Are you too Lazy to Flip Properties?
If you are reading this article I want you to ask yourself a key question. Are you ready to sign up for another full time job? Every aspect of real estate investing takes work, a well thought out plan and solid execution. But Flipping Houses successfully and consistently takes a lot of work and it is my experience that most folks under estimate the amount of work, focus and struggles the flipping market offers.
I will freely admit that we are not flippers so I buy the argument that our view point is skewed but it doesn’t make our opinion wrong. Let me be very clear about one thing, if flipping properties was truly the easiest path to long term wealth we would do it in a heartbeat.
Our general approach starts with the goal that we want to have a secure retirement and not be limited in any fashion so we want passive income that more than covers our monthly expenses so we can continue doing what we like to do. So we buy a distressed asset, repair and rent the property and in the current market we earn north of $300 a month cash flow per property.
Let’s take a minute and highlight how we see the major phases of both Buy and Hold vs Flip:
Property Identification:
In the current market it is much easier to find solid rental properties as owner occupants and FHA buyers seem to ignore any and all properties that may have one or two little issues. Things like corner lots or too close to railroad tracks, etc. Less competition means lower prices and in many cases a lot lower prices. Now ask yourself how much difference in rent would you expect? The answer is somewhere between $0 and $25 a month. So you can buy quality rentals for discounts and not give much up on the rental rates thus producing a nice yield on invested capital.
As for flipping houses you have to be focusing our where the buyers are looking which means competition is up. It also means every investor or flipper is focusing on a pretty finite area, price range, etc. As always more competition means higher prices and lower margin of safety.
In the end the buy and hold investor can use property negatives that scare owner occupants to secure cheap properties and high yields.
Purchase or Negotiations:
As the above phase indicates the Property Flipper has to act fast as competition is crazy and bidding wars are fierce. I suspect in many cases any margin of safety is squeezed out of the property as the bidding war gets to the second or third round. While the Buy and Hold investor has found a property that no owner occupant or flipper wants and thus has lower competition and can even hold firm on their initial offer. We do it all the time with about a 50% success rate.
Make Ready/Repair:
Guess which buyer has to sweat the details of make ready and repairs more? In a buyer’s market you really have to make your property pop and stand out from the crowd which means you have to go the extra mile and expense to insure interest. This is risky because once the money is spent you have no guarantee of the return.
The Buy and Hold investor simply fixes any and all safety issues, paints the unit, puts in new (cheap) carpet and cleans up the yards and fences and boom they are done. I don’t have any exact numbers but if we took the same property in the same condition my estimates says the Flipper would spend at least twice as much as the buy and hold investor if not more.
We should not forget the time element in these scenarios as time is money and holding costs are brutal for flippers with hard money loans. Which do you think takes more time and involves more contractors and subs? Is it the fancy remodel that is being flipped or the simple make ready that is going to be a rental? The answer should be obvious.
Lease or Sell:
Now for the moment of truth you have done all the work and put a sign in the ground, either for sale or for rent. In the current market a nice rental house will be rented inside of two weeks (and most of ours are rented before the remodel is complete). The house being flipped can sit for months as the supply of houses for sale is not coming down in the short term.
So the buy and hold investor will start earning a return much faster than the flipper with a far more certainty on the rate of return. The flipper could hit a homerun and sell the place in two weeks and close without issue 30 days later but then again they could hold it for 6 months as well.
Post Lease/Sale:
Okay so you finally got the place leased or sold now what? Well the Flipper first has to pay taxes on the profits and they will be taxed at least at the ordinary income level and even higher if they are seen as a dealer. While the buy and hold investor is receiving passive income from the monthly rents. Not to mention the fact that the Buy and Hold investor now owns a much more valuable asset and thus can go out and look to secure a loan for a portion of the equity they built by turning a distressed asset into an income producing asset. Guess what the tax rate is on a loan? Answer Zero!!!
As the phases above indicate we believe that the current market greatly favors the buy and hold investor and that flipping houses in such a buyer’s market is fraught with risks. In the end if you chose to flip houses please go in with your eyes wide open. Also remember one successful flip doesn’t mean the second one will be equally successful so stay vigilant and focused on the task at hand.
That said we are convinced that sometime in the next 10 years it will become advantageous to sell/flip but until then we will just keep buying our rental houses (aka Little Green Houses).
