Flipping to support my buy and holds habit

[Drew Y.]

I decided last year to embark on a different strategy than my normal buy and hold investment strategy given that the market for buy and holds in California has become a lot more difficult where we have seen CAP rates move to less than 4 in some areas (San Francisco, Bay area) and only 6-7 in sub markets such as Sacramento and Stockton.

The math has been pretty straight forward. Flipping California properties 200-500 acquisition price points with normalized net returns of 15% has allowed us to capture between 30k-75K per project average to around 52.5K per project. This approximately gave us 250K to buy a passive purchase all cash and not have to worry about the interest payments, giving us the option of cash out refinancing or keeping our powder dry for other future acquisitions.

I most interesting thing about this decision though is it has change the mindset of my previous investment strategy. Moving to a dedicated flip 5, buy 1 buy strategy,  help me move away from a "transactional" mindset , flipping with no goal other than to increase the size and volume of flips (which was becoming exhausting) to a grower mindset. The flip 5 , buy 1 strategy has allowed me to take my profits off the table while intentional growing my passive income stream and reducing my portfolio risk. By planting these fixed seeds that are and continue to pay dividend, it stabilized my income flows and concurrently allowed me to build up reserves for additional purchases. 

We are currently working on 3 flips in california and 2 in florida right now and will be heading out of state for our next buy and hold. I am excited about this mental shift and it has been a refreshing way to change the transactional mindset that flipping had become. 

Free Advice: Create two LLC's one for flipping and one for your passive as this will prevent domino effect if one aspect fails and make sure you setup proper firewalls to prevent commingling funds.

[Drew Y.]

@Armin Nazarinia So currently I have 5 mortgages including a commercial mortgage. So my buy and hold portfolio does spill off a fair amount of excess cash reserves . Since interest rates on those loans are currently between 3.85-5.75%, I look at it via a cost benefit lens. 

For my buy and hold portfolio I have a few buckets that I put funds into. Percentages vary depending on your strategy but here is generally how I use my excess cash from this portfolio: 

Say you have extra 1,000 bucks after paying your monthly expenses and putting aside money for reserves: I split it out in the following manner. 

1) Additional rainy day fund for CAPEX and repairs. 10%

2) Additional Acquisitions budget 50% 

3) Additional Debt paydown 25% 

4) Stocks / Bonds/ Pay myself. 15% 

I definitely prescribe to the pay myself first , and have a more conservative approach when dealing with debt . But for me if if I didn't have a use for the cash then I would rather reduce my debt load quicker, which ultimately increases my cash flow as my that debt is paid down. Also you can always pull out a line of credit against buildings that have a strong equity balance if you need to tap it for liquidity.