Business Focus With Constrained Resources

[Bryan Hancock]

On a separate thread today there is a debate about flipping versus buy-and-hold. The point was made that one should focus their investment strategy and that diversion from focus is a sign of an amateur. Others disagreed as did I.

With limited resources one is forced to do "non-optimal" activities to accumulate capital to do what one does best. The alternative is to invest in someone else's enterprise and let them take all of the upside that is skill-based. To me this represents an opportunity cost larger than investing in a manner that is "non optimal" or different from one's singular set of expertise.

Do you agree? Disagree? What is your experience with investing your time on activities that are profitable, but perhaps you don't consider yourself an expert at? How would you get to be an expert if you didn't practice with your own funds?

[Paul B.]

I think, "to each his own." Let the flippers flip, let the buy-and-holders buy and hold. Everyone has different goals, risk tolerances, time commitments, credit, access to capital, etc.

I think you can run those strategies in parallel, too. Sometime a great flip would make a lousy rental because the cap rate is just too low. If I buy a house for $140,000, put $20,000 into it, then sell it for $215,000, I might clear $30,000 pre-tax when all is said and done. That same house, however, might only rent for $1,200 a month, which is terrible.

I agree with Bryan, too, that flipping and renting is apples and oranges. Sure, in absolute dollars, the calculated ROI on a flip might be magnitudes higher than the current ROI on a rental. BUT, that is not at all taking into account the huge time commitment to a well managed flip. If you assign any sort of value to the time it takes to locate, negotiate, close on, renovate, market, and sell a flip, the numbers get a whole lot different.

I know in some cases flippers flip because they have no choice. They need chunks of cash to survive; a $100 or $200 cash flow each month isn't going to do them any good, even assuming that they had access to long term credit, which many of them probably do not.

I did a series of flips a few years back, and at the time I thought it was the greatest thing in the world. My very first deal, I net $25,000 plus at settlement, and I didn't put one cent of equity into the deal.

Thing is, it became harder and harder for me to find deals with that much fat in them, and when I started assigning a dollar value to my time (and paying the IRS their cut), I realized that the money wasn't as good as it looked.

Now I see the value in long term holds, and that is my new goal. However, if I encounter a potential flip that is too good to pass up, I'll do it...