Rental vs. Flipping: Which, and why?
Real Estate Investor · Dallas, TX · Member since 2017 · 14 posts · 6 votes
Rental vs. Flipping: Which, and why?
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Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
9y@Account Closed I don't do Fix & Flip anymore. It has the highest tax bracket, takes the longest and is the riskiest. Generally a Fix & Flip runs for 3 to 6 months and and you can only do so many in a year. The market changes and you can be left trying to sell a property people can't afford.
I start with the assumption that I am *not* going to put more than $25,000 into a property, "All in."
So, for instance, if the seller has $8,000 in equity, I give them $8,000 out of the $25,000 I have allocated and use the rest, $17,000 for the expenses. I Purchase (I take over the loan), pay escrow, pay title, pay carrying costs, pay utilities, pay for marketing, pay for property clean up, I do *very little* rehab and I keep $5,000 in reserves from that $17,000 in case I need it later. I've developed a spreadsheet for this model and I can tell pretty quickly if I am within my "safe zone". I assume 3 months to sell. Usually sells within 30 days though.
My typical houses are in the $150,000 - $300,000 range. I invest & coach in multiple states and In the Tri-Cities the numbers are a bit lower of course but relative to the same percentages. Say a property has a PITI of $1,200. I go to rentometer and see what rents are going for in the neighborhood. I then mark up the payment into the first quarter of the "red zone" on the chart, say, $1950. So the difference between what I pay and what I get is my monthly "cash flow" or $750 in that case. (That's from an actual deal.) People are willing to pay more if they will actually own the house rather than rent forever.
I do my comps and mark the sales price *up* beyond what things are currently selling for. Say, $30,000 above market. (Less of course in the Tri-Cities). It's "whatever the market will bear". I don't use real estate agents so I am saving the 6% fee, $12,000 in the case of a $200,000 property.
Then I offer the property on Owner Financing/Lease Option/Wrap/etc to business people who have great incomes, some money set aside and want to own a house but can't get financing because their Tax Returns don't show enough income. (Self employed get *great* tax write offs but that doesn't help when trying to get a loan from a bank).
The first Tenant Buyer who has $25,000 to put down and qualifies under DoddFrank gets the nod. If they have the money to put down, if they have a job that will support the payment under good lending guideline Ratios, (I used to be a loan officer and that is how I was trained), and If they don't have *unpaid* child support, if they aren't *delinquent* on student loans, if they aren't currently in a bankruptcy, if they aren't currently in a divorce, if they aren't currently in a lawsuit, etc. I don't care if they had a bankruptcy discharged last week. I don't care if they have lates and long ago write-offs.
So, I get the $25,000 back when the Tenant Buyer comes along, usually within a month or two. I get the $750 a month ($9,000 a year) cash flow and I don't care how long he wants me to carry the financing. Each year that goes by is another $9,000 to me plus the principal is being paid down. When he eventually does do a refinance, the difference between his payoff amount and my payoff amount I get to keep. This is a more *complex* technique but anybody can be taught how to do it. I read at Realtor.com that the average gross return on a Fix & Flip is about $25,000. This is *far* easier, faster, less risky and more lucrative. IMHO
59 Replies
- Real Estate Agent · Addison, TX · Member since 2017 · 57 posts · 7 votes9y
@Account Closed As a local Wholeseller here in the DFW metroplex I would recommend you make that decision based on your time and your ability to manage a project. I would suggest to all of my investors if they are doing this part time to start off to do flips and use part or all of the proceeds of a flip or two to fund your rentals. The nice thing about rentals is they pay for themselves with little work, and can be tax shelters for your capital gains while you are flipping (talk to a professional tax adviser for that). If you are interested in getting access to my list of properties I would be happy to get you on my list, we get 30-40 Properties a month, so plenty to choose from. Hopefully that helps you out in this fun and excited road you just started on.
- Real Estate Investor · Dallas, TX · Member since 2017 · 14 posts · 6 votes9y
@Robert Westbrook Thanks a lot!! I have a meeting at Net Worth today with @John Preston!! Can't wait.
- Real Estate Agent · Addison, TX · Member since 2017 · 57 posts · 7 votes9y
@Account Closed You are in great hands, John is a great guy.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Account Closed:
@David Faulkner Whoa, No need to be rude and impertinent. "Stick it to the person whose name is on the loan?"
I think I would decline to work with you or teach you the techniques if that is the kind of thing that pops into your head. That comes from the heart and I don't think I am the one that has the ability to straighten that out.
No, the solutions are rather simple and honest: Exit strategy in the event a DOS is called
1) Cash it out with personal money and pay off the loan
2) Refinance and pay off the underlying loan
3) Get the Tenant Buyer to refinance and pay me off so I can pay off the underlying loan (give a "discount" if necessary for him to qualify)
4) Get a hard money loan and pay off the underlying loan
5) Work out an "assumption" with the note holder (bank) of the underlying loan
6) Have the Tenant Buyer "assume" the loan with the bank
7) Transfer the Deed back to the original seller and assign my interests to him
There are other solutions, but these are sufficient for this discussion.
Now, go wash your mouth out with soap and don't think thoughts like that. ;-)
No offense intended ... this is NOT an option I would ever pursue myself, but I can be a blunt person ... I have thick skin and assume others who have been in this business awhile would too ... I am not offended if I am not the type of person you would want to work with, and I don't partner with anyone anyway. Have a nice day.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9y
@Account Closed You've received some good information so far about active vs. passive, tax implications, etc. The only thing I'll add is that I see a lot of people that think they will use wholesaling to build capital to be able to flip. Then use flipping to build capital to get into buy-and-hold. Personally, I think that's the wrong way to go about it. There are risks in flipping, it's not guaranteed money, HGTV has made it look like an easy path to $50K, etc. And I would also argue flipping is a skill that can be developed over time. You won't understand the market, have an array of go-to contractors, be able to estimate timelines, catch all of the hidden issues, budget extremely well, etc. on day one. You'll get bumps and bruises along the way that those cost money. If you get good at flipping you'll probably want to (and should) keep doing it. But you have to approach it like a business rather than a means-to-a-buy-and-hold-end.
Side note, I think you'll get the same bumps and bruises when it comes to buy-and-hold so if you focus there it will also take time to get good at it. Your first property manager might not be perfect, you might buy in a D area when you thought it was a C area, etc. Buy-and-hold, however, is a little different from the perspective that I seldom hear people on BP talking about using cash-flow from buy-and-hold investment to fund flips. It's always the other way around...
Net advice, pick what you actually want to do and get really good at it.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes9y
@Account Closed Buy and Hold versus Flipping. They are not mutually exclusive, you can do both. We have had property that we rented to the same tenant for 30 years, Buy and Hold worked out very well with not one day of vacancy in 11,000 days! But we have also taken title to a property and sold it 9 days later, didn't clean it out, didn't paint it, didn't even turn on the utilities, nothing, nana, zero, zilch. That worked out well also.
The decision is all yours, but there are outside factors like where you invest, how much time you have and your finances. For the first 11 properties that I bought, having started with nothing, I was forced to have 100% financing. When I started my idea was that real estate was accessible to everyone, I could have control over my own destiny, I could start small and that it would provide a cushion for a far off retirement. It grew to much more, that I initially imagined. Good luck
- Real Estate Investor · Dallas, TX · Member since 2017 · 14 posts · 6 votes9y
@David Krulac I have to tell you how encouraging your input is. If for no other reason than to see a successful investor actually say, "I started with nothing." In order for me to get started I'll have to use 100% financing as well.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes9y
@Account Closed
I've bought and sold over 900 properties and was a guest on Bigger Pockets Podcast #82, and I did start with nothing!
- Indianapolis, IN · Member since 2014 · 6 posts · 0 votes9y
@Ken Min This is a great strategy. Am I understanding correctly that you have one contract with the current owner (the one who is on the bank mortgage) and one contract with the end buyer? Does the bank know about these other arrangements? Not trying to imply anything, I just genuinely am interested in learning more about this strategy.
- Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes9y
I would say you need to follow where the market and your abilities / risk tolerance takes you. If flips are plentiful and profitable and you are comfortable, then you should be a flipper. same goes for buy and hold. House hacking is one of the best options for people getting started. The financing makes many deals work that would not as pure investment.
First and foremost, I am an investor. I am not an RE person, a landlord, etc. I do not care how I put my money to work as long as it is working hard. My preference is value add long term buy and hold, sfh - commercial (5+) units. As time allows I do flips. My day job keeps me pretty busy!
- Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes9yMy personal preference is rentals. You get much better tax treatment as a buy and hold investor vs. flipping, for one. Also, for me personally, I can make more money per hour in my "real job" than I would from flipping (even if I was good at it). And I don't *hate* my real job. If I did, it would be a different story. So, I choose to build my cash flow and equity slowly, with the long term goal of having a low tax, passive-ish cash flow funding my family's lifestyle.
- Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes9y
Originally posted by @Alex Barnett:
@Ken Min This is a great strategy. Am I understanding correctly that you have one contract with the current owner (the one who is on the bank mortgage) and one contract with the end buyer? Does the bank know about these other arrangements? Not trying to imply anything, I just genuinely am interested in learning more about this strategy.
Hi Alex. It's all perfectly legit and above board. It *is* a little more complex of a transaction, but I teach each step and the *right* way to do these and Lease Options and Wraps. People can get into trouble if they know 80% and think they can fill in the rest of the information. It's kind of like fixing a car engine. Most people can do it but unless you been trained there may be some parts left over when you're through. ;-) Doing things right is in the details. Pick someone who knows what they are doing and learn the details. The idea is to get enough properties working for you that you have a steady stream of cash flow. Within a year, working just a couple of zip codes, most people can replace their income and then do real estate investing full time to increase their wealth. It will feed your family for the rest of your life. I've done Fix & Flips, I've done Buy & Holds and I've done these. These are far better.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Little bit of both works well for most folks... its always nice to take some profit off the table when you can.. drip income is nice if you have the mind set that your going to scale.. but if you have no intention to scale or ability to scale then flipping is probably better and or even better sell real estate make commissions and have no financial risk on either side..
@David Faulkner as you probably surmised Ken sells a coaching package on sub too.. !! @David Faulkner Ken I can assure you Mr. David needs no coaching :).... but I am pleased to see you talk a little about the adherint risks in sub too and not just the blue sky.. its best to be fair and balanced .. I just cringe though unleashing these techniques of yours on under capitalized folks that will when something goes wrong most likely just walk.. because they will not have the ability basically to unwind these deals in the manner you suggest other than deeding it back.. and unfortunately I have seen way too many not so nice investors really fowl up sellers with this model.. I would also think in this market right now finding these deals is not quite as easy as it was a few years back... at least one's with any kind of decent equity. Not saying it cant be done .
but I put it right up there with the TV flipping guru's telling people they can make 40k a month flipping or the wholesaling coach guru's who tell people they can make 20 to 30k per deal with not one cent of their own money.. IE this can happen but so can winning power bowl this sat.. that's my real goal. !!! good thread though .
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes9y
I am with @David Faulkner on this - @Account Closed's approach could work but has a lot of risk involved. The available exit plans are not how I would want to do business especially considering the most likely scenario is kicking it back to the seller making them mad and losing my "max" $25,000. It is a creative way of looking at things but the ability to scale this into a business model doesn't seem very likely.
Back to the question - We work on a combination of flips and rentals, it really depends what is going on in our market. In asking the question which one do you prefer I would ask back why can't you do both?
We may buy a property with the intention of flipping it and decide to keep it as a cheap rental. We have also changed our intent on having a cheap rental become a flip property. Most of our decisions are based on our expectations of the market, availability of other investments, and ultimately what seems to be the best use of our money. You will note that I am a CPA and I didn't list tax consequence. Yes, taxes matter but the tax savings with a 13-15% tax rate differential can be lost quickly if the market tanks or if you have to repair the property after a bad renter. Also on major renovations we can typically mark the price up a bit more for a "not lived in" house.
As mentioned above flipping houses is a business which needs careful attention and it will utilize more time. Rental properties take less effort but unless you have nice outside income you may get stalled out because of your debt to income ratio. Sure you can look for seller financing but it has been a seller's market for a while in MN so anyone who is not in a bind can easily sell. If your market is hot now I suspect seller financing is also not as feasible as other markets.
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes9y
Well put @Jay Hinrichs
- Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes9y
@Jay Hinrichs @John Woodrich Two things.
First, I think of the coaching/teaching as a way to get people to do things ethically and to keep them out of trouble and to keep the seller happy and safe. In my world one doesn't do this kind of transaction unless you are well funded. And I am very upfront about it. Also, most people wouldn't know how to do things properly unless they are taught (disclosures, deeds, title reports, using escrow and an attorney, etc).
Second, having differing opinions about ways to do real estate investing is one things that make investing interesting. Some will do only Fix & Flip. In my opinion, Fix & Flip is the riskiest way to invest. Ask anyone who was investing in 2008-2011. That is a long run of dropping prices.
- Rental Property Investor · Cleveland, OH · Member since 2016 · 653 posts · 769 votes9y
I've not done any flips since I'm a buy-and-holder, but the way I see it, flipping is effectively a job that may pay really well, or maybe not at all. But rentals will build real wealth. The second you stop flipping you'll be draining the bank account, but with some good cashflow, you can live indefinitely. I guess that's why a lot of people flip for capital to use on down payments for rentals.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Actually, I personally know of some flippers in LA that did quite well flipping 2008-2011 ... they bought for 60 cents on the dollar, got in and out quickly, and sold at 85 cents on the dollar ... all in your buying and operational discipline. I agree though, I think it is riskier and I did much better on a risk, work, and tax adjusted basis with buy-and-holds 2008-2011. I would gladly take the risk of either during that time frame over being on the side of a sub-to deal anytime where my name was on the loan for a property I no longer owned, and I wouldn't care how much the guy on the other end of that transaction knows or how well funded they were either. I understand that is not the side of the transaction you operate on Ken, but every coin has two sides and I like to try to understand both sides. To each their own, though, and I agree that differing opinions make this forum and REI interesting.
- Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes9yDavid Faulkner Great call on sub-to DOS exit. I always wondered what will trigger it, and the answer I found was greedy banks, with fed interest coming up, on a sellers market, the banks might call on those to increase their bottom line. In LA, foreclosure has a rate of 50-100 at any given time a few months back, now you're lucky if you see a dozen. To the OP: I'm never a fan of rentals like what Jay Hinrichs is saying, too slow income, but if I we're to HAVE both fix and holds, i'd say fix 3-5 then buy a 5-10 unit with the proceeds. I don't like to deal with emotions of a rental, nor deal with a snail system of government (and believe me, i know, they compose of 90% of my business as my client), on a uber tenant friendly state, where eviction takes at least 6 months with the help of $100 cockroach eviction lawyers. I would rather hold a retail strip or medical offices vs condos. While fix is the riskiest, the scalability of it is much more appealing, from land devs, to row houses, to communities. I believe a 25 unit row house dev makes the same money or beats 15-20 years of management of a 200 unit apartment. In both scenarios, you still get up in the morning and go to work, either home or office, still same effort, you just have the chance to retire earlier on bigger risk/bigger return scenario -- or if better said (you know you don't want to retire early), you hit your goals earlier.
- Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes9yAnd to add, if rentals can be a clockwork type of business, so can fix and developments, we have a family owned company that makes roads and bridges with 150-300 employees at any given time, we could leave it with minimal management of 1-2 hour work during vacations just to answer high management level emails. As long as everyone knows what to do on a certain scenario and you set it, it pretty much works on its own.
- Realtor · Charleston, SC · Member since 2016 · 229 posts · 159 votes9y
Simple for me to answer according to my belief and goals.
Would you rather have an orange or the tree that continually gives you oranges?
For me, I want the orange tree, in fact I want a damn orchard full of orange trees. I don't like single use transactions too much and I want to make money while I sleep. So for me rentals all day long.
@Account Closed
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Manolo D. my partner in my airplane is an underground contractor who sold his business to his employee's at 45 and he owned all the iron free and clear and leases it to the company NET NET NET for 100k a month.. plus the company makes another 3 to 5 million in pre tax earnings yearly being a contractor and he gets 25% of that.. now to be fair he also owns rentals .. but most is mixed use commercial that he bought and totally gutted and rebuilt one project at a time.. but his major wealth came from his business not his real estate.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Manolo D. And he started with one old 5 yard dump truck and an old case 580 doing septic systems.. LOL.. but he would have made it at whatever he did he is wicked smart.
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes9y
@Chris Armstrong your analysis is simple but the problem lies in how to turn your one orange tree into multiple orange trees while battling debt-to-income ratios and not having additional income or cash for a 20% down payment.
Rental investing is great but scaling up becomes an issue for many people as it takes a long time to build equity paying off $100 of principle a month.... Hence where flipping comes in - you can increase your taxable income, increase your ratios for financability, and you can create down payments for rentals in a relatively short period of time.
- Realtor · Charleston, SC · Member since 2016 · 229 posts · 159 votes9y
So in my case specifically I am using short term rentals to pay down loans and very quickly build equity in the properties. I will have 4 paid for within 4 years. Then I will then use them for Lines of credit and 1031 exchange to get into more units. You just have to be smart about it. Ride the wave while it lasts and then plant the orchard. Domino effect, snowballing, whatever you want to call it. I dont take 1$ from my properties until I hit my goal minimum $20k per month passive income and 15-20 paid off units plus a slew of others.
4 is a managable number for most people to get into if they are determined and disciplined. once these are paid for I will have nearly 1 million dollars to snowball into the next set of properties, most likely a small apartment complexes 25-50 units.
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