Rental vs. Flipping: Which, and why?

59 Replies

@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.

@John Woodrich

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. 

@Chris Armstrong sounds like you have your plan figured out.  Not sure what the value of your properties are but being able to pay off the debt associated with a property in 4 years is not realistic in most markets without continuously investing additional capital.  Suppose you could have owned them for several years prior but I want to mention it as this is not a reasonable expectation for a newer investor.

I own 6 properties free and clear but I couldn't have gotten here if it wasn't for flips. No way rental properties would have me even close to the amount of equity I have.  

If someone had a goal for rental units they could create the down payment for 2 or 3 rentals with one successful flip.  That is a whole lot easier than saving 20% down. I think starting with an orange is a good way to get seeds to plant more trees :)

@Jay Hinrichs I have a similar story here through my bond broker that 10 years ago, a company got written for a 300k single project bond (payment and performance), and now doing 300M a year in gross sales. He was nervous at his first project that was 200k even when his father doing 30-50M in the same industry. It's a no brainer to scale, there are too many government opportunities out there that no one contractor can take. Our family owned business back home also started with selling sand and gravel with no more than a 3 cubic yard truck, that was 35 years ago and now in 3-4M range in gross (and here's the kicker, average DAILY wage is at $4/day). lol.
In the government side here, there's still too many opportunities, if you want single size 20k project, in the thousands, you want 200M, still in the thousands. I just went through SBA underwriting which will back my collateral 75-90% with the bond agency so my 250k project the real exposure to the agency is only 25k, on a 16M project their exposure at 4M. It's a good move to rent Trip Net with 100k and still maintain 25% equity, I won't say I'll take it because I might be greedier, but that's a good number to start, 1.2M + 1M, I guess that's almost 50%. Pretty sure he spent a bunch of money on forging that contract, but isn't it possible for the company to buy his shares out?

The wealthiest people I know in this industry are all landlords. Sure, there are a few flippers who make great livings, but the day they close shop, that income stream is gone. The faucet is turned off. Landlords on the other hand can turn their entire portfolio over to a management company, a relative, a young strapping wannabe investor, etc. and that income will still keep pouring into the bank. A landlord could also sell and carry back 30 year fixed rate paper. If you're 65 and you carry back the financing on 20 or so houses, you most likely won't live to see the final payoffs on every one.

Very interesting! @Account Closed

As for the original question, I agree with what others have to say.  My husband and I flip and rent.  The rentals, you have to deal with tenant situations, but only take a day or so a month.  Flipping, on the other hand, is much more time-consuming.  We purchase foreclosures, so my husband spends time researching the property, cleaning up and getting rid of everything that was left there, and then fixing it up (he only does light remodeling) which takes a lot more time.  But the payout is in the short-term.  We like that the satisfaction of the flip is quick and it is quite interesting!

@Jenna Hintz I am pleased that you and your husband do flips together. My lovely wife of nearly 40 years and I have always done them together and we enjoy flipping as much as anyone can. All we did for the first 15 years was flips (Using Subject To to purchase them). I can wire to code and I can plumb to code. I don't do roofs ;-) But, my point is profit vs risk. We enjoy the tremendous cash flow without the hassles of tenants and their dramas. Yes, you will have drama at some point with a tenant or two. Everybody does. But, you should do what you enjoy most. And there is *great* satisfaction in a well flipped house.

I'll come at this question from a different perspective. Buy and Hold vs. Flip for most comes down to this- money and credit. I initially came into real estate investing with the idea of building a large rental portfolio. I picked up a few houses and got into the rehab process when low and behold, no one wants to do commercial loans on rental properties. Sure, I could apply for a private mortgage, but my business model was LLC based. And I got into investing full time, so technically no job. Had to flip to unlock my cash.

Flipping, you can always get money.  Private money, hard money (a type of private money).  It's based on the deal, not your credit. For the most part, find a deal, rehab, sell (or wholesale), repeat.  Once you've made enough, buy your rental.

Buy and Hold.  Simply put, you need credit.  You also need a pretty turn key property to get mortgages.

Then there is the hybrid system we use with many of our investors. Buy a rehab property with hard money, rehab, then get a regular loan. This system allows the most flexibility and puts investors into cash flowing property's for about 10% or less if my ARV and rehab estimates are on. (and yes, they are! lol)

Hi All, I know I'm late to the party but recently googled Flip Profit vs Rental Property to analyze whether I should flip my latest remodel vs rent it out and this thread popped up and your insight has been great thus far. 

Essentially I am trying to evaluate the ROI of a flip vs the ROI of renting out that remodel and finding out what the breakeven point is using the following projected metrics:

FLIP:

Equity in: $100K

Flip Profit: $50K

Flip ROI: 50%

vs.

RENTAL:

Equity in: $100K

Rental Profit (annual): $12,000

Rental ROI: 12%

Or is the answer here a combo of both? Aka the BRRRR method to recover capital and still cash flow (as well as take advantage of taxes)?

Thanks all in advance!