Take profits from Flip to fund more flips or buy and hold?

[Thuy Pham-Satrappe]

Debating whether to use my flip profits into reinvesting in more flips and continuing that cycle until the market cools down and then switching my strategy to buying and holding (when it becomes more of a buyers market), or using some of that money for buy and hold investments now (which is the ultimate goal)?

[Dave Foster]

@Jeff Piscioniere, I don't know if that would make banks more skittish - I doubt it.  I was more looking at a comparison. Let's say a $100K loan carries 2% origination fee to get a 5% interest rate.  If you can flip that 4 times in a year you're looking at a very real $8K of origination fees.  that eats up profit.  But more importantly whats a better deal for you - 4 loans @5% that cost $2K each or one loan at 6% that costs $2000.  There's definitely finance cost savings in a buy and hold strategy.  You just have to spread sheet em to quantify them.

But more importantly is the tax burden of the flipper.  Ordinary income plus self employment and maybe the ACA surcharge of 3.8%.  It's very easy for flip income to approach the 40% tax mark.  That tells me that it takes someone 3 flips to equal the gain that I get from one buy and hold that I 1031 to keep the tax deferred.  And I get depreciation and equity build from the tenant paying the mortgage down.

I'm not saying don't do flips.  I have.  They're fun and the cash injections can be very addicting.  And they can be a good kick starter.  But the tried and true long term path to lasting generational wealth is through holding real estate for productive use, taking advantage of every tax write off, transferring the properties tax deferred and giving them to your heirs tax free.