Buy & Hold vs. Fix & Flip - What are the numbers telling me?

Question

I recently watched the @Brandon Turner and @David Greene webinar on the 90-day call to action for real estate investing and have since begun to analyze as many deals as I can in my spare time.  My question came up as a result of using the Rental Property calculator and looking at the future cash flow/return model...

Most listings in my market (San Diego) don't come close to passing the 1% rule... however, I still run the numbers to start looking at how close I can get to positive cash flow and what has a bigger impact on the numbers (purchase price, reno costs, etc.).  I noticed that in most cases my cash flow was negative, or barely breaking even (the median home price is $600k+ here, most people don't rent for $6,000/mo if you follow the 1% rule).  However, I also saw that in some cases my Year 1 or Year 2 "Annualized Total Return" was huge - from 65% to 150% in some cases... I'm still honing in on renovation costs, etc. to make sure this is accurate... but in these scenarios would it make more sense to do a "flip" and exit immediately rather than buy & hold? Am I missing something?

Thanks,

--

Matt

Lee Ripma · Answer

In coastal CA most none of those rules apply. A rental bought now won't cash flow but the IRR long term can be very high when appreciation is taken into account. There are ways to get cash flow but you won't be able to just buy something off the MLS and have it right away, like many cash-flow midwest markets. You can flip or hold for long term appreciation but if you buy at market rates off the MLS you are not going to cash flow on a SFH. I'm going to start helping a friend in CA do flips but I otherwise don't invest in CA. There are many markets in CA that are like the midwest, checkout twentynine Palms!

Jan H. · Answer

@Matt Hardy- I am curious: how do you get to those 65%-150% Annualized Total Return figures in Years 1 and 2? Are you taking 10%+ annual rate of appreciation into account?

Ali Boone · Answer

I always think that in markets that won't cash flow (which is just about every SoCal market, for sure), flipping is the way to go. I personally don't flip and have no experience doing it, and it would take higher capital in SoCal/San Diego so you'd want to have a feel for what you are doing, but I certainly think flipping is the more profitable move with where we are in the market right now (super high prices).

San Diego most definitely won't hit the 1% rule. Typically, if it would be positive cash flow at all, that would be impressive.

Wilson Lee · Answer

Flipping in high cost markets is sometimes your only option.

But if you want rentals, You will need a cheaper market. Only if you knew some one in a cheaper market..  Like Birmingham AL.

But really, Your market is costly.  There are many other places to invest in.  Read up on out of state investing.

Buy & Hold vs. Fix & Flip - What are the numbers telling me?

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