250K. Minus Realtor and Closing cost of 8%. After 40% Tax the cash out is 142K

Wholesaling

30 Houses, 10K/house deal. Total Accumulated after 1 year = 300K. After 40% Tax the cash out is 180K.

My conclusion is,

if an investor has the 100K to spend on Real estate investing and are really good being a landlord and have a full time job where he does not need to take out money from the RE ventures for living, the best wealth building would Buy&Hold. I have not even added the capital depreciation tax benefits that the Buy&Hold investor gets.

Fix&Flip is the lowest but would probably be good if an investor is trying to accumulate cash in the short term. The tax % takes away a lot of equity.

Wholesaling is second best but It still does not beat Buy&Hold even though the ratio of cash accumulation is 3 to 1 in my analysis. The tax % takes away a lot of equity.

Maybe Buy&Hold is best strategy for this investor who has full time job, don't mind being a landlord and has initial capital.

So why are investors doing Fix&Flip and Wholesaling ? Short term gain. Cash accumulation ? No Initial Capital.

Thoughts ?

James

James, Thanks for the numbers work. I think the last sentence in your post is why we see so many different strategies (No initial capital). I have very little capital, so I either have to go @Ben Leybovich on the investments, or I need to figure out ways to pull together capital.

From my personal example, I'm able to save about $6k/year from my day job to be used for investing (that's w/ a really stripped back budget). At that rate, it would take me a LONG time to get enough capital pulled together to buy more investments.

To over come the capital obstacle, this year I'm working with an investor to complete a few fix-and-flips. My investors plan to roll the cash into additional flips but I plan to roll my cash into additional rental properties.

@Liam Goble thanks for the comment. What i dont understand is that many people with big capital also focused in fix&flip and wholesaling.

I like the way your looking at this, but there are several problems with your assumptions, so lets look at some of them.

Your figuring selling the properties without any sales cost, I figure 10% sales cost.

7% annual appreciation,,sorry over the long run that's too high (ask someone that bought in 2006), if I get 3% appreciation I am very happy.

Your not taking into account finding the deals,,the biggest obstacles for many right now (or at least for myself), is finding good deals,,times have changed and its really hard to buy at the types of discounts we were use to a few years ago, and the type of discount your figuring in.

Average cash out of pocket is $10k,,,not sure where your getting financing, but those days are over,,you can, on occasion, get into a house for $10k, but that means your doing a double close with hard money,,so add that to the cost) ifyour doing straight financing figure 25% down plus rehab.

The cost of buying the property,,you will have roughly 4.5% (thats just a figure I use, others may have different estimates) for closing when purchasing, thats an additional cost going in.

Buy and hold is a GREAT way to go (ok its what I do), but holding for one year and selling you would be eaten up with expenses,,,,not that you couldn't make some money, but nothing like what your projecting

Agreed with Andy above...most of your assumptions are way off base.

For example, if you buy a rental at 25% below market, it likely needs a rehab before you can get a tenant in there. It likely needs another rehab to capture the equity at sale. And if two rehab and a sale takes about 4-5 months, that leaves 7-8 months the place is rented. Ultimately, you do twice as much work and spend twice as much money to capture the same amount of equity/profit in the same amount of time, with just a little extra in rental income. In other words, to make $25K on a rental would require a better deal than to make $25K on a flip, taxes not factored in.

Using realistic assumptions, you'd likely find that wholesaling is the best IRR, and fix and flip is likely the next best.

Not to say rentals aren't a great path to wealth, but not if you're only only them for one year...in that case, they are just more expensive flips with better tax benefits.

James and Shanti Kandasamy but will add another factor. If you turn that many houses over in buy and hold, the IRS will likely classify you a dealer. That means RETROACTIVE change in tax status, penalties, all kinds of bad things. Selling after a year is not buy and hold. Nor is it wise unless you are set up as a fix and flip business.

Originally posted by @Walt Payne :
James and Shanti Kandasamy but will add another factor. If you turn that many houses over in buy and hold, the IRS will likely classify you a dealer. That means RETROACTIVE change in tax status, penalties, all kinds of bad things. Selling after a year is not buy and hold. Nor is it wise unless you are set up as a fix and flip business.

Excellent point! It's been discussed here before, but just because you hold for 366 days doesn't mean you're exempt from paying ordinary income taxes...

@James K. I have to agree with the posts above. I do not get 7% appreciation on any property I own. Selling costs are easily 8% and 10% is a real possibility when the buyers ask for points. There are costs for everything from advertising for wholesaling, to self employment taxes. A huge factor to consider is the amount of time committed. It is possible to have others do a fix and flip but I believe it is the most labor intensive. I believe being a landlord is the least intensive. Hiring someone to paint or unplug a toilet is different than hiring a contractor to rehab. Getting the startup money for buy and hold is hard. So it is a hard to balance the 3, you are limited by time or money or both hehe.

@Andy Collins @J Scott @Walt Payne @Jerry W. Thanks for the comments. I am asking all this questions as i am validating the model that was suggested to me. To clarify, i have included the selling cost for Buy&Hold and Fix&Flip taking into account around 8%. Appreciation - i guess it depends on market. Let say i use 3% as appreciation, the buy&Hold still comes to 208K, Fix&Flip at 142K and Wholesaling at 180K.

The strategy that i assume is is double close for 10K Cash out of pocket. The 25K equity capture is after all rehab is done and the double close closing cost in factored in. The rehab usually takes an average 4-6 weeks. I think its still possible to find deals as such even though its very hard as such so i would discount the fact that its hard to find deals as such. Similarly, its also hard to make 10K consistently on wholesaling as that seems to be on the higher side even though i have not done one. Its just an assumption for simplicity.

I usually do one major rehab on the beginning to get highest appraisal for the second close and get a really good tenant to reduce my tenant headache and minimize maintenance issues popping up.

The taxation change in status is a valid one and i have seen others posting in these forums but that is not conclusive as well. Talked to a few CPAs and i get different answers. That is still a valid concern for me as we want to do things right.

The resolution to tax concern is to do 2 year buy&Hold and do a 1031 exchange. That would be a better strategy but would hold up the capital for longer time. I tried recalculating again with that assumption. this time i tried to calculate the rate of return with assumption that Buy&Hold need 100K capital, Fix&Flip 50K and Wholesaling 36K (marketing 3K per month). I have also added $300 per house Cash Flow for the Buy&Hold. Assume Buy&Hold is 10 House for 1st year and 10 for 2nd. Fix&Flip and wholesaling income is merely double on 2nd year. The results shows net profit for Buy&Hold 530K, fix&Flip 292K, Wholesaling 316K. However when i look at Rate of return at the second year with the new initial capital assumption, Buy&Hold is 27%, Fix&flip 29% and Wholesaling is >10000% as there is only marketing money down. So @J Scott was right that wholesaling would be the highest rate of return follow by Fix%Flip. Even though the rental has the lowest Rate of Return but nobody can dispute the Passive income Cash Flow power from it for long term wealth building. The amount of time in fix and Flip would be the highest followed by Wholesaling and then Buy&Hold. I guess if the systems are put in right for wholesaling then that would be the least time. The disadvantage of Wholesaling would be ...it's not long term (plus its a job) unless someone uses it as cash accumulation machine on the front end and use that cash to invest for long term Buy&Hold.

Thoughts ?

This post has been removed.

@James K. I have to agree with the posts above. I do not get 7% appreciation on any property I own. Selling costs are easily 8% and 10% is a real possibility when the buyers ask for points. There are costs for everything from advertising for wholesaling, to self employment taxes. A huge factor to consider is the amount of time committed. It is possible to have others do a fix and flip but I believe it is the most labor intensive. I believe being a landlord is the least intensive. Hiring someone to paint or unplug a toilet is different than hiring a contractor to rehab. Getting the startup money for buy and hold is hard. So it is a hard to balance the 3, you are limited by time or money or both hehe.

Sorry for some reason it posted my old reply not the new one.

@Arlene Wright-Correll . You appear to be new to the site. You should post attempts to sell products under the marketplace, and not use a thread dedicated to another purpose to sell your product. I am not commenting on your product, just letting you know the rules. I think it is called hijacking a thread. I am glad your model worked for you, but be ready to defend your self on it. there are some on this forum who will ask some pretty hard questions about selling knowledge that they see as being free.

I just don't think your coming close on your numbers on the buy and hold,,the cost of two closings would be close to 9%, add that to your purchase cost, plus you have holding cost including interest, taxes and utilities for that period plus the time it takes to get a tenant in.

If you can buy a house and rehab for $60k that has an ARV of $100k, your numbers might work,,,but in my market the days of finding deals with purchase and rehab at 60% of ARV are long gone, you might run across one every once in awhile,,but to do it monthly,,,I just don't see it. I am picky about neighborhoods, if I find an 80% deal today in a neighborhood I like I'm happy.

On paper many things can work, in the real world with unexpected rehab expenses, it taking longer to rehab than you think, maintenance, wear and tear if its held long term, the numbers just don't work.

As someone stated earlier, you would have to rehab for tenants, then rehab again when you go to sell, now 2 years later,,,that second rehab isn't figured in.

I'm not trying to tell you buy and hold is bad, its great, but you have to have realistic expectations or you won't last.

@Andy Collins I have not factored in a 2nd rehab cost. In reality i have not to come to that stage yet so i just don;t know on how bad is that. My thoughts are the 2nd rehab would not be that big of a cost as i have done major ones in the 1st one. Good tenant selection that i do, hopefully will give me a good tenant that does not destroy properties and caused me to do 2nd rehab. Hopefully wear and tear. However, I don;t know about that assumption until i cross that line. Thanks for great advice.

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