Buy and Hold investor vs Flipper - who will make more money in the next 10 years

[James Park]

I've always wondered which investor would come out on top in the next 10 years of investing.

1. Let's say that Julio buys up $50,000 SFRs and flips them for a profit for $25,000 - $40,000 in the Dallas market. He does anywhere from 5-8 transactions a year.

2. Let's say Mark is a buy and hold SFR investor and buy one property a year and finances each one of them with 30 year fixed and rents them for 10 years. So Mark will be holding 10 SFR by end of year 10.

In this case, who would come out ahead? Have you met more people who are multi-millionaires by flipping homes or buying and holding several properties. I know both strategies have its pros and cons.

[Bryan Hancock]

The beauty is that James can emulate Julio and Mark and DO BOTH. Then you get the best of both worlds. You can use some of the profits from your flips to fund discounted purchases of rentals with leverage.

Capitalization rates for rentals are generally under 15%. So in the absence of debt you can generally expect to make 15%- on your money. With debt you can leverage maybe 3:1 or so to ratchet this number up.

This number will almost undoubtedly be lower than the return (100%+) on equity for flips or new development deals if they are done properly. However, this number also does not carry as weighty of a time component and is harder to execute with a full-time position that provides stability needed in most people's life circumstances. The development and/or rehab business will erode your ability to keep a W2 income and thus this presents and tradeoff or opportunity cost.

I like this formula:

1. Have a steady W2 income to provide the stability and base needed to build your business

2. Execute rehab and development deals, combine these funds with the excess funds from item 1, and fund long-term rentals

3. Purchase a mix of SFRs and MFDs dispersed in both time purchased and locale to spread risk. Purchases should be made at a discount and provide at least break-even cash flow. The blend can also be between those purchased with upside (appreciation) and for cash flow

You can then do some tax sheltering to mask W2 income and keep more of what you earn. You can also set up separate entities and insurance to indemnify legal risk. Later on you can also start a private equity fund to raise cash from investors to help fund the capital needed for your growth.

If you do all of this skillfully you get stability and a machine that spits off cash to fund discounted rental purchases to provide for what will eventually be free and clear income to produce hammock cash flow in your later years. You can also exchange properties to avoid taxation as you trade up and capture more depreciation tax shields against income.

I don't look at it as a choice between good flavors of ice cream when I can have it all!