The Sad Truth About Flipping Houses

[Account Closed]

Hey Guys!

I wanted to share some knowledge I learned with you on this beautiful Saturday here in Fort Worth, Texas. I live only a couple blocks away from the TCU stadium and so I can hear when the big plays happen. This is a very electric atmosphere. Anyways, I have been into real estate investing for about 13 months. I have flipped 6 houses, built 3 houses and have 18 doors for rentals (just picked up another duplex). And I have been contemplating whether I am doing the right thing or not. But I found my solution through a mentor which is stated below. It was vague, but that was his intention. 

So I had a guy on BP ask me a series of questions about my flipping and holding strategy and this was my final message in the DMs. 

The last question he asked is if my strategy is short or long term?

"Long term. My strategy is all long term. You have heard before that real estate is not a get rich quick game. And the only way to truly become rich is through long term holdings. But, don't let that scare you, you get paid every month too!

The way I see it is this: If I flip a property and make 25k, I only make 25k, one time. But when I get a property for free (through financing), own 30% equity (free through financing), and charge a $1200 rent, I can make my money back in about 5 years. You do that 20 times in a year for 5 years, you have some serious cash flow and have enough earning power/assets to do anything you want. Ever.

This whole thought process started with one of my mentors, who is worth around $500m, asked me 6 months ago: "Beau, why are you selling your houses. Why would you want to give away net worth?"

And I thought about it. Best described in an example: say I make 25k off a 100k flip house. But through financing I can retain that house for FREE and have had a 30% equity, or 30k (increase your net worth). So technically, I am making LESS money up front selling the house (25k cash vs 30k net worth), and loosing infinite money down the road through rent and property increases.

The way to make your money back through retention is to slap a home equity line of credit on that house. Usually around 70-80% of your equity holding which would be 21-24k disposable money for business. So, what would you rather have? 25k profit up front OR 21-24k profit up front, a 30% equity stake and rent for many years to come?"

[J Scott]

Originally posted by @Account Closed:

And I thought about it. Best described in an example: say I make 25k off a 100k flip house. But through financing I can retain that house for FREE and have had a 30% equity, or 30k (increase your net worth). So technically, I am making LESS money up front selling the house (25k cash vs 30k net worth), and loosing infinite money down the road through rent and property increases.

Sounds like a guru pitch to me...  The only way you're losing "infinite money" down the road on the flip is if you're throwing away that $25K in profits.  If you invest that $25K in profits for -- let's say -- 10% compounded return, that $25K will be worth $40K in 5 years, $64K in 10 years and $168K in 20 years.  

Of course, you have to factor in taxes and you have to be able to make 10% compounded returns (which hopefully most good real estate investors and business people can do)...but, the math is still pretty simple.  If you need cash flow to sustain you as well, then just do the math for a longer compounding time.

Ultimately, there is more than one way to get rich/wealthy in this business.  If your mentor is telling you otherwise, find a new mentor...