Successful first flip...but should I switch to rentals?

Question

Aloha, we closed on our first flip and did very well (70k profit). But BP podcasts, headlines about successful real estate investors and just about everyone I talk to says- building a rental portfolio is the road to true wealth. However, my underlying concern has always been the horror stories of how these rental rockstars 'lost everything' during the recent crash. It's only a matter of time before the market levels out, dips or (hopefully doesn't) crash. So...questions:

How does one 'lose everything' during a crash/dip in the market?

I understand their property values decrease, but do their tenants all of the sudden stop paying rent? Are buy and hold investors banking on the fact their properties will appreciate and never depreciate?

How does one 'lose everything' during a crash/dip in the market?

I understand their property values decrease, but do their tenants all of the sudden stop paying rent?  Are buy and hold investors banking on the fact their properties will appreciate and never depreciate?

Hattie Dizmond · Answer

First, congratulations!

Second, you're in MO, so I sincerely doubt you're going to experience a true "bubble" in the market.  People "lose everything", when the market crashes - usually - do to financing.  Here's the deal...

If you finance the property in a sensible manner and with a fixed interest rate, it doesn't matter what the market does, as long as you can keep renters in it.  As long as your rental income at least covers the financing and cost of ownership, you're golden.  You may not be making money, but you're not losing it either.  Now, if the property values drop far enough, you may not be able to sell the property without taking a loss.  However, if it isn't costing you anything, why would you HAVE to sell?  Generally, you would only be forced to sell, if you had gotten into financial trouble in another area and needed to get your equity out of the property as a life raft.

I don't know what your market is like or what your financial situation is like.  However, unless you are sitting on a ton of capital, I would use flipping to fund your long-term hold acquisitions.  Personally, I would see if I could do a couple more great flips.  Then I would set aside enough of the profits to provide a down payment on my next flip and fund the rehab.  That way I'm not paying high hard dollar rates.  I would use the rest to put a down payment on my first long-term hold acquisition.  Then just lather, rinse and repeat.  Get yourself enough SFH holding and use them to leverage up to multifamily.

Don't look at it as either/or.  Figure out what your goals are and then leverage the different strategies to reach them.

Neil Henderson · Answer

@Dymond Shafer

1. Resist the urge to chase the shiny object. You've just had a VERY successful flip and probably learned more about how to do it than 50 hours of training with Fortune Builders. Why not work on getting even better at doing that? Work on building systems that will allow you to scale by having other people take over the low value tasks that you're having to do now.

2. I agree that, buy and hold is where it's at for the long term. House flipping is a transactional business and even the best flippers are going to either burn out or hit a threshold where they can't grow any more. Use the flipping to build up a war chest that you can deploy when it's sufficient to buy you some scale. See multiple doors below.

3. As far as losing everything, I think there are a couple of things you should remember and a couple of things you can do to mitigate your risk as best you can:

A. Remember that there is no national real estate market. Just because your market is over valued, doesn't mean Omaha, NE is overvalued.

B. Never bet on appreciation. It's the cherry on top.

C. Cash flow is your foundation. You'll almost always make more money with appreciation than with cash flow, but if appreciation is your sole play, if your margins are so thin, or non-existent, you're on shaky ground. Time is the investors best friend in Real Estate and Stocks. If you can wait out a market correction, you're in good shape. If your property isn't cash flowing and the market goes south, there's a good chance you're going to lose it or be forced to sell, which is where you'll get to see what it's like to be on the other side of the flipping business.

D. Multiple doors helps mitigate some risk. Four doors (Fourplex) or more gives you a small measure of stability. If you lose a tenant, you're not 100% vacant, you're only 25% vacant. It only gets better as you grow the number of doors. 100 units, one vacancy is only 1%.

Carson Wilcox · Answer

Over leverage, lose a few renters, negative cash flow, stop paying mortgages, Turd snowball begins...

As for "switching".  Sit down and write down your goals for the next 20 years in as small increments as you can see them.  Then figure out how to get there.  It is true rentals are the best way to long term cash flow and "wealth"  BUT how are you going to buy rentals that spit out cash... In most cases you cant leverage rentals 100% and make $...  so you will need some cash to put in... where are you going  to get it...?

It is very difficult with all the different ideas, methods, and stuff on BP to not SQUIRREL! and jump from thing to thing every time a podcast lands in your inbox.  Flips, now notes, now wholesaling ,now syndicating on and on..

Pick something "master" it and stick to it.

For example. I am new (15 months?).  I have done one flip, Started it Nov 2017 made great $.  My goal was 2 flips in the first year.

for the first flip to pay off all my debt sans cars.  Did that.  In escrow on my 2nd flip now.  If this one goes well, I will pay off old business debt and cars.

3rd flip on and on once my plate is clear I will save the proceeds and use it for flip $, and to have on hand once the RIGHT MF comes at me.  My goal is in 10 years to have $3000 in cash flow per month  from what I think will end up being 2 3/4plexes...  with a healthy cash position.  in 20, double or triple that by the time my wife and primary breadwinner retires.

Corby Goade · Answer

My two cents...if I am not selling a property, I don't care if it's worth a million dollars or a penny, property values are inconsequential to me for a place that I plan to keep indefinitely. Good management and communication will eliminate nearly all vacancies, which would be the only possible concern during a down market.

Yep, buy and hold is where it's at. Flipping is a great way to build capital, but it's risky, hard work and active income. You stop flipping, you stop making money. It's taxed as active income. With buy and hold, I collect rent when I am on vacation- it's like there's this amazing secret way to earn money that I've figured out. Take the profits from your flip and turn it in to passive rental income.

Thomas S. · Answer

Investors do not lose their properties by being over leveraged in a down turn in the market they lose due to insuficient positive cash flow and lack of reserve finances. How much you owe on a property is irrelevant. What matters is whether your finances can sustain a drop in rental rates and possibly above average vacancies.

It is a higher risk having only one property in a down turn than having multiple properties. This assumes that your multiple properties have a over all higher percentage of positive cash flow. When you buy right, with significant positive cash flow, you are better insulated from market shifts.

Whether you owe 50% or 100% on a property makes no difference if you can not afford the payments.

Also keep in mind when you have excessive equity in a property and the markets turn it is your own cash that is at risk not the banks money. Buying cash flow, by paying down a mortgage, is always expensive but doubly so when markets drop.

Kevin Sobilo · Answer

I would imagine in a rapidly appreciating market that rental prices may have also been rising to  a bubble. So, when a crash happens and you cannot keep renters in place at the same price you could have a problem if you over-leveraged (borrowed too much).

If you are aggressive and over-leverage and your rental income isn't durable in a down-turn you could end up with negative cashflow and no way to make up the shortfall. If your houses lose value you can't refi out any money to get you through the hard time.

I think as long as you don't over leverage rentals can be great. Borrowing big sums in a rapidly appreciating market might make someone feel like a mogul, but the fall from those highs probably hurts as well!

Stephen Shelton · Answer

I bought 3 cheap and unloved homes during the 2008-2016 economic problem, but now that that problem had been disposed and good times have returned I'm stuck! I've been trying to find a new property to renovate and rent but with housing prices rising so rapidly I can't find one that works, at least locally. I did find some viable properties in Daytona Beach, but the government overlords in that city aren't landlord-friendly so those properties can continue to rot for all I care.

I think with flipping all that really matters is a healthy economy. Even if housing standard or even dips slightly you can still profit: i.e. no matter what the price is so long as it at least isn't dropping rapidly you should at least make some profit. Local markets may differ, but nationally I think this is not a landlord friendly market.

Dymond Shafer · Answer

Thank you all for taking the time out to reply, giving great advice and sharing your insight!  We got lucky (ugly house in the perfect neighborhood) and took a big gamble on a courthouse steps auction.  Purchased for 21k, rehab was 30k and we got full asking at 125k.  Guess it's back to the drawing board to see which road we'll take.

Ryan Proffit · Answer

Congrats, you threw me off when you said Aloha, 70k is awesome for MO.  I would love to hear details of your flip.  I am also a Missouri resident.  Thanks.

Ryan

Successful first flip...but should I switch to rentals?

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