Flip or Rent?

General Real Estate Investing
1

New investors often wonder whether to focus on flipping properties or to concentrate on rentals. Here’s my take on the pros and cons of both.

FLIPPING

Flipping properties is an excellent way to rapidly begin making money with real estate investing. Flipping is a general term that can mean a variety of things. It can mean buying, rehabbing, and retailing a property to a homeowner. It can mean wholesaling a property to another investor. It can mean assigning a contract; sandwich lease options, etc. Basically, “flipping” means buying a property at a discount and then reselling it in a relatively short time for a profit.

PROS

The advantage of flipping is that a person can start quickly and literally turn this into a full time occupation almost overnight. By flipping only one or two properties a month, many people could replace the income from their JOB.

CONS

The disadvantages of flipping are two-fold. First, profits from flipping are treated as ordinary income. This means that you’ll pay both state and federal income tax which can literally eat up nearly half of your profit!!! Also, flipping is a lot like a job - if you stop working, the money stops! So, with flipping you must constantly be finding new deals - if the deals stop for any reason, you’re out of business.

RENTALS

Operating a rental business is self-explanatory. You buy properties and rent them out for a positive cash flow (profit).

PROS

The primary advantage of rental properties is that (in theory, at least) this is passive income. Once you’ve got the business going, you make money 24/7 without actually working. You can take a trip around the world and the money still comes in. The reality is somewhat different in that someone has to manage the rentals or at least manage the manager. Therefore, the management does require some degree of work to keep the business going.

With rentals, you make money at least 5 ways:

  1. You pick up equity when you buy - if you buy at a discount.
  2. You get the cash each month from the rents (assuming that you have a positive cash flow. This is money that you can live on.
  3. The tenants pay down the mortgages on your property, thereby always increasing your equity in the property you own.
  4. You get the appreciation of the property over time, which is historically 3% to 5% per year.
  5. Finally, you get the tax advantages of owning rentals. There are many deductions and you’re receiving passive income.

CONS

The BIG disadvantage of owning rental properties is PEOPLE! Dealing with tenants can be an absolute NIGHTMARE - enough so that many landlords get quickly burned out and sell their rental properties. This subject could be a book in itself, but the negatives associated with tenants should not be underestimated.

Another disadvantage of owning rentals is that it takes longer to become a full time landlord than to become a full time flipper. For most people, it will take years to build a large enough portfolio to support their family.

Sooooo, to flip or rent - THAT IS THE QUESTION!

Mike

2

Good note for the NooBies, Mike!

Keith

3

That is a great question. I have decided to have my business be rentals. I have chosen that because I want to someday quit working. I enjoy my job so I have stopped short of eating up all my time. I say that being a full time landlord is being a contractor, but instead of building houses, I just do makereadys of my rentals.

My wife keeps nagging me to flip pretty much every house I find. She sees the $10k - $20k, and I see the steady income I could get. I had a meeting last night with my mortgage broker and a property management company. We set up a plan to get me 20 single family houses (approximately $2million) in the next year and try to automanage them so that they are actually passive income. This is the amount of property that it will take to free me from this gilded cage I call my job. We are looking at doing 2 houses every 90 days (as inventory is available).

4

How do lease options fit into play? I have been told that sometimes they can be the bset bet because the tenant treats the home like theres many a time making the home incerase in value, and you dont haev to do repairs.

5

Why not combine both strategies to build a successful REI career?

Without enough equity to advance to buy & hold ( or lack of adequate amount of financing), i also agree with getting first rental businesses through sandwich lease-options.

6

The real answer is that there is no right answer. You have to do what works for you and your sensibilities.

I have wholesaled almost 70 transactions this year and am in the process of going over 100 for the year. I have rehabbed a few buildings, totaling about 25 rental units. All of which I have already sold.

With that being said, I do not do single family homes as I hate dealing with the buyers. I only do multi units, preferably 6 or more units. I am currently working on two 7 unit buildings. They are both upscale rentals in very high end parts of town. My goal is to have one building ready to be rented, then sell it, based on its prospective income. The other I am cleaning and gutting out, repairing the floors, roof, joists and then selling it.

I hate rentals because I hate tenants. I do not care, at this point, about the passive income. I would rather have the cash in pocket. Here is a scenario for my completed 7 unit. It will net, after all taxes and expenses, about $45,000 per year if I rent it, or I can sell it and net, before taxes, over $400,000. Even after taxes I still have $265,000 in my pocket, plus my return of my $100,000 down payment and my $70,000 rehab costs. This totals over $440,000 in my pocket. No headaches, I sleep at night and I have a ton of money for my next project.

Do this 2 or 3 times per year and it beats cash flow rentals. Just my opinion.

7

How do 1031 exchanges fit in with the flipping scenario…(or do they)?

I haven’t had a chance to research exactly what they are yet…but aren’t they some type of means where you can defer cap gains which you’d normally incur on a sale such as with a flip?

-Mike

8

mike, what do you think of a strategy of combining renting and flipping/rehabbing?

build your cash reserves a little while accumulating rentals slowly.

this is my intention at this point.

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Cecsix,

I think a combination of rentals and flipping/rehabbing is an excellent strategy!

Mike

10

Thank you for your very informative post, propertymanager!

11

seems you’ve found yourself a very lucrative JOB. the beauty of passive income is that it doesn’t require you to work more than 10 hrs/mo.

but i’m sure you’re having a whale of time and its doesn’t feel like work, but if you don’t show up, you’ll stop making money.

after a point you might want to consider some passive income as an insurance policy. there’s more to life than fixing houses!

just my 1 dollar and 2 cents [i started with 2 cents, but by flipping its appreciated :wink: ]

12

Hi again,

I believe the strategy from Masoning must be successful, if he has plenty of time ( it seems like Nickerson´s own strategy, which is commonly accepted as simply the best one to create wealth over time).
The combination of this strategy with some rents, will secure enough passive income for a living, but maybe the price to be paid will be an overall profitability fall.

Thanks PropertyManager for this excellent topic and for your high quality postings.

Regards,
Paulo

13

Just a footnote to my post:

I have tried rentals and I was not very good at them. They require a lot of upkeep and I just lose interest over time and the buildings suffer. I try to keep my buildings pristine. I find that after an undefined anount of time, I lose interest in any project or thing I am doing. I know myself and what works for me.

I sold all my rental buildings last summer. Rentals took up too much of my time.

14

I just wanted to say thanks for the original post - VERY helpful for us newcomers.

Christina

15

while that might be true, in the long run, you’re better off not selling.
inflation drives up the value of the house and the rents, keeping your initial investment the same. suppose you bought a $5k house in
1960 in CA with a 90% interest-only loan[i know they didnt have those back then]. today it would be worth $600k and would bring in annual
rents of 24k. quite a good return for a $500 investment!

16

Hi,

Sell/exchange to buy another one with more potential grow in equity value- Nickerson´s strategy- from whom i m a convinced follower ( after trying other strategies with practice trial).

Thanks,
Paulo

17

Y’ know if I didn’t have to do anything, 40k almost tax free would be a great goal.

Free time with friends and family is worth tons more than $.

If I’m gonna have to be on the hunt constantly, my satisfaction level goes up to like 300k.

Plus flipping gives an average joe who has saved up 15k, a way to start making real $ ( hopefully he’ll reinvest it).

I’m gonna try to do the two intermittently.

Rentals are great. I’m not gonna count on social security to be around when I’m old.

18

flipping is a great way to start. its low maintenance and if done properly can be low risk. i confess i’m using pre-constructions to boost my capital.

here’s some interesting info on it.
http://moneyshaker.blogspot.com/2005/09/how-to-invest-in-pre-construction.html

i was just arguing in favor of holding some stuff long term too. i’m not against flipping per se.

19

Hi there,

I don´t have nothing against flipping, since i also used that strategy in the past (with both results: good and bad ones).

I simply defend that we absolutely have to know what we are doing. And in my humble opinion, when we choose the naked flipping, we aren t investing at all. We are speculating, since this is based on the fool theory ( it will appear a fooler than myself that will pay more than i did for the same property).
And what about bear market, recessions, slow down economical periods and corrections on prices?

Investing must be another thing (more identical to the model proposed by the author i have mentioned). It must be an activity that can be self-sustainable, that can generate a positive cash-flow per si.
And this can t be accomplished by naked flipping, new construction or subdivision of raw land, nor through new urbanizations or new development projects, though these are some of the most profitable activities that i know in RE field.
Again, according to my humble discernment, we can only accomplish that, aim on the systematic growth of our initial capital and building wealth in the long run WHILE SELF-SUSTAINING OUR INVESTMENTS, by investing in INCOME-PRODUCING PROPERTY.

Thanks,
Paulo

20

Paulo,

I have to disagree with your assessment that flipping is speculating. By definition, flipping is something that is intended to occur over a very short period of time. I would not consider buying in an appreciating area with the intention of holding a year or more to be flipping. As you’ve said, this is just pure speculation.

I would consider flipping to be simply buying at a discount and then nearly immediately reselling at or below retail. In essense, you’re buying wholesale and selling retail. This is no more speculation than a supermarket buying groceries wholesale and selling retail. You make your money when you buy!

Mike