Buy and Hold or Flip or Both?

Question

Hi Everyone :)

How did you decide if you wanted to deal with rentals or flips?

Ideally, I like the buy and hold strategy but may need a couple of flips to raise capital to purchase rental property. I plan to start small and stay pretty small. I forsee 4 properties/year max.

Our lender requires 25% down so unless I use some creative financing (which I am not familiar with) I will be limited to one property for the next 2 years until the rent coming in can be counted as qualifying income by the bank so we can get another loan.

Our primary residence will be paid off in 2017 so we can put together down payments much easier then.

Did anyone start with flips and transition to rentals for this same reason? What financing strategy worked for you?

TIA!

Jon Holdman · Answer

@Charlene S. this statement scares me to death:

If you're going to buy and fix up property, whether to rent or to sell "taking something back  to its shining glory" is absolutely not what you want to do.  This is the path to losses and bankruptcy.  You fix up real estate to make a profit.  Period.  Fixing up a rental to be nicer than any other in the neighborhood will not make you one penny more than just making it match the neighborhood.  Your focus must be on matching (not exceeding) the expectations of tenants in the area and on hardening your rentals against problems and damage.  Similarly if you over improve a fix and flip you will lose money.  Again, you have to match the expectations of buyers in the area where the property is located.  If one color of paint in plain rooms is the expectation you'll waste money with two tone paint and crown molding.

Over improving is one of the primary mistakes of new investors.  A good fix and flip deal will return your profits of perhaps 10% of the selling price.  A 15% profit on the selling price would be a great deal.  It is very, very easy for a new investor to overestimate the selling price.   A 5% error can eat half your profit.  Combine that with going over your rehab budget and a potentially profitable rehab becomes a loser.  New rehabbers (honestly, I don't consider rehabbing to be investing) often think "I'll just raise the price".  Nope, sorry, but what you paid and what you spent on rehab is completely irrelevant in setting the sales price.   Markets and (especially) appraisers set values.  Bringing a junker up to the standards of the area can yeild great profits.  Going past that point is almost always a complete waste of money.  Maybe an over improved property sells faster, but you won't get a higher price.  Even if you find a buyer who'll pay a higher price, the lender will kill the deal unless the buyer kicks in a lot of cash.

Similar for rentals.  New landlords sometimes think that if they make the place especially nice for the area they can charge a higher price.  It does not work.  If someone can pay more they will usually choose to live in a nicer area.  If you try to get above market rent you will end up with a crummy tenant.  They're the only one that will pay your overpriced unit.  Good tenants will have multiple options and will choose one that's a good deal.

Charlene S. · Answer

Hi Jon :)

Absolutely correct!

I am aware of all of the above so that is why "the idea" of it is tempting, as I said.

Unfortunately, the market does not support it so I will let my subs do the bare minimum...with top quality work, of course ;)

while I pick one little project to waste my time on while I also supervise with my whip LOL!

Thanks for your insight!

Charlene S. · Answer

Hi John :)

Thanks for your reply!

I plan to explore all of these options to see what fits with my circumstances.

Our home will be paid off in 2017 and these decisions will be much easier to make at that time. We have approx $275k in equity right now (so the bank wants to throw $$ at us) but even though we are stable financially, I still question tying a loan to my residence. But there is no gain without some level of risk.

I will continue learning and developing my plan of action...thanks again!

Charlene S. · Answer

Hi Bob :)

The properties taxes here in SC are ridiculous for coastal property. My parents home on St Helena in Beaufort also jumped 50% at the last assessment...but that is oceanfront.

I am targeted a tiny little town with property taxes to match ;)

Thanks for your reply!

Charlene S. · Answer

Jacob,

I feel the same way about managing the property myself. All of mine will be managed by my agent (who is also my mentor). He runs a property management co along with his realty so I know everything will be handled well.

I am into refinishing antiques and so the idea of taking something back to its shining glory is HUGE for me. Then to have a tenant or buyer who also appreciates it, that would be the icing on the cake! I love old houses but I am being careful because I know these big old beautiful homes can come with big hidden problems :)

This venture will be fulfilling a lifelong passion for many things all rolled into one. I have a team supporting me who has a similar vision so it is destined for success!

Thanks for the welcome :)

Charlene S. · Answer

Shawn,

what you plan to do is exactly what I am thinking. We close on our 1st property in 3 weeks and it will be a rental. I was blessed...we are getting it for approx. 50% below market (estimated repairs included).

My thinking now is to get 2 rentals for each flip. My husband and I can handle 25% dp and not have to dip into our 8 months of living expenses.

I have my subs ready and am ready to roll :)

It certainly is "work" but I am having so much fun during the process, it doesn't feel like work to me. But I am a SAHM and am not doing it for the money so I can afford to take a laid back approach, when I know most are not so fortunate. I count my blessings everyday!!

Thank you to everyone for your responses!!

Charlene

Ali Boone · Answer

You are asking about two completely different things that require different levels of work/involvement and accomplish different goals. So it depends on what you want to do and what you want to accomplish.

Maybe this can help-

www.biggerpockets.com/renewsblog/2013/10/26/investing-route-go/

Pete T. · Answer

I cant speak to flips, as I havent done any, but to me it seems risky as things are always found and even if you do everything right, you are dependent on a buyer.  Renting seems harder to mess up IMO.  You figure your cost, income, and purchase.  Find the right tenant (ie-tenant buyer) and it can work out good.

Shawn Thom · Answer

I started almost a year ago exactly.  My first was a flip because I was lured by the money.  The first one is always tough so I thought I'd cool my heals a little a try a rental.  That was tough too.  I'm on my 2nd rental and it is easier now that I found a better contractor.  I think many will agree a good contractor make a night and day difference.  So far on my 3rd house I talk to the contractor a few times a week and meet him onsite once per week for a payment.  It is working out well.

to answer your question, I had some cash so I spent some of it on rental. Now I am a little low so I am going to do a few flips to build up some more capital.  I am trying to figure out a good ratio, but i am thinking may be 2 flips then a rental then repeat as I am trying not to carry a lot of debt.

Jacob A. · Answer

@Charlene S.

For me the decision was a simple one.  It was less about money as it was more about personal preference.  At this point in my life I don't want anything to do with dealing with tenants.  I love the idea of taking an absolute crap hole of a house and restoring it to its former beauty or even beyond that to help bring the community to a better place.  Dealing with tenants and reading some of the stories on here scares the crap out of me.  Eventually, I'd love the passive income but at this point it's nowhere on my radar.

Buy and Hold or Flip or Both?

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