Moving from Fix and Flip to Buy and Hold
Most Popular Reply
Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votesCarl:
If you have been successful at fix & flip, you have more than half of what you need to be successful in buy & hold. You just need the education on screening and managing tenants.
Here is a new mental model for you.
Instead of fix & flip, think of it this way, fix, rent, & flip. On my properties, I do just what you do. I fix the place up and make everything safe and perfect. If you offer it at market price, you get the pick of the best tenants because your property is the best one around at a competitive price. Keep the tenant in place a few years and then sell the property before things start wearing out again. That process should be no problem for you.
Here is what gets really cool. When you fix & flip, the income is ordinary income, taxed quite high. If you hold it for a few years, it is an investment. The cash flow is largely tax-deferred (covered by depreciation) and when you sell, it is a capital gain or portfolio income, taxed differently. If you like, you can even get into 1031 exchanges to defer taxes further.
So, I'm not exactly answering your question, but hoping to explain that you don't necessarily need to change your strategy, except to insert "rent it to a tenant for a couple years" in between "fix" and "flip".
5 Replies
- 9yGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
Carl:
If you have been successful at fix & flip, you have more than half of what you need to be successful in buy & hold. You just need the education on screening and managing tenants.
Here is a new mental model for you.
Instead of fix & flip, think of it this way, fix, rent, & flip. On my properties, I do just what you do. I fix the place up and make everything safe and perfect. If you offer it at market price, you get the pick of the best tenants because your property is the best one around at a competitive price. Keep the tenant in place a few years and then sell the property before things start wearing out again. That process should be no problem for you.
Here is what gets really cool. When you fix & flip, the income is ordinary income, taxed quite high. If you hold it for a few years, it is an investment. The cash flow is largely tax-deferred (covered by depreciation) and when you sell, it is a capital gain or portfolio income, taxed differently. If you like, you can even get into 1031 exchanges to defer taxes further.
So, I'm not exactly answering your question, but hoping to explain that you don't necessarily need to change your strategy, except to insert "rent it to a tenant for a couple years" in between "fix" and "flip".
- Tampa, FL · Member since 2017 · 240 posts · 153 votes9y
Originally posted by @Carl M.:
I'm a fix and flip investor who is used to buying homes and fixing them up both inside and out. Not only making them as pretty as they can be but also as safe as can be. I'm having some mental hurdles that I am having a hard time getting over in switching to this strategy. I'm used to re-wiring homes to ensure that they are safe. But I hear of so many investors who buy homes at a good price and immediately turn around and put a tenant in. Can anyone speak to this?
Some people I know buy and hold, and just can't fix and flip.
Dont undervalue yourself and your skill set. Both the flipper and the buy and holder both have their place in the market, and it's up to you to play up your strengths.
Give the buy and hold thing a whirl with a small, low risk property. If it works out and you like it, then do what you want.
- 9yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Carl M., Spending the effort to make a house safe and attractive to a buyer will also make it attractive to good renters who will provide cash flow to compensate for those long service capital expenses.
@Greg Scotts right on. I'd also add one more took for that kit - when you do sell, using that model you can now use the 1031 exchange and use the deferred tax dollars to buy even more real estate. So although the initial pace is slower than a pure fix n flip model it escalates quickly.
The 1031 Investor5137 Reviews - 9yCarl M.Investor · Wilkes Barre, PA · Member since 2016 · 54 posts · 10 votesOP
@Greg Scott Thank you! I have a flip that we just put on the market (FSBO). I considered renting it and might be able to get $1500 to $1650. We are selling for $189,000. How long would you recommend renting? We were going to rent but we really did this one up nice and the reason I chickened out was I am afraid someone will trash the place. Definitely allowing fear to keep me from doing this.
- 9yGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
I've had a few lower-end rentals, properties worth ~$80K. I find that tenants for those properties generally have lower incomes, worse credit, and are rougher on the properties.
As I progressed in single family I started moving up the food chain. The last few properties I bought were in the $175k range. (I wouldn't go much higher than that as the CoC returns start to suffer.) In those sorts of properties, I found I was able to attract a much better tenant base. When they move out, they often clean and vacuum the entire property. I almost never have damages exceeding the deposit. Note: Even if you do, you should be able to go after them for additional damages. Tenants with great credit scores want to keep their credit so will pay.
To get maximum value as you sell, try selling it just before the tenant moves out. (Free staging!) Ideally, you give them some incentive for the inconvenience. Once the house is vacant, you may find the walls need some touch-up or carpet wear & tear becomes more obvious, so it is better to sell while it is occupied.
So just get some education on managing rent properties and you are good to go. I highly recommend Lifestyles Unlimited for that. (I am a member and not an employee and get nothing for recommending them) Their basic 1-year membership is pretty cheap and gives you online access to 100s of hours of recorded video classes plus online live webinars, and access to many live in-person events (mostly in Texas). My wife and I actually fly down to Texas a few times a year to go to their events. They changed my life. Feel free to private message me if you want more details.
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