Should You Buy & Hold or Fix & Flip Properties? [Video!]

by | BiggerPockets.com

I’ve said it before and I’ll say it again—money makes money. Please don’t forget that. Now, you wouldn’t believe how many investors reach out to me every single day with $20,000 thinking I’m like David Copperfield and can turn that into a million dollars. It’s not going to happen, guys. Something I want you to keep in mind is that no one is going to help you out unless you help yourself. Every single time that I’ve put my destiny into someone else’s hands, I’ve ended up losing out big time. So don’t expect any favors from anyone, and don’t expect any handouts. Be the master of your fate and the captain of your soul. You should solely depend on yourself, on your hard work, on your efforts, on what you do every single day.

Related: 3 Valuable Lessons I Learned From Backing Out of My First Fix & Flip Deal

I want to share something that has been following me around on my whiteboard for the last four years at every office we move to. I’ve named it the “Dingo Law.” The first thing that the Dingo Law stipulates is to stay frugal and keep costs low. Second, never ask for favors. Third, keep it tight—meaning, better insight and control over your expenses. Furthermore, stalk your accounts like an eagle—dispute $2 charges. I’m telling you, it will prepare you for when you start doing millions and millions in revenue and in deals. Last but not least, minimize mistakes, meaning measure twice and cut once. Your job as real estate investors and business owners is to minimize risk and maximize profit.

Let’s Get Into it: Flipping vs. Buy & Hold

You’re going to have to sacrifice and do deals in a market where you can actually buy and flip a house with $50,000 to $100,000 in cash. If you’re on the east coast or west coast, I’m sorry—I’ve got no tips for you because those markets are super expensive. I moved from my home of Sydney, Australia to Toledo, Ohio to chase my dream. You have to make certain sacrifices in life if you want to achieve financial freedom and if you want to achieve success. So once you find a market where $50,000 to $100,000 will be sufficient to buy, fix, and flip a property, I want you to start educating yourself on that market.

Personally, I think you should not be buying and holding unless you have significant amounts of capital that will allow you to buy, fix, and hold or to buy and hold a property but still continue to buy, fix, and flip. Money makes money, and you need to stay liquid unless you are making millions and millions of dollars in your 9-5, you’re a dentist, you’re an attorney, or you’re a high executive at some company. Most of you are not those things. You’re making $50,000, $60,000, or $100,000 a year and working your butt off every single day. Be frugal. Save the $50,000 to $100,000 and then go into your first flip. Let’s just say hypothetically that you make $20,000 to $30,000 on that flip. In my opinion, that is very reasonable. Unless you are making 20 percent minimum margins on the flip, don’t even do the flip.

Related: How to Pay Zero Taxes, Minimize Risk & Keep Your Sanity While Live-In Flipping

Buy & Hold When You Can Afford to Forget That Money

So you invest $100,000 hypothetically, you make a $30,000 profit, and then you do it again—and again. Now you should have around $190,000. Use $50,000 to $90,000 of that money and buy, fix, and hold. Set it and forget it. Let’s start getting some residual income and cash flow. You still have $100,000 in liquid capital to continue buying, fixing, and flipping. Look, I’ve done over 450 deals, and I just started buying and holding around six months ago. I kept liquid, I invested in companies, and I’ve got three businesses right now.

Anyway, I think you get my drift here. I personally believe that you should buy, fix, and flip, continue making lump sum capital gains, and only buy, fix, and hold when you can afford to forget that money that you will use for buying, fixing, and holding. If you’re going to be using leverage, well, I don’t believe in leverage personally, but suit yourself.

Any questions or suggestions?

Please comment below. One thing I’d like to hear from you guys is topics you’d like to see covered in the future!

About Author

Engelo Rumora

Engelo Rumora “The Real Estate Dingo" is a successful property investor, motivational speaker and serial entrepreneur that quit school at the age of 14 and played professional soccer at 18. He is also a soon to be published author along with becoming a TV personality in his very own real estate house flipping show. To find out more go to engelorumora.com . Engelo Rumora has been involved in over 400 real estate deals and founded five businesses in Ohio. The most successful is Ohio Cashflow, a company that specializes in providing turnkey properties in several Ohio markets. The newest venture is List’n Sell Realty, a real estate brokerage based in Toledo, Ohio and soon to be known as the #1 discount broker in the country.

16 Comments

  1. Celia Rudder

    This is what I plan to do. I only have 30K to invest and no time soon will have 100K. I have researched markets for several years. I think I have a few where I can purchase under 20K and fix for around 10K and sell for around 60K. Yes, I know that is not a lot of profit but I am willing to make as low as 10K on a flip. One per quarter is my goal and then 2 per quarter starting in quarter 5. The most difficult part will be getting those properties. I am a believer in low-priced housing. It worked for my parents as landlords and it is still working for other investors. If you know of any markets where I can do this please share.

  2. Christian Reyes

    Great article and video, brother. Not specifically the strategy I am going with but I can definitely see the exponential growth that occurs when you flip logically, pool money, and then Buy and Hold.

    I see it as:
    Work your butt off (Flip)

    and then

    put it in YOUR bank (Your Hold).

    • Engelo Rumora

      Not sure how a J-O-B has anything to do with flipping ?

      If you hate your J-O-B you should start flipping as then you won’t be JOB (Just Over Broke).

      If things go wrong when flipping, then you can just go back to being “Just Over Broke” in your JOB

      Much success

  3. Why not find places at or slightly below market value, leverage 90% LTV, renovate slightly, get creative with leasing (i.e. renting to multiple people if multiple bedroom condo/house) and hold for 20-30 years? This way you have your cake and eat it to- you stay liquid, your tenants pay the PITI + generate CF for you on a monthly basis, and you take advantage of the many tax shelters real estate has to offer (depreciation expense, deductibility of interest/other expenses, etc.).

    When you flip properties your investment time horizon is very short, and you expose yourself to much more risk than if you buy and hold over the long-term. In order to get good deals flipping (30%+ return) you most likely have to go after properties that are uninhabitable. You won’t be able to finance these deals with traditional financing. You will either pay a hard money lender an arm and a leg in interest, or you will have to put 100% of your money down.

    There are too many factors that can go wrong here: Short term market changes leading to longer listing periods and property not selling, issues with contractors doing work incorrectly, permitting process taking too long, etc. On top of all of this, you need to be able to sell the property at a substantial profit because you will be incurring capital gains taxes and brokerage costs each time you transact. Even if you get fancy with 1031 exchanges, you’ll be hiring an accountant/lawyer to figure that out.

    You said you have done 450 deals in the 100k range.. When you sell you probably pay anywhere from 3-6% in transaction costs to REALTORS. So you have bought/sold $45M worth of real estate. If you listed the property for sale through an agent you incurred $1.35M- $2.7M in commission costs.

    I would much rather minimize the number of transactions and save/invest the $1-3M, minimize the amount down to benefit from leverage/without tying up capital, incur less in capital gains, incur less income taxes via depreciation expense deduction, and reduce overall risk.

    I’m surprised that you don’t believe in leverage. Leverage is necessary if the average Joe wants to build wealth. Too much leverage is dangerous, but the right amount is essential.

    Flipping is not easy, it is a lot of work for very unpredictable/speculative returns. Don’t work hard! Work smart. Buy and Hold!

    Kevin

    • Engelo Rumora

      Thanks for your detailed comment Kevin,

      A few things come to mind as I’m reading it:

      1) Investing in real estate shouldn’t be done as a “tax saving” strategy. Also, using 90% leverage on a deal is a super risky game for average “Joe” and is much riskier than just buying with cash flipping. “Joe” only has himself to blame and no other lenders will be blowing up his phone if he looses.

      2) “Short term market changes”? This is real estate investing and not stock trading. “Joe” can be in and out of deals making lump sum cash profits in 3-4 weeks if he has the operation down packed.

      3) You mention me doing 450 deals. Yep, and I have sold every single one of those myself thus not paying a dime to a realtor or a brokerage. I also own a brokerage and PM company so that comes in handy. Folks can sell their own flips directly via numerous online tech platforms. Or just get a license, join a 100% commission broker (like mine) and not pay any large fee’s when listing on the MLS.

      At the end of the day it comes down to working hard and not being average. Many people like “Joe” are just lazy and looking for overnight success or getting something for nothing.

      I suggest that folks get of their A$$ and do as many deals as they can. Make as much money as they can, as quickly as they can.

      Nothing is easy and all good things take time.

      It’s easy being average and very hard being AMAZING

      Work hard and smart

      Much success

  4. Hi Engelo,

    A few things to note:

    You mentioned that investing in real estate should not be done as a tax saving strategy. Real estate is one of the best tax shelters. Leveraging the tax benefits of depreciation, 1031 exchanges, deductibility of interest, repairs, etc. via buy and hold strategy can help to yield higher returns that other investments like stocks, bonds, and flipping real estate.

    80-90% leverage is not super risky. What is super risky is tying up 100% of your money into a property. Even if you have the money to do this, you should take out a loan to magnify your returns. (i.e. 10K on 10K investment is a much better return than 10k on 100k investment). Why use your own money, when you can get a loan, especially if it is only for 3-4 weeks.. Keep your money on the sidelines to cover any short fall in monthly CF.

    Short term market changes- look at 2006-2009.. You assume you can fix and resell in 3-4 weeks? There’s a lot of variability and speculation here and a lot of it is out of your control.

    Your 450 deals without paying a dime in brokerage costs. How do you compensate buyers agents? Even if you paid nothing in brokerage costs, your capital gains taxes are sky high. Let’s say you made 25% on every deal and purchased each property for 100k (as you mentioned in the blog).. That’s 11.25M revenue before costs. But since you are flipping houses every 3-4 weeks, short-term capital gains taxes at the rate of your ordinary income tax rate apply. It looks like you make a lot of money, so we’re probably talking 35%? Right? So we’re looking at around $3-4M in capital gains taxes. If you buy and hold, and play your cards right, those taxes are close to none..

    Taxes play a huge role in investing. Can you explain your tax strategy to minimize these capital gains taxes?

    Thanks,
    Kevin

    • Engelo Rumora

      Thanks Kevin,

      I can’t wait for the days I’m paying $10m in taxes because it will probably mean I’m making $100m in profit lol

      Capitalism at it’s finest and favors individuals and companies making money.

      The average folk look at how to save while the top 1% look at how to get 3x on ever dollar spent

      I suggest investors focus on making money and not to save on taxes.

      That’s just petty small scale thinking IMO

      I like to think big and focus on making as much money as possible and let my accounting team do the rest (Like how to minimize tax, etc…)

      We pay no capital gains taxes on a deal per deal basis as we do 100+ deals yearly so the IRS classifies this as revenue for our real estate investment company.

      11 full time staff along with a total of 50 people associated with our operation so the expenses tend to be high also.

      There are various other companies that come into play like a brokerage, property management, construction, etc…

      I’m sure you can tell that our operation is “larger scale” than what the ordinary investor would be running so in order to grow such a company I wasn’t able to assume things but rather work on certainties 🙂

      Much success

  5. Gotcha, I thought this blog post was intended for the average investor, (i.e. someone doing less than 100 deals a year). Seems more geared to the owners of larger real estate companies that can take advantage of economies of scale- with brokerage commissions, taxes, and other costs.

    • Engelo Rumora

      Thanks Kevin,

      It doesn’t seem like we are on the same page here 🙂

      The message here is for the “average investor” to work hard and make money.

      Fixing and flipping in my opinion is the quickest route

      Please feel feee to tune in to my next blog.

      Much success

  6. Chris Jensen

    Engelo, thanks for a great article. It really resonates with my thinking lately. My long-term goal is the BRRRR approach with commercial multi-family properties. But in the meantime, and as a way to build capital, I’ve been seriously looking at doing some fix-and-flips. My wife and I live in a market with plenty of under-$50k to under-$100k cash deals. The problem I’m finding is many that are listed are D-class properties in D-class neighborhoods. I’m curious how you started off finding your fix-and-flip properties, and how that process has evolved over time.

    • Engelo Rumora

      Thanks Chris,

      There is nothing wrong with any piece of real estate as long as the price is right.

      Start small and cheap and things will evolve from there as long as you stay obsesses with investing 😉

      I wish you guys much success

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