Flipping Houses vs Owning Rental Real Estate

Posted on May 21, 2017 By

Should you flip your house or should you hold it for cash flow from a cash flowing tenant? That’s today’s video. Let’s dive in. Hey there, I’m Clayton Morris. I’m the founder of Morris Invest. I’m a longtime real estate investor. I flip houses, I own rental real estate, I’ve done hundreds of rehabs. And today we’re going to talk about whether or not you should flip houses or hold them for cash flow. But before we do that, I want to remind you to subscribe to my channel. If you’re not already a subscriber, hit the little Subscribe button down there. And hit the little bell, as well, because it’ll remind you, as soon as a new video is uploaded, you get that notification.

And you can jump in and watch it. So today we’re going to talk about the differences between flipping and cash flow, and where I come down on this very interesting, you know, very interesting niche. Now, I work with and I have flipped a lot of houses in my time, but I’ve also worked with a lot of flippers. I want to give you sort of an average year in the life of a typical flipper who maybe does five projects, OK– five projects in, let’s say, the New Jersey area of the country, which is what I know very well– and what a typical project, that doesn’t need like a build out, like they’re going to add a, you know, a second story to the house, they’re not going to add anything to the footprint of the house, takes about five, maybe six months of work to get a property like that up and running. So let’s say it’s a four-bedroom, two-bath house. They’re not adding anything to the footprint of the house. It can take them pulling permits, getting all their contractors in line, all their subcontractors in line, can really take four, five, six months of work.

And at the end of it, they may walk away with $40,000 $50,000, $60,000, $70,000 in positive return. That’s great. And that’s what they sold the house for. And they walk away with that kind of cash in their pocket. Wonderful. Congratulations. That’s fantastic. And that’s the allure of it, right, is that I’m going to make that much money. It’s going to take me that much amount of time. And I’m going to have that much cash in my pocket. A couple things to consider, of course, is that they’re going to pay taxes on that. They’re owning the property for less than a year. They’re going to pay capital gains on that. That’s a huge chunk of that cash taken right off the top in the profit department. And that house after it’s sold, is no longer producing cash for the owner of that house, the flipper of that house.

They’re paying back interest on loans that they probably took out, in order to do the, to do the construction on the property. And again they’re paying taxes on that money. To me, flipping is great. However, it is a transactional business, meaning it’s like a paycheck– except the paycheck takes five, six months to get. And you have to rinse and repeat and start all over again. You’re not on Easy Street. So when you’re halfway through that project, many of the flippers that I know would be reaching out and saying, hey, I’m ready for my next property. Do you have anything because this one’s about to wrap up in a month? We’re going to sell that one, but we need our next project.

So while you’re knee-deep in a project, you’re having to think about your next project. And you’re having to start to put the pieces in place for property number two because, again, it’s a paycheck. And you technically are living paycheck to paycheck with each flip. Now I just mentioned a property that was not increasing the footprint of the house. Now what about a property that is small and they want to increase the square footage of the house– where you need to pour a new foundation and you need to pull all kinds of permits for expanding the setback of the house? You need to check with the city to make sure that you’re not encroaching on areas of setbacks that you’re not allowed. Do you have to get a variance? All of these crazy things that you may have to consider if you’re increasing the square footage of the house. Additionally, if you’re doing a build-out on a property– that’s what that’s called– you could push your rehab beyond six weeks or six months into a year.

I’ve seen 5,000 square foot homes with flippers and builders that I work with personally, takes about a year to get them done. They’re big, they’re massive, they’ve got a poor foundations, all kinds of permits are required. And you’re pushing into that year mark to get it done and sold. Think about the holding costs on a property like that– the holding costs from the bank on your construction loan. And then think about how, you know again, having to pay those capital gains taxes when you’re done, then having to find your next project, and rinse and repeat. You’re getting one paycheck in that one year unless you’re running multiple projects at a time. But again it’s still a transactional business– flipping– which brings me to why I love Buy & Hold real estate. Buy & Hold real estate produces for you constantly. It produces for you over and over again. As you own that property, number one, you’ve increased your net worth by owning that property. Your overall– let’s say you buy a $50,000 house but it’s worth $60,000– your net worth is now $60,000 higher than it was before you owned it. You also have cash flow coming in every month from a cash flowing tenant who lives in the property.

So maybe it cash flows $700 a month, $800 a month. You’re going to have that for the rest of your life unless you sell the house. You also get to claim depreciation on your taxes. The tax benefits are way different than if you flip that house, right? Instead of paying capital gains taxes on flipping that house, now the government is helping you by being able to defer and offset the other income that you have coming into your house. Cash flowing rental real estate, when you compare it to flipping real estate, there is zero contest in my brain about this.

I am all about holding those properties for the rest of my life. And of course, you can assess your portfolio. Let’s say you have 30 rental properties. And one, maybe, isn’t performing as well as the other 29. And you’ve had it for five years. Fine, consider selling that one out of your portfolio. But I would even caution you against selling it because you’re going to pay capital gains taxes on that property. So what I would even rather have you do instead of selling it, is do some sort of a seller financing option with someone who might want to move and live in the property, or selling it to another landlord who would like to own rental property.

Therefore, you’re able to mitigate your capital gains taxes that you would have to pay by selling the property. So to me, rental real estate is the best way to build wealth in this country. And to me, it’s the best way to invest in real estate. It’s the best vehicle in order to create wealth. And remember, that property is going to produce for you every month. It’s producing streams of cash. When that guy’s flipping that house, it’s not doing anything for him. In fact, it’s sucking money out of his bank account. Every day that a contractor sleeps in, or every day that a contractor is sick, or they order drywall and it didn’t show up to the job site, that is money out of their pocket. Owning rental real estate every day is putting money in your pocket and making you wealthier. I’d love to hear your comments about this video, but first I want you to subscribe. Click the Subscribe button right here, the big circle, and subscribe to the channel.

But in the comment thread below, I’d love to hear your thoughts about this. Are you a flipper? Do you own rental real estate? Or were you considering one or the other? And again, nothing against my flipping friends. I love those guys. I just don’t have the stomach for it. And I would much rather have my net worth increase and my cash flow– basically letting me be financially free. That’s how I do it. And also check out our great play lists here on the channel, as well. We’ll see you back here next time with another great video, everyone. Take care..

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