Flip Your Way to Long-Term Holds…What?!

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I have multiple aims in mind when I write articles. One is to deliver actionable and motivational content – this is why you keep coming back. Another is to keep the posts of a certain minimum length because the search engines like “EPIC” content, as my friend Brandon Turner likes to call it.

Well – I am busy today, in light of which this particular post is going to be short, real short; the shortest I’ve ever written. That’s OK, isn’t it? After all, it’s not how many words we write – it’s what we say with them, and I just don’t think that this particular subject needs or deserves anything more than what it’s getting. As to search engines and SEO, Josh Dorking may have to cut my pay on this one… 😉

You know what your biggest problem is?

You have too many options and you are dazed and confused by them – that’s it! I could elaborate, but I could never say it as well as Albert:

“A perfection of means, and confusion of aims, seems to be our main problem.” ~ Albert Einstein

Got it? Focus and quit being confused…

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How?

Simple – what do you want? Decide what you want and go after that – and nothing else! If you want to flip houses, then go do that. I think that you are nuts, but I respect your commitment. However, if what you want is passive cash flow from rentals, then why don’t you just go get some and be done…

And yet – every other day a newbie jumps into the BiggerPockets Forums saying he is going to flip houses in order to generate investable capital with which to buy long-term holds. What kind of backwards logic is that? First of all – do all of you have any idea how freaking difficult it is to flip one solitary house for a profit, let alone be consistent at it?  And then there is this:

Why Do You Need Cash Anyway?

Brian Burke just closed on a 140-unit complex with exactly $0 out of pocket. I guess when I called to congratulate him last week I should have remembered to ask how many houses he had to flip to get this bird tied-down. Although, had I asked Brian would have said “none”, seeing as he had ZERO MONEY IN THE DEAL!!!

While not as sexy as Brian’s 140-unit, in February of this year I bought a 10-unit with a bit over $5,000 out of pocket. This was the first time I’ve ever brought money to closing – EVER!

Sure – you need cash to close on real estate. Yes, you do!

But it does not have to be your cash. How many different ways do you need to be told? Listen – of the billions of dollars of investment capital floating around this economy, if you can’t get a few hundred thousand to buy a few units then you are either not looking in the right place, which means that you need to be educated, or you don’t even know to look, which really means that you need to be educated. Which is it?

“Capital isn’t scarce; vision is.” ~ Sam Walton

GET PERSPECTIVE!

Conclusion

Some people call it Synergy of Means, and certainly there is room in a sophisticated portfolio for flipping, assigning, and a lot of other techniques. However, if what you ultimately want are long-term holds, then learn how to get some. Don’t confuse yourself – you will lose money. As my wise mother says from time to time:

Stop looking for brains up your butt!

I am supposed to ask you a question now to encourage your engagement. However, realizing that you are either peeved at the moment because I just popped your pimple, or are falling out of your pants laughing, I won’t ask…

Photo: kurichan+

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

50 Comments

  1. Ben,

    Great article, especially in these times when the Federal Reserve is expanding the money supply by $200 million a day with zero interest rates to foster an experiment in government and economy.

    The regular work a day folks have no where to invest safely and make a return worth the risk of their capital.

    Nothing safer then REI that has been well thought out, and executed.
    As one of my mentors long ago commented when I asked where I could get money? “Dennis, there is some much money floating around out there it shouldn’t be hard to find with just a little effort.”

    Of all the properties I bought and kept as long term holds, I have to date spent $32k of my own money, and that I got back a week later. My mentor told me at that time I was just being lazy, and he was right.

    One piece of advice for the newbie, in your angst to buy something do not pay to much, err on the conservative side. I am mostly low income, and this is where most newbies are born and for the most part die.

    If you go this route you need to be “Highly” rewarded with massive cash flow for providing housing to financially dysfunctional folks.

      • Tony,

        Not sure what you mean risks, I have zero of my own money in any of these properties.
        The area they are in is not dangerous, the area is pretty much 90% rentals very few owner occupied properties remain.

        The only true risk is that from other landlords installing tenants without proper screening.
        Low income people are like everybody else, they want a clean safe place to live. Unfortunately these areas also attract landlords who do not care how their tenant is impacting the area.

        The downside risk is a situation cropping up that chases tenants from your buildings, this is why the property needs to have massive cash flow and as little debt as possible.

        A property about a mile up the road, owned by a friend became totally vacant in one night. A body was found in a basement storage locker belonging to one of his tenants, it seems this upset all of the other tenants who quickly moved out.

        Great thing about these areas, the tenants are transient, so have short memories. A exterior paint job of a different color, and the place was filled up again when the local media moved on to the next story.
        This is a 6 unit building that my friend took subject to with the seller paying all costs of closing, including the buyers RE taxes. Can you say motivated seller?

  2. Matt Vanden Avond on

    Ben,
    I’m still early on my investing career, I have one long term hold and closing on another in October, but I was thinking I may have to start flipping just to have money to stay in buy and holds. You’ve inspired me to stay with what I know. I’ll have to do some research on your blogs. Thank You!
    Matt

    • Thanks so much Matt!

      There is certainly room for a flip here and there in a sophisticated portfolio. Once in a while, we come across a deal that is just stupid good. But, we need to allocate our time efficiently in my opinion, and if you take time to perfect flipping, then you are taking time away from understanding creative finance behind long-term hold acquisitions. I don’t believe in being all things to all people. Therefore – what do you want?

      Thanks so much for your comment!

  3. I use flip income to buy long term rentals all the time. It’s not for everyone, but nothing is. It’s takes time and experience to build up a flipping business, but once you understand the game it can be very rewarding. It is by no means a get rich quick business, newbies should not expect to make enough from flips to buy three rentals their first year.

    Everyone has different methods, styles and strategies when it comes to real estate. I think the individual person has to experiment to see what works best for them and what they enjoy the most.

    • Mark – you are not the norm You are a sophisticated investor and realtor with access to uncommon tools and knowledge. Yes – I agree it can, and in some cases should be done. But, not for the vast, vast, vast majority of people reading this in my opinion…

      Thanks so much for your comment!

  4. Hi Ben,
    Excellent thinking. Perhaps however it’s a matter of style and preference. Also, smaller landlords seem to live a bit boring life, and flippers are often the exciting bunch a cool cars. I’d say try both to find out your niche that makes you money and makes you excited.
    Cheers,
    Derek

    • hahaha Derek. One out of 1,000 drive the fancy cars, such as J Scott. The rest try to fill out for rent applications for my units lol

      But, in the spirit of “man has got to do what man has got to do” – I understand the need for people to go down that road…

      Thanks so much for commenting!

  5. Abdul Rasheed on

    Ben,

    Unlike others I did not fully understand the message of this post.

    1) Are you saying don’t waste time flipping but start using OPM to buy income-producing properties?

    2) No down payment, nothing from me is needed? How will I structure that deal, who owns the property or how much is my share of the ownership.

    Sorry for these simple questions.

    Abdul

    • Abdul,

      Most creative real estate deals are nothing down from the guy putting the deal together. This is a prolonged conversation, but understand the following axiom:

      In the world there are two types of people, those with ideas and those with money. It takes those two coming together to realize the ideas. It is extremely rare that an idea guy will have the money to realize his ideas – this would be a great blog post btw.

      If you have the money, your job is to find the ideas. Conversely, if you don’t have the money, then the only way to succeed is to have an entrepreneurial perspective on life and the knowledge to support this spirit. Do you? That’s what it takes!

      Figure out what you want – the money will come once you’ve paid the dues 🙂

      Thanks so much and hope this helps!

      • Abdul Rasheed on

        Thanks Ben. I gotta dig deep into this further though. I heard people (even here in BP forums/podcasts) frowning down on ‘no-money down’, ‘creative-financing’ ideas. Just like how you said (earlier comment) how only 1 in 1000 flippers are really successful, I am thinking even creative financing is not for everyone too. Not everyone is entrepreneurial or can come up with such great ideas or can attract money or other people’s attention. Your post as usual was excellent and got me thinking.

        • I can not argue with you. My calculation, however, was the following:

          If given an opportunity to be 1 out of 1,000 – would I want to be the flipper or the creative finance guy? You know how I chose. I simply feel that long-term holds is the answer to a lot of problems. It takes time – I do not drive fancy cars. I re-invest over 25% of my take-home pre-tax pay. I won’t say no to a killer flip if one comes along, but I am building a future for me and my family. It ain’t exciting. It’s grunt work. But, I know that I am putting equity on my balance sheet each and every month, and I am building CF. You must choose my friend 🙂

        • Abdul:
          “Not everyone is entrepreneurial or can come up with such great ideas or can attract money or other people’s attention.”

          That’s where coaching and training from successful investors comes in.

          To your success!

        • Karen,

          I appreciate the sentiment you expressed for Abdul’s benefit – I completely concur. We are on a BiggerPockets platform and it is close to blasphemy to insinuate that a coach could be a good thing. You got balls 🙂

          Here’s the thing. Success is not about tools and techniques. Success is a vision, a way of perceiving the world in which we live – it is an attitude. Frankly, most people that we interact with on a daily basis do not know success intimately – these people are the ones shaping our own attitudes. Success is a pattern of behavior, and those who want to be successful need to be around those who know success, with everything that entails.

          I love it when people assume that I haven’t paid for the privilege of having some pretty incredible people in my inner circle – I’ve paid. Boy – have I paid…

          Thanks a lot Karen!

        • Ben:
          Agreed! Success is a state of mind and has nothing to do with money. Everyone’s definition of success is personal.

          But you better believe everyone on BiggerPockets who is financially savy had some training somewhere. Creating financial wealth is an area to be studied and understood. We certainly don’t get it in k-12. We’ve paid a ton for our training and it’s been worth every dime!

          🙂

        • Abdul Rasheed on

          Thanks for that clarification Karen. I get that and realize the value of a good mentor. I am open for a good mentor. I figured out earlier on that it is hard to find a good one. I understand that nothing is free, the student need to bring value to the mentor (I think its Marty Boardman who broke it down for me in his first podcast). Thanks again for responding!

        • Abdul Rasheed on

          Ben and Karen, I gotta tell you, I am inspired. There is a whole different world out there…wait its me my attitude that needs to change! Thanks again.

      • Abdul Rasheed on

        Hi Ben,
        I didn’t mean to be argumentative! I hear you, respect you and I see that you are very experienced and successful. I have been learning from your podcast, e-books, blogs, blog post comments etc. Thank you, thank you for taking time to respond to me. it all helps.

        • Not at all Abdul. Don’t be afraid to reach out my friend. In fact, let me tell you something –

          When I first started and before I knew ANYTHING, I spoke to lots of CPAs. Most blew me off, but one “humored” me when I told her about all of the great things that I was going to accomplish. She may have laughed, but I didn’t see it…

          I could likely get CPA services done for less money, but I am still with her. Obviously she is capable as hell, but more importantly – she didn’t laugh!!! She should have laughed cause I made no sense, but she didn’t…

          Don’t be afraid of looking or sounding like a newbie – you are one. If you have strong faith in yourself, you WILL attract others who will have faith in you 🙂

  6. Like you, Ben, we buy houses all the time and never use our own money. In fact, there are plenty of houses out there that require no money to acquire – yours, mine, or anyone elses.

    Lots of people are trying to do this business with very little education and wonder why they’re struggling. Thanks for the kick-in-the-pants.

    🙂

    • Karen,

      I had a meeting this morning, and if there was a $500,000 deal on my desk right now that I wanted to bring down, I would bring it down. It wouldn’t be my money that does it, but it would be my knowledge 🙂 It all comes down to knowledge and track record!

      Karen, I must say. There are some people in this world who have the capacity to slice through the bull is if it were hot butter. More and more I am of the opinion that you are one of those – thank you!

  7. Karen and Ben…or anyone else who has experience buying properties with zero or little of your own money, could you elaborate on how it is done or recommend a good article, blog, or book? So far, the information I’ve found on this topic suggests that it is next to impossible to make it work for buy and hold strategies, or any other strategy for that matter.

    Thanks!

  8. Hi Ben,

    I’m learning a LOT from your posts. They challenge me to think outside the box. Thank you!

    Your advice about using OPM’s (up to 100%) may work for an experienced investor with a solid track record. But for newbies like myself, shouldn’t the first few deals be with some of our own money? I myself wouldn’t feel confident getting private money from family & friends to finance my REI from the get go. Even though I’m educating myself as much as possible, there’s really no substitute for experience, don’t you think?

    • Thanks very much for the feedback Emma!

      Your argument is flawed from the get-go in that it presumes options. The very essence of this article and the thought that I am putting forth is that we have too many options, which is the cause of confusion. What forces us to step out of ourselves and our comfort zones is lack of options – this creates clarity of purpose!

      Benism: Lack of Options creates clarity of Purpose.

      Are you there? Because if not you will find it increasingly difficult to succeed. Making lemonade out of lemons is the essence of entrepreneurialism in my view. I had no money to contribute, so I figured out a way to play without it. Your argument Emma is purely a mental contortion of sorts. If you have the money, and you want to use it to achieve your goals – do it! If you don’t have the money, then figure out a way to do without. It is hard; it carries risk; it forces you to step out of your comfort zone – all of that is true. But, if you’ve got no money to play with, your other option is not to play – is that an option Emma?

      • So does it follow that for someone who DOES have the option to use their own money – they should somehow remove their options in order to get clarity of purpose? 🙂

        Another point: the strategy that you used on your first deal worked for you due to a number of specific factors all coming together i.e. your market, the point in time in the real estate cycle that you started out on, your network/connections at that time, your personality & negotiation skills, the time/effort you were able to devote to REI etc. Other people’s situation may be vastly different so their ability to make similar highly leveraged and profitable deals may be hampered by various factors.

        Nonetheless, I completely agree that “necessity is the mother of invention”. That’s why I’m a big fan of your way of thinking…

        • Haha – Are you an attorney by chance Emma…? 🙂

          Removing cash from equation is not necessary, though, I’ll say it again – every enterprise has 2 driving forces – Idea & Funding. What I’ve experienced is that with track record comes access to funding. It is easier now obviously than it was 6 or 7 years ago. But ultimately, while it’s popular to blame lack of capital for inaction, money has nothing to do with anything…but, if you have some and you want to use it – by all means. Just get educated first!

          Thanks so much Emma and thank you for the encouragement – I guess I’ll keep writing…:)

  9. Michael Dorovich on

    ‘If given an opportunity to be 1 out of 1,000 – would I want to be the flipper or the creative finance guy? You know how I chose. I simply feel that long-term holds is the answer to a lot of problems.’

    Hi Ben, great article! Hope it is not too late to revive this topic. Regarding the quote above, are you referring to multifamilies rather than single families for long-term buy and hold? Is it not often easier to structure creative financing with a commercial owner than a homeowner?

    Thank you for a steady stream of awesome articles.

    • Short answer – yes Michael!

      I think that you are referring to owner financing, which is one tool. When we talk about creative finance, what we are really talking about is attracting capital. At times it comes from the owner, but most of the time it does not.

      So to answer your question, yes I believe that it is much easier to attract capital to solid commercial-sized deals…

      Thanks for reading Michael and I hope this helps 🙂

      • Michael Dorovich on

        Thanks Ben!

        Another silly question… when purchasing a property using this type of financing (syndication?) is it typical to be less than the majority owner of the property, and if so, what is typically the exit strategy?

        How does one buy and hold long term (and have the deciding vote) if one is say, 30% owner of a property?

        • Michael,

          It is typical to be less than majority in a syndicate. However, many times I am the majority owner, and often I am the sole owner – how’s that for an answer? Helps? lol

          Your question gets to the securitization process in real estate, which is a long conversation. But basically, money comes into a RE deal in one of two ways – either as a lien or equity. Whichever way you structure impacts your terms. Furthermore, money has different needs and looks for different things in an opportunity. You have to recognize the problem that needs addressed and use the vehicle that best suites everyone. Makes sense?

  10. Michael Dorovich on

    Thanks Ben. I think it makes sense, without asking too many questions at once.

    Lien vs equity sounds like debt vs equity, where debt investors get a percentage return and equity investors own a part of the building.

    Not sure how long term holds work with an equity structure, I’m guessing there are some things you only learn by being out there and doing it.

    I’m guessing you had a mentor when you got started?

  11. Ben,
    I love the article, but considering a large majority of your readers are newbies, I would think examples of gathering money for no down financing would be helpful. Outside of investors, bridge, special, and seller fiancing I have yet to find no money down train (unless you include LOCs). This one of those places people come to learn.

    • Pete,

      When you get out of bed tomorrow morning, after you pee, wash your hands, and brush your teeth, I want you to look into the mirror and ask the guy staring at you this question:

      What is it about you that should attract capital? Really think on it Pete – it’ll come to you. And if not, look me up 🙂

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