My first mail campaign began this weekend so hopefully the phone will start ringing shortly. My long term goal is buy and hold rental properties, mostly SFR, but I have managed to convince myself I need more cash to buy a rental property and therefore I am going to start out with fix and flips to build up my cash reserves before committing to a long term buy and hold. I want to repeat this process over and over for as long as I see fit. The problem is, the more I ponder this strategy, the more I realize that if I find a good deal for fix and flip, that deal would also probably make a excellent deal for a rehab and rent. Gainesville is a college town and the rental market seems to be doing quite well and should continue to do so for a long time.
So the question is, am I stupid to cash out on a fix and flip when I could probably turn it into a cash flowing rental instead? If I "buy like a wholesaler", my deals should have tons of room for cash flow even with bank financing. I'm interested to hear the groups responses. Just for the record, I can handle property management, but I am thinking I would rather buy low enough to afford to pay for it with my cash flow. I would rather buy more houses than spend my time fixing stuff.
I would recommend basing your strategy on your financial situation. Do you have enough cash for multiple downpayments? If not, you may flip a good deal to provide more cash for future downpayments on rental SFRs.
@Tom Scott you are in the same boat as many others - where you struggle with strategy. What says you have to stick with one strategy? @Brian Ortins is right with picking a strategy that fits your financial situation (at that point in time) but you may consider doing multiple strategies as you move through your investing career. I was fortunate enough to save enough money to put 20% down on my first deal, and 2nd deals but then there was a lag of time I went without purchasing any properties. I used this time to learn the trade; land-lording, screening tenants, doing the maintenance and so forth.
There is money out there, don't be afraid to ask for it. You can also look at self directed IRA that you can used to invest in Real Estate. My point is be creative and you maybe able to do more deals than you think, but ensure the numbers work for whatever strategy you decide to pursue.
As I have moved through my investing strategy, it has changed and even as I become more active on BP I develop new ideas and strategies. So yes you have picked one... and have actually acted on doing it, now keep you head in the game and keep you nose to the ground looking for more deals. By talking with others you will gain knowledge of things that may or may not work in areas within your market. Also become part of your local REI groups in your area and get to know these people; they may become your buyers, sellers or even your partner.
Hope you have a successful future!
@David P. brought up a good point regarding using a self directed IRA for investment. I personally have no experience in this arena, but you can search BP threads to find more info.
@Tom Scott I think you nailed it with your thought of "if I can buy like a wholesaler and fix it like I was going to flip it, why not hold on to it?" That's my thinking exactly. The flip is my "plan B" on all of my deals.
I'll send you a colleague request and we can talk more details, but I think you are right on the money with your thinking.
The SD-IRA strategy works if you have a significant amount of money built up in a former employers 401k or IRA that you've funded on your own. Otherwise you can only start building up in an IRA on your own until you have enough to start investing with. There's a lot to know to set it up and then use it properly. I use it personally, but the stars lined up just right (not part of any ingenious plan) and I had a former employer's IRA and Roth IRA savings that were positioned perfectly for this purpose.
You can partner personal funds with IRA funds if the combined capital takes your deal across the finish line. If partnering with yourself, your ability to gain non-recourse financing becomes extremely difficult because of personal guarantees and partial ownership.
You can also borrow from other IRAs OR partner your IRA with other IRAs as tenants in common.
There are many users here on BP that use their SDIRA funds for private lending, just ask.
@Robert Leonard has my line of thinking down exactly. The more I think about it, the more I see flipping a great deal as killing the golden goose. Unless the house is high end, which I'm not targeting, then it would fall in the starter home / blue collar home category which is the butter zone for both rentals and flips. If I can get a house that meets the criteria for a flip with lots of profit, I feel like I am trading great cash flow by flipping it and cashing out. It would be like selling a rental home with great cash flow and equity. I would imagine most people here would tell me that is a horrible idea.
Obviously every property will be different and no one rule applies so this is more of a philosophical debate. I am just wondering if perhaps I should look harder at pushing right into SFR rentals and focusing on cash flow instead of being so preoccupied with having cash on hand immediately. After all, I could refinance the rehab as soon as it was completed and probably pull out my investment and roll it into the next deal.
I should point out the SDIRA really isn't an option I want to explore here. I am focusing more on the high level discussion of cash flow vs cash and the benefits of each.
Always reserve enough capital to do your flips. When you have enough to keep one and still have enough left over for the next flip, then its time to hold on to one. After a year of seasoning you can do a cash out refinance and get all your cash out for further deals. The lower end houses tend to have a better cash on cash return (and require less cash to hold) so you hold those. The higher end houses tend to have a higher spread so you flip those.
@Tom Scott anyone who tells you, you need one year or even six months seasoning before you can cash out of a property, hasn't spoken to enough small banks or credit unions. You can cash out with NO SEASONING, 1 day of ownership. You just have to keep talking to the right commercial, portfolio or community investment bankers or whatever lender at the institutions I mentioned.
Tom, you even used my golden goose analogy that I use all the time. That's wild!
@Robert Leonard I have made quite a few phone calls. It has not been hard to find somebody who will do a cash out refinance on the purchase price with out a seasoning period. However, I have yet to find a lender who will do a cash out on the market value in less than 12 months, not giving up yet though.
You pretty much stated the benefits of each... cash flow or cash.
Flipping gives you a big chunk of cash. Now, how do you best invest it?
Buy and hold gives you a small chunk of cash every month. Build up enough of those and you have a big chunk of cash every month. Wealth.
If I was flipping it would be a means of building capital to acquire more buy and hold properties.
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