Should I rent or flip in my area?

Question

I live in Dallas, TX, which has one of the top buyer's market in the nation.  Homes are cheap and abundant, so im thinkin houses would stay up for sale longer than usual because theyre so many houses to pick from.  So I think I should rent out for a few years and then flip and sell.  What do you guys think about this market?

Michael Rossi · Answer

That is exactly right.  In fact, the appreciation of real estate consistently underperforms the stock market.

The beauty of real estate is the leverage.  In fact, with the no money down techniques, your return can be infinite because you don't have any of your money in the deal.

Mike

Account Closed · Answer

Mike, I think you are assuming that the whole of the US looks like what you see when you drive around.

In many parts of the country people are still making money flipping properties. In years past people have made money flipping properties in down markets.

The direction of the market is only one variable. If you can buy low and sell higher to another investor I would not be too concerned about what the market is doing. Find better deals and you can flip if you like.

I understand this perspecitve. I historically keep most of what I buy. Some folks buy and then sell short term so they can put more equity into their rentals as they own rentals in market that do not cash flow without a large lump of cash invested.

One's strategy does need to adjust to the market.

Two quotes for you to consider when you drive around:

At some level you are already see things differently as you see streams of income when most people do not even notice. Even still maybe there is more possibilties than just buying rentals.

John Corey

Michael Rossi · Answer

I agree with that.  These fads come and go.  The Day Trading Fad, the Flipping Fad, and now the Work at Home Fad (which is more of a mini-fad so far), are all examples of these fads.

Me too!

The "headlines" are irrelevant, however the facts matter.  There is an 8.9 month supply of inventory.  That's a fact.  Prices are down nationally.  That's a fact.  There are a large number of pending foreclosures that will affect the market over the next couple of years, putting further pressure on inventory levels.

It's fun to pretend that things are going up, up, up and the sun will always shine.  Unfortunately, that only happens in fantasyland.  I'm in business and that means being prepared to deal with the real world.

Mike

Account Closed · Answer

Mike,

During the fad years was there much flipping in OH? What about other places where the boom never happened?

We might call flipping a fad. We could say that it was going on in the 1970s so it was a very old fad. Or a fad that came back around with new people playing.

I tend to call the period you are describing as a period of dumb money. People who did not know much about what they were doing were making serious money. They were effectively outbidding people with more experience like yourself.

I for one am happy that the dumb money has largely left the market.

John Corey

PS. As an investor I know you do not believe all the headlines. The doom and gloom stories sell papers but do not accurately reflect the market. Last year the US housing market crashed we are told yet the numbers show the US was up for the year. This year there has been a continued contraction yet some areas are seeing double-digit rises. RE is all about local markets. OH missed the boom as did much of the Midwest. Know your local market is my advice.

Michael Rossi · Answer

John,

I'm not assuming anything.  All of the real estate data points to a significant downturn in real estate in the United States.  Inventory levels are currently so high that there is an 8.9 month supply.  Prices are continuing to decline.  The sub-prime fiasco continues to affect the market and we are on the brink of a wave of foreclosures, which will only exacerbate the supply problem.  As the result of the sub-prime fiasco, lending practices have tightened.  I am not assuming anything.

Does that mean that there aren't any areas of the United States that are currently in a growth phase  -  certainly not.

Am I arguing that no-one should not flip, wholesale, or assign contracts?  No.  What I am saying is that "flipping' was the latest fad, much like the previous "day trading" fad.  Everyone and their brother has been flipping and many people were successful because the recent boom in real estate made failing much more difficult.  Wild appreciation makes failure difficult.  The boom is over and the market has changed.  Previously hot areas have cooled down and prices have dropped and continue to drop.  The flipping fad is over.  Those that are left standing will have to make money the old fashioned way  -  they'll have to actually earn it!

Mike

Michael Rossi · Answer

agentpeter,

Yes, I have several dozen rentals.  You make money with rentals by buying at a HUGE discount.  Finding these properties is NOT easy.  That is why the majority of newbies fail.  They pay too much for the property and lose money.  That is the TRUTH that you won't hear on any infomercial!!!

Most of these deals are not found on the MLS.  You've got to get out of the house and do the work to find them!

YES!  Less than $650 if you actually want to MAKE MONEY!

Mike

Peter Stewart · Answer

Do you own rental properties?  How do you obtain "positive" cash flow?

You're saying my mortgage would have to be $650/month in order for me to break even with the unit rented for $1,300/month?!?

[$1,300 Rents - ($650 mortgage + 50% Rent) = 0]

N/A N/A · Answer

Can someone please shed some light on the scenario I have depicted below.

I think real estate investment can produce incredible returns when your equity in a property is relatively small.  For example, if I buy a house for 200K, put down a 40K deposit, as an example, and generating positive cash flow.  I have incredible leverage now.

Over time, let's say the house value has doubled to 400K after a prolonged upcycle in the market and my mortgage is down to 125K.  I now have 275K equity.  My leverage is substantially less now and so are my returns.  Is this now not a very average investment perhaps compared to something else?  It seems to me that real value of real estate is in the leverage and once that is gone, real estate investing has come back to the pack and is more comparable to other convservative investments.

I know refinancing is an option but can only be used to a certain point.

Michael Rossi · Answer

AgentPeter,

That is completely wrong.  If the rent is $1,300 per month and the mortgage payment is $1,000 per month, then your monthly LOSS is about $350 per month.  OUCH!

The reason that is that in addition to the mortgage payment, you also have operating expenses.  Throughout the United States, operating expenses run 45% to 50% of gross rents.

REI,

In many parts of the county, this is yesterday's strategy and is outdated.  Flipping is a good strategy in a booming real estate market.  The boom is over.  For example, here in Ohio, I saw a report that 22% of all the mortgage brokers in our state have gone out of business since January 1st.  I see that personally as I drive through town and see the closed mortgage brokers' offices.  Houses simply are not moving and those that do sell, sit on the market a LONG time.

I started out in the rental business and only do rentals.  If you buy rentals right, you get BOTH the cash and the equity.   I don't sell the goose that lays the golden egg.

Mike

Account Closed · Answer

Terry believes that you need to be flexible. You want to flip some for lumps of cash and you hold others to build wealth. If you only flip you have a job. If you have passive income you can buy your time back.

You need cash and equity in your property to have the margins to weather temporary downturns or unexpected repairs. You also might need lumps of cash when bad things happen in your life.

You do not want to be working all the time. You want to work when you feel it is worth working and when you choose to do so. Passive income lets you buy back your time.

Conditions in a local market might cause you to do more of one type of investing than the other. Even still there is a time and place for both.

John Corey