The answer is it depends…
Flipping houses is sexy. How do we know? There’s a reason why there is so many TV shows about it. All kinds of themes from junk houses to luxury flips to beach flip to whatever else, flipping is sexy. It’s cool. It’s fun…at least on TV it is when you get to play observer absent of all responsibility.
Funny thing is, you never see a TV show about buying rental properties. Sounds like a need we should fill. Can you imagine it now? Buy this house and drum roll…RENT IT! And get a few hundred bucks a month! I can see the top tier ratings now and executives at HGTV shaking in fear of ratings drops.
The reality is rental properties is rarely exciting. But it is quite a positive when it comes to a number of items such as cash flow, depreciation, amount of work involved to name a few when compared to flipping.
So the question is which should you do first?
The answer is it depends and here’s why.
If you want to flip a lot and then use proceeds to buy rentals, this strategy works as long as a couple of things are in play.
- You have liquidity or access to liquidity
- You have to market to find the deal or buy the deal from someone/something (MLS) handling the marketing for you.
- You have systems in place to manage the flip
- You get your numbers right
- You hire the right contractors
- You hire the right sales people
- You do the right market analysis
- You hope that nothing goes terribly wrong on the project
- You hope the market doesn’t change your valuation
After all of that, and by no means does that list include everything, you will hopefully be profitable to move to your goal of buying a cash flow assets. And don’t forget you will be taxed at a higher rate.
If you just want to buy and hold, it has it’s own list and there is some overlap.
- You need liquidity but depending on your acquisitions strategy, it could be a lot less than for a flip.
- You have to market to find the deal or buy the deal from someone/something (MLS) handling the marketing for you.
- You can choose to manage the rental yourself or hire a property manager.
- You get your numbers right
- You hire the right contractors if they are needed but chances are there is a lot less of them and the amount of work tends to be minimal by comparison
- You do the right market analysis for rents for the long haul
After all of that, and again there are other factors, you will hopefully have a cash flowing asset. But now you get to take advantage of tax benefits not available to you as a flipper.
So what is best?
If you are good at acquisitions, you may want to consider a couple of scenarios. When you are good at acquisitions:
- You can wholesale deals off to rehabbers. Get paid now instead of later and bypass all the headache of being a rehabber.
- You can use creative strategies to buy rentals to keep your ‘in’ very, very low allowing for a very low cost way to get into rental properties for cash flow.
- You can leverage private capital to buy rentals and refinance them into long term bank notes.
- You can leverage that same private capital to wholetail deals for higher wholesale profits that still avoid 95% of the issues with flipping.
So yes you can flip your way to buying cash flow rentals. But leveraging other avenues can get you to cash flow faster. Flipping is a viable strategy but I have learned many times over it is one of the riskiest of the real estate strategies because of the complexity and number of factors involved. Not to mention it is by far the most time consuming.
So if you love to flip to acquire rentals, go for it. We still flip as well albeit a lot less. It is viable but just understand what you are signing up for. If cash flow rentals is your end goal, consider some of the strategies above. You may get there much quicker and with a lot less headache plus more money in the bank.
Happy investing!