This Year, I’m Focusing on Rental Properties Over Flips: Here’s Why

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I bought three rental properties in 2014, but my goal was to buy six. I am not super disappointed that I only bought three rental properties because I was able to accomplish many more things. I flipped 12 houses, sold over 150 houses on my real estate team, continued to grow my blog to over 170,000 views a month and I bought a Lamborghini.

After reviewing my year and my goals, I decided I needed to focus much more on buying rental properties. Flipping is great for short-term income, but once you sell a house, it is gone and no longer makes you money.

How I Bought, Rehabbed, Rented, Refinanced, and Repeated for 14 Rental Properties

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Why Rental Properties Make a Great Choice

I love rental properties for a number of reasons, but the main reason is the cash flow. I have 11 rentals and about $6,000 a month coming in from those rentals after all expenses are accounted for. That $6,000 is after accounting for vacancies and maintenance. It has been awesome to see my bank accounts grow from my rentals. Now that I have my team managing the properties for me, I do almost nothing for that money.

Early in 2014 I paid off my first rental property by using “the snowball effect.” I took all my cash flow from one rental property and used it to pay off one mortgage. After I paid off that house, I decided to save up my cash flow instead of using it to pay off another mortgage. I did that to increase the amount of rental properties I could buy. I was able to save much more money, but I ended up using much of that money to flip houses instead of buy rentals.

Why Did I Use the Money for Flipping?

I used the money to flip more houses because I was finding great deals to flip. I have strict buying criteria for my rentals; I want them in certain areas, for certain prices, with certain cash flow, and they have been hard to find. I have been able to find more flips because I am not as concerned about the location or cash flow since I am selling these homes. I also thought it would be a great idea to build up capital with flipping so I could buy more rentals in the future.

Related: Think Bigger: How to Buy 100 Rental Properties in 2015

The problem was I kept buying flips! I had 10 at one time, and I have 8 now. When I had 10 flips at once, I simply did not have the contractors to fix the homes in a timely manner. My financing is cheap for flips at 5.25% and 1 point, but it only covers 75 percent of the purchase price. That leaves me to pay for the down payment and repairs on the flips, which at one time was almost $500,000. Luckily I had some private money and a line of credit to cover some of these costs, but I still had a ton of cash locked up in these houses.

Flipping is a great way to make money, but the longer you hold them, the more risk there is that the market could turn. Flipping has made me more capital, but I am just now realizing that capital, and I am making myself hold off on buying more flips!

A Quick Buck Now or Two Bucks in the Future?

Even though the flipping made me a quick buck, the rentals make more money over time. I may make $25,000 on a flip, which is more than $6,000 a year one rental property may make me. But that difference is not as large as it seems. For one thing, I have to pay ordinary income taxes with the flip, and on the rental I have many tax advantages working for me like depreciation. I may be paying 30 percent or more in taxes on the flip, but less than half that on the rental property. Now my profits are $15,000 versus $5,000.

I also am paying equity down on my rentals, seeing appreciation and rent increases. Another big factor is the time it takes to flip versus the time it takes to own a rental. Hands down, the rental property wins.

Will I Stop Flipping?

I am not going to stop flipping, but I am going to tone it down. I think I want to have a maximum of seven flips at one time because it takes too much time to fix up houses to hold more properties than seven. I wrote about wholesaling a couple of weeks ago, and if I see an influx of deals come my way, I will have no problem wholesaling them to keep from spending all my capital on flips.

Related: The Ultimate Guide to Analyzing Rental Properties (+ Free PDF!)

My Goal for 2015

In 2015 I want to buy at least seven more rental properties. If I can buy seven more rentals in 2015 with similar cash flow to what I have now, I will be making close to $100,000 a year from my rentals. To me that is quite a milestone and with the income from my blog, I could actually quit flipping, quit selling houses and focus on a much less stressful work life. However, I tend to like expensive things like cars, and I don’t foresee myself slowing down too much in the future.

Now it’s your turn to weigh in: What avenue of real estate are you focusing on this year? What goals have you set for yourself in 2015?

Let’s talk in the comments section below!

About Author

Mark Ferguson

Mark is Real Estate Broker and investor in Greeley, Colorado. Mark invests in long-term SFR rental homes and also does 8-15 fix and flips a year. Mark started a blog this year that focuses on investing in long term single family rentals.

32 Comments

  1. Joaquin Marte

    Happy New Years @Mark Ferguson
    Congrats on the Lamborghini that’s a huge Accomplishment . I’m Gonna start flipping and building up Capitol. my goal for this year is to pull the trigger and complete my first deal, and get the ball rolling.

  2. Gordon Cuffe

    wow 5.25% for flips is incredible. That must not be private money. Your lender doesn’t care that the house needs work? I have been using 11% private money on flips. Can you share your lender source to see if they lend in CA?

  3. 5.25% and 1 point is a pretty amazing rate for financing. Is this a private investor or some sort of bank line of credit? I typically get 10% and am completely satisfied. Yes flipping takes up a lot of time, and I too am looking to wholesale more. Are you planning on paying off your rental mortgage from your flipping income?

  4. There is nothing more powerful in buiilding your wealth and securing your future and that of following generations than owning free and clear properties. To start with set your goal at 10 properties, in most cases I think that would be enough passive income to stop your day job if you choose to do so. That is my definition of being wealthy. If 10 does not meet your goals add one a year for as long as you want or need to do.

  5. Randy Smith

    Mark, thanks for sharing. I purchased 10 rental properties in 2011-2012. At this time, our gross income is $148,800. After all expenses our net is 45%. This includes using a full time property manage. These homes were purchased at the bottom of the market in our area. This has been a good experience for us. Good luck! Wish I had your car 🙂

  6. David Semer

    Mark Great article. I have to agree 5.25% and 1 pt are great number for flipping. Thanks for the article. I have only done rehabs but not to your level Mark but I feel like you have to recreate the business every year by flipping. I feel like rentals will take the business to the next level with income coming in. Just have to find that first one.

  7. Brandon Kelly

    Mark, nice work. I fell into the RE investing realm by turning our first home into a rental (after a failed attempt of sale during the recession). It wasn’t until a couple of years later that the board smacked me over the head, and I was able to see into the future – i.e. “Free & clear” and “cash flow”. It was at that time that I caught the bug. “I must get more”. Well, saving the boring way, we were able to get another in February this past year. “Okay, now this is moving too slow.” That said, I found some partners, created a couple of partnerships, and am about a week or two away from doing my first couple of flips… …like many others, for the sole purpose of gaining capital quickly in order to debt snowball and buy more rentals. Anyways, I follow your articles, and am jealous of your cars… …being a car guy myself, I’m currently designing/permitting an oversized garage (with lift) for the current “toys”. Good luck to you (and everyone else on this thread) in 2015!!!!

  8. William Allen

    Mark, if you want more rental properties why not rehab the property and keep it as a rental if the numbers work? Do a cash out refi after the rehab and you have a rental with no money down on the house. I’m suspecting the answer is going to be that the flips don’t fit your criteria or locations but figured I would ask. I just finished my first flip a few months ago and that was my backup plan (cash out refi and keep it as a rental).

  9. Aaron Junck

    Great article!

    I am curious to how you wholesale when your a realtor? Or did I misunderstand when you mentioned your real estate team. How do you tell a client you will give them 60k cash for a place and then turn around and call an investor and say I have a great property for you for 70k? I am sure I am not understanding you correctly. Could you explain?

    Thanks much and congrats on getting your lamborghini!!!

    • Mark Ferguson

      When ever I talk to potential sellers who I want to buy from I give them two options.
      1. list the house on MLS for this much
      2. sell the house to me for this much
      I also have the sellers sign a document saying I am buying below market value and may make a profit on it.
      Some people want a quick buck or don’t want to list it for whatever reason. Most the houses I would wholesale would be MLS deals as well so they are not my clients.

  10. Mike S

    The thing I love about rentals is the ability to scale your operation. Once you’re over the hump of your first few units, it become self sustaining and very little if any additional capital is needed.

  11. Vincent Crane

    Mark this is a really great article, thanks for sharing. I definitely hope to follow a similar path myself by building up a long term rental portfolio and generating some capital with flips. I was curious, how did you get started with your first and second property? Just wondering the building blocks of this and how it began (for a young one like me it’s great to see the path). Thanks so much again, definitely enjoyed this one.

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