Real estate investor or house flipper, which one should you be?
It boils down to this, do you want to be self-employed and make fast cash with an active income or do you want to be financially independent in the long term and have an ongoing passive income?
Many savvy investors opt for a combination of the two.
An article from Lifestyles Unlimited explains the limitations of focusing only on house flipping in more detail but I’ve summarized the gist of it below:-
Let’s begin with the house flipper.
As a house flipper, you locate a property that you accurately assess as having an after repair value of $120,000.
You purchase it from a motivated seller for just $75,000, a great deal.
In this example, $20,000 in deferred maintenance is the reason for the favorable price.
So, you purchased the property for $75,000, you put $20,000 into the renovation and you have about $5000 in holding and closing costs.
Your total investment is $100,000.
You put it up for sale and manage to sell the property in a couple of months for $120,000, leaving you with a net profit of $20,000.
Congratulations you added value to the property and made a tidy profit.
Now contrast the investor.
Take your average 40 unit apartment complex or 20 single family homes, netting about $4000 per month, if run effectively.
So if you are a house flipper, and you fix up and sell a house profiting $20,000, how long does it take you to spend that money? Not very long at all.
Dealing is not investing. It is earned income so it is taxed differently.
After taxes, you are left with $12,000.
Just to live your monthly expenditure comes to say, $4000 a month. How long does it take to spend that $12,000? Just 3 months.
To get another $20,000 what do you have to do? You must go out and find another house and do it all over again.
This is active or earned income and you are taxed as such.
Now let’s look at the investor with the 20 rent houses and $4000 a month profit. If their bills are $4000 a month and every month those 20 rent houses hand them $4000 a month, when do they have to go back to work? They don’t.
This is the difference between financial independence and self-employment. A dealer or flipper is just self-employed. He or she is constantly working to get that next house and get that next quick fix.
The Pros of Flipping
This article is not about saying that investing is good and flipping is bad but it is to make one thing clear, flipping houses is active, not passive income.
There are, however, pros as well as the above-mentioned cons to flipping houses, here are two of the pros.
Substantial, Quick, Money
Flipping can bring in a rapid and large injection of cash.
If you can earn even close to $20,000 per flip and you have the capacity to turn them over very quickly, then you can make a healthy profit.
Minimal Long-Term Commitment
Holding on to a property as a rental investment obviously brings with it the responsibility of maintenance and management and the headache of dealing with tenants.
Even when you hire a property manager to take care of all this for you, dealing with that property management company can become your headache.
For those reasons and more many prefer the simplicity of flipping houses for quick cash rather than taking on a long-term commitment.
When it comes to long-term wealth it makes sense to buy and hold properties.
Still, many investors choose to continue flipping houses.
Experienced investors know how to weigh up a property and determine if it will serve them better with a long-term buy and hold strategy or if it would be ideal for a fix and flip opportunity.
Real estate agent, author, and entrepreneur, Mark Ferguson takes the following balanced approach,
“If I had to choose between buying more flips and buying more rentals, I would buy more rentals. I love the long-term cash flow, and if you refinance them you don’t have to have that much cash tied up in the property. I still flip houses because I love flipping and it generates a lot of income. I can use that income to buy more rentals. My market is also much easier to flip in right now because of the high prices.
I complete 10-15 fix and flips a year and I also own 16 long-term rental properties. One of the most common questions I hear is “how do I determine whether to fix and flip or rent a house.” Many people think it is easier to find a rental property than a fix and flip, but I find it harder to find rental properties. I have very strict guidelines that my rental properties must meet; cash flow, cash on cash return, location, condition, age and more. With fix and flips I want to make sure I can sell the house for a profit in less than 6 months and I am not worried about the location, cash flow or cash on cash return as much.”
Having taken a look at the positives and negatives of each type of real estate investment what conclusion can we draw?
Focusing on rental property seems like a no brainer if your goal is long-term or even generational wealth.
However, rental property investment requires serious investment capital and one way to generate that would be by fixing and flipping houses, so a combination approach seems to be ideal at least in the short term. Plus we learned that some properties just lend themselves more to one approach than the other so this combination approach may even be a wise long-term strategy.
In order to grow your rental property, you need to generate cash and house flipping can be the means by which you do that.
Experienced investors caution against focusing only on house flipping because it requires constant attention, time, workers and employees, and energy.
This can lead to a lot of cash but no passive income.
Why not consider flipping houses to fund your long term, passive income real estate investment strategy?