Rentals vs Flips - Posted by Arnold

Posted by Sean on March 14, 2006 at 11:42:53:

Flipping though is not building that residual income… you can make 300k a year selling car parts and do the same thing, but you have to keep working to keep that cash flowing until you have enough investments to pay you enough to live off of.

Flipping didn’t build the wealth, it gave you cash,the investing of the income builds the wealth.

Buy and hold builds wealth from the very first hold, assuming you do it right.

There are many ways to skin a cat… but as a wealth building tool, flipping produces income, as long as you are working… holding creates residual income and wealth.

Best approach as far as I’m concerned is a combination of both… flip the dogs, and use the profits to pay off the gems, own 10-20 gems free and clear, and you no longer have to work… but the goal is always free and clear holds… not more flips, just for flippings sake.

Rentals vs Flips - Posted by Arnold

Posted by Arnold on March 10, 2006 at 22:46:58:

Which is the better choice today for building wealth?

Re: Rentals vs Flips - Posted by Sean

Posted by Sean on March 13, 2006 at 20:43:31:

Flipping builds cash… HOLDING builds wealth, long and short of it.

do both - Posted by Gene

Posted by Gene on March 13, 2006 at 16:30:50:

Starting out its best to pick one…but once you get going, do both.

I think flipping is best for starting out. Long term rentals is a hard way to start. Expenses are more than you think they will be. Quick flips (not full on rehab) can be pretty easy and can build up your buisness faster.

I have some properties that are ideal as long term rentals, so I keep them. Many properties I do not want to hold so I flip them. To me its all about finding good deals. Then figuring out what the best exit stratagy is. I never want to limit myself to a particular type of deal, or youll pass up so much.


Re: Rentals vs Flips - Posted by Frank Chin

Posted by Frank Chin on March 13, 2006 at 07:41:49:


Depends on who you are, what you want to do. John gave you a very detailed answer below, and let me add mine.

I’ve gotten fat and happy doing rentals because I live in a high appreciation area. Three families that go for 150K in 1980, goes for 850K in 2006. By owning just 3 or 4 of these, over 20 years, you built up tremendous wealth. While the cash flow isn’t the greatest if you still have a mortgage, $1,500 to $2,000 cash flow per month per building is nothing to sneeze at either, after 20 years.

My dad owned only ONE commercial property, paid off when he retired over 20 years ago, and that cash flows over 5K a month. For someone who’s not into fancy cars, clothes, he banks all of this, and invest all of it into tax free municpals. In his case, why would he have to do flips???

And if you have a daytime job, a main business, rentals are a lucrative side business. But if you want to make 100K OR MORE in year 1,2 and 3, you’ll have to do flips, providing you can do it profitably, and consistently in your area.

Yet, I tried doing flips here. I found out its really a FULL TIME business if you want to make a go of it, you’ll have to be on the constant lookout to do deals. On top of which, you’ll need a decent sales personality. So what you really traded is a “9 to 5” job in a cubicle, to maybe “9 to 5” running around looking for deals.

Bottomline, it depends on what you want out of life.

Frank Chin

Re: Rentals vs Flips - Posted by John Corey

Posted by John Corey on March 13, 2006 at 04:32:03:


Define wealth.

Some thing wealth is cash in the bank and no debt. Others things it is flash cars in the driveway (leased) in front of the big house (leased) with fancy cloths (paid for with a credit card).

Flips produce short term income. Rentals might produce long term income (capital gains) while producing short term income (rental income after expenses).

Cash is cash. How much time you have to put in to get it sometimes separates what some call retirement from a job. Passive income, where you invested no time to earn the income is a possible objective. Flips will not produce this sort of passive income. Once you stop flipping the income stops. If you use flips to build up cash to then invest in something (RE - rentals, stock market, bonds, annuities, notes, etc) so that the investment then produces passive income you have found a way to convert income from a job (flips or a normal day job) to passive income.

Rentals can be a lot of work once you buy them if we are talking single family residences (SFR). If you are a TIC owner of a shopping mall then the income is very passive but you will not see much growth.

Simple answer. Use flips to make some short term cash while you learn about RE. Use Rentals as a way to reduce the tax impact and to retain some of the good deals you find when searching for flips. Focus on rentals that cash flow and will support their full costs with zero appreciation assumed. Such rentals will never create pressure to sell from negative months, etc. When appreciation does happen think of it as winning the lottery. You can not win the lottery if you do not own a ticket. You can not benefit from RE appreciation if you own no rentals. The tenant keeps you in the game because they are paying all the holding costs.

John Corey

Re: Rentals vs Flips - Posted by Pat

Posted by Pat on March 12, 2006 at 19:54:37:

You need 2 things in this business…CASH and CASH FLOW. I’m sure you can figure out which one provides which. Both provide wealth but one is perhaps more fleeting than the other.

Re: Rentals vs Flips - Posted by Jim(Fl)

Posted by Jim(Fl) on March 11, 2006 at 06:05:39:

What are you talking about? Sometimes people ask some silly questions. Both methods build wealth. This is not theoretical physics. Just pick one and START WORKING.

Re: Rentals vs Flips - Posted by Wendy

Posted by Wendy on March 13, 2006 at 20:58:31:

You do enough flipping and it builds wealth as well.

Re: Rentals vs Flips - Posted by Steven

Posted by Steven on March 12, 2006 at 23:18:55:


You are an a$$.

Re: Rentals vs Flips - Posted by Larry

Posted by Larry on March 11, 2006 at 18:40:15:

It is probably one of the most asked question for new people. They are just trying to figure out which direction to go. It can be overwhelming. Give him a break.

Personally I hate tenants and dread dealing with them. Also, don’t believe that property values will keep going up forever and make you rich some day. They may, or may not. Therefore I prefer flips. But a good balance woud be the best thing I believe. Once you have all debt paid off and some money in the bank, then flip a house and put the profit towards a cash flowing rental in a good up and coming neighborhood. But remember that when you own rentals the equity is an asset but the houses are a liability as well. Many landlords are equity rich and cash poor. 10 years of cash flow can evaporate overnight when you have to replace a sewer pipe. When you believe you have reched the top of a market, don’t get greedy. Consider selling them and re buying when the market drops. Just my 2 cents.

Re: Rentals vs Flips - Posted by Sean

Posted by Sean on March 13, 2006 at 21:15:05:

Flipping is a job, you stop working the money stops flowing… holding the cash comes in month after month.

Flipping is a JOB, a potentially well paying job, but a JOB.

Re: Rentals vs Flips - Posted by Greg (FL)

Posted by Greg (FL) on March 13, 2006 at 21:44:22:

Hi Steven,
I think the positive that Jim is trying to contribute here is “just get started”… You don’t need to know EVERYTHING to do that. You can learn and ad lib as you go, building your own special business model.

I’m sorry. What was your positive contribution?

Best Wishes,

Re: Rentals vs Flips - Posted by John Corey

Posted by John Corey on March 13, 2006 at 04:23:09:


I get the impression that you have not been investing in RE for that long and that limited exposure to rentals. This is not a good or bad thing, just a reflection of what I take away from your comments.

Lets start by assuming that I agree with some of your points. Getting started is difficult, building cash is good and ultimately a balance is important.

What really separates the flipping from the rentals is the amount of work necessary to receive a check each month. The presumption with rentals is that you can get to the stage where you can receive a check even on days when you do not get out of bed.

Property management is a big issue. The type of property and how much you own can determine how hands-on the owner is when it comes to property management. A NNN commercial property will produce a check each month for 5 years or longer with no phone calls and no management. How to get to the point where a NNN commercial property makes sense is a long story and best covered over in the commercial forum.

I would make the following observations based on my experience of owning rentals in different states and countries.

  1. Assume zero appreciation. If you have a repayment (amortized) mortgage the tenant is effectively paying off the debt. Hence you will have an asset (the property) that is debt free and producing monthly income at some point in the future. I call it a savings account into which the tenant deposits and the owner gets to make all the withdrawals. And the tenant is fine with the deal.

  2. The government likes being a silent partner. They will let you buy and sell without paying any taxes if you continue to re-invest. They will let you shelter some of your present income from a job or other activities if you manage some rentals. Not a bad deal as most people do not have any similar alternative.

  3. A property has to cash flow at more than the PITI. It needs to produce a surplus so that you can fund things that break or otherwise wear out. Sewer pipes are included in this model. Once you have 10 or more units you can use the surplus from the other 9 to cover a vacancy, etc.

The key message is RE as a business has to cover all its costs over the effective lifetime for RE to make sense in a zero appreciation environment. SFR property rarely does this but it can. Hence many RE investors assume positive appreciation and only look for break even cash flow. The comments you made about equity rich but cash flow poor fit when people are counting on appreciation rather than thinking appreciation is a bonus. Such investors really should restructure or move to a better cash flow position. That might mean flipping a few to build up a cash reserve or to reduce the LTV on the rentals so they do produce better cash flow.

Not all equity is good equity. Some is more like dead equity. Equity you can not tap, produces no real income and otherwise just looks good on paper is dead equity. If we are comparing RE to real businesses then we would expect a company to invest to make money. That investment is equity. There are very few business sectors that can even dream of getting 100% leverage. Hence having some equity tied up might just be a normal business practice. Getting a good return on that equity is important.

As Ray Alcorn will tell people, if you want to invest in commercial expect to have equity (cash normally) in the deal. Rarely will you see less than 20% equity in a commercial deal. It is residential where people think 100% leverage is minimal acceptable. With commercial you expect to have cash/equity in the deal and measure what sort of return that equity is earning.

In conclusion I think you have hit on a few good points while being a bit off on the rental side.

One comment not mentioned about flipping is the short term tax impact is pretty steep compared to the long term capital tax treatment plus other tax benefits of investment RE (flipping a property means it is not classified as investment RE).

Some flip for current income. Some enjoy their job and keep working. A few make more from a job than they can make from flipping so that is why they stay in the job. The only escape from a job or flipping (flipping being just another job which may or may not pay better) is when you have something that produce income independent of the time invested. Rentals, bonds, notes, the stock market, annuities, NNN commercial property are all ways to have passive income. There are more.

So, you are correct. A balance is important and sometimes the balance when you start is different than the balance once you have reached cruising attitude.

John Corey

Re: Rentals vs Flips - Posted by Wendy

Posted by Wendy on March 13, 2006 at 21:18:48:

I do not disagree that it is a job. But you can build wealth doing it. For example, make 300k a year. Save 100k of it and invest it. 7 or 8 years to a million. Both are good, but more than 1 way to skin a cat.

Re: Rentals vs Flips - Posted by Andy

Posted by Andy on March 13, 2006 at 21:16:43:

So is property management.

Re: Rentals vs Flips - Posted by Larry

Posted by Larry on March 13, 2006 at 10:10:17:

I have quite a bit of exposure to rentals. But you are right that it is in sfr not commercial. This is where I believe you find the large number of people who are equity rich but cash poor. It is growing harder and harder to get a sfr to cash flow just like you said). It might cash flow on paper before aything breaks, but not in the real world. That is why my suggestion for someone starting that wants a balance is to flip or wholesale, and then invest some of those profits in a rental in a good up and coming area. The temptation is to buy the 1st place someone finds that will cash flow without having to put money down on it. This is usualy in a war zone. I know from experience to avoid this.
I am not anti rental at all, not even sfr. Even though to me they are a pain in the but, and I hate tenants. And tenants in mutiplexs are even worse. I believe rentals should be a major part of anyones investment strategy. But not when someone is first starting with no money and debt. It is my opinion that before someone starts collecting rentals they are better off fliping and wholesaling until they are debt free and have cash on hand.