Rental vs. Flipping: Which, and why?
Real Estate Investor · Dallas, TX · Member since 2017 · 14 posts · 6 votes
I'm sure most new investors have this question. Although I myself am new, I know where I stand. I'd prefer to build a rental portfolio accompanied by periodic flips. But I'm curious. Are you more on the side of running a flipping business, or building an income stream with rental properties, and why?
I'm an excited aspiring investor in Dallas, TX. To all others of you in my area, novice or experienced, let's network!!
@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
@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 :)
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.
Just north of Dallas myself @Account Closed and looking into buying some rentals in Dallas. Would love to get a group together and toss around ideas, deals, and solutions!
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!