Best Strategy for 1 year Wealth Building for Buy&Hold, Fix&Flip and Wholesaling

[James Kandasamy]

I was trying to do some analysis on different RE strategies between Buy&Hold, Fix&Flip and Wholesaling. The assumption i made was

- 10 house with equity capture of 25K for both Buy/Hold and Fix&Flip.

- For Wholesaling, i assume that the amount of deals are 3x (30 deals) with 10K per deal fee.

- The analysis period is 1 year which means at the end of 1 year the Buy/Hold houses are sold to realize the equity capture.

- There is 100K of initial capital for Buy&Hold or Fix&Flip for acquisition, rehab and closing cost.

- Average cash out of pocket is 10K per house. Each house is 100K.

- Appreciation is 7% per year. Equity pay down is 1% since tenant will paying down the Buy&Hold houses. I assume 6% realtor fee and 2% closing cost for both Buy&Hold and Fix&Flip.

- The investor is paying around 30% tax rate currently.

- The taxation for selling Buy&Hold houses after 1 year is 15% Long term capital gain tax. Tax for Fix&Flip and wholesaling is around 40%. I assume 40% because the investor is paying 30% now and few more hundred thousands of active income (Fix&Flip, Wholesaling) would put the investor at max 40% tax rate.

The results

Buy&Hold

10 Houses, 25K/house equity. Total Accumulated after 1 year = 250K. After 1 year with 7% appreciation and 1% loan pay down by Tenant minus Realtor and Closing cost of 8%. After 15% Tax the cash out is 212.5K

Fix&Flip

10 Houses, 25K/house equity. Total Accumulated after 1 year = 250K. Minus Realtor and Closing cost of 8%. After 40% Tax the cash out is 142K

Wholesaling

30 Houses, 10K/house deal. Total Accumulated after 1 year = 300K. After 40% Tax the cash out is 180K.

My conclusion is,

if an investor has the 100K to spend on Real estate investing and are really good being a landlord and have a full time job where he does not need to take out money from the RE ventures for living, the best wealth building would Buy&Hold. I have not even added the capital depreciation tax benefits that the Buy&Hold investor gets.

Fix&Flip is the lowest but would probably be good if an investor is trying to accumulate cash in the short term. The tax % takes away a lot of equity.

Wholesaling is second best but It still does not beat Buy&Hold even though the ratio of cash accumulation is 3 to 1 in my analysis. The tax % takes away a lot of equity.

Maybe Buy&Hold is best strategy for this investor who has full time job, don't mind being a landlord and has initial capital.

So why are investors doing Fix&Flip and Wholesaling ? Short term gain. Cash accumulation ? No Initial Capital.

Thoughts ?

James

[Andy Collins]

I like the way your looking at this, but there are several problems with your assumptions, so lets look at some of them.

Your figuring selling the properties without any sales cost, I figure 10% sales cost.

7% annual appreciation,,sorry over the long run that's too high (ask someone that bought in 2006), if I get 3% appreciation I am very happy.

Your not taking into account finding the deals,,the biggest obstacles for many right now (or at least for myself), is finding good deals,,times have changed and its really hard to buy at the types of discounts we were use to a few years ago, and the type of discount your figuring in.

Average cash out of pocket is $10k,,,not sure where your getting financing, but those days are over,,you can, on occasion, get into a house for $10k, but that means your doing a double close with hard money,,so add that to the cost) ifyour doing straight financing figure 25% down plus rehab.

The cost of buying the property,,you will have roughly 4.5% (thats just a figure I use, others may have different estimates) for closing when purchasing, thats an additional cost going in.

Buy and hold is a GREAT way to go (ok its what I do), but holding for one year and selling you would be eaten up with expenses,,,,not that you couldn't make some money, but nothing like what your projecting