Beginner: Advice Needed on Flip VS Rent and Hold

[Pesi S.]

Hello,

I am a  beginner and would appreciate  guidance from experienced advisors on what is a good strategy for real estate. Flipping VS rent and hold for say 4-5 years. Is flipping comparable to day trading in stocks ?  I have a opportunity to buy a 2 BR 1.5 bath condo in Charlotte in a Cash only deal. I am getting it at 48000 plus around 10000 in rehab costs and around 1000-2000 in purchase closing costs. My agent says we can flip it for around 85000 in 3 months. Sale related costs of commissions, closing etc will be in range of 7%.

The flip calculator on Biggerpockets gives me a pretax profit of 16000 or around 24% ROI. The calculator I believe does not take into account the expenses you can write off or any depreciation you can claim. Is 24% pre tax a good return on a flip ? I am told the pre tax profit for a flip will be taxed at your personal income bracket which could reduce the total profit by another 20-24%.

When I run the numbers and try to compare it with a rental calculator to see whether renting and holding for 4-5 years makes more sense I get confused. The Cash on Cash ROI is low around 7% as this is all cash purchase and the cash flow is around 370 per month. In the section where it displays Yea1 to Year 30 columnar report the "Annualized Total Return %" keeps on dropping especially after 1st year which is extremely confusing even though the Total Profit Value is increasing.

 I am confused on how to compare these numbers VS Flip numbers. I have attached the charts and would appreciate if anyone can guide me on this

Flip

Thanks a lot.

[Todd Dexheimer]

A lot of great info out there already! You need to decide what your goals are and what you need. If you leverage rental properly and take advantages of tax benefits renting will beat flipping in ROI in most cases.

If you need quick cash, flipping is ok, but you will pay ordinary income tax on profits and the write offs are limited (no depreciation and the gov't treats you as a developer, not an investor). A $16,000 profit is low. There is not much room for error. In my flips I have found that it is easy to be off by $5-$10k.  Flipping in my experience - and I've done over 100 - is a job.

Rentals are my favorite, but I like 10+ unit deals. Single families are ok if you are willing to manage them and they are within 30 minutes of home. The great thing is the tax advantages, the availability of doing a 1031 exchange and leveraging your money. As shown above, your effective ROI is multiplied with a mortgage on the property. Rentals are going to bring you financial freedom, flips are a good tool to help you buy more rentals.