| Flipping Versus Rental |
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 The Investor’s Dilemma
Some investors only buy properties that they can be quickly turn and resell to other investors or retail to owner occupants, thus avoiding the risks associated with the rental business. Other investors buy and hold everything they get their hands on, thereby missing out on the quick profits of a sale. Both extremes exists in this business. I know one investor with over 800 properties in states from Florida to California. Others I know buy and then sell one property, before making another investment. Both miss potential profit and wealth. John was an investor who had been buying and selling houses for 10 years. Most months he reached his goal of 2 deals and lived the kind of lifestyle we all dream about: A house at the beach and another in the mountains; plus a luxury home for his primary residence with enough money left to travel the world with his wife and three children. John incorporated all types of purchases into his investing: Short sales, forecl osures, FSBOs and more. Though John had assets totaling over a million dollars and cash equaling almost as much, he owned no rental property and swore he never would. If anything ever happened to him, he reasoned there was enough life insurance to take c are of his family. Certainly he had enough money to retire, but like so many of us who enjoy this business, John continued to buy and sell houses. While traveling with his family, he looked at real estate and made offers. Besides being a successful investor, this man was a great husband and father who provided well for his family. All his bases were covered, and without the headaches of being a landlord. He had avoided that hassle. Everything was fine until John was in a car accident. Hit by a drunk driver, he was paralyzed from the neck down, and, there was brain damage. Eventually John could communicate by writing messages, but he would never walk again. In time he would be able to use a computer, but would never be clear enough to evaluate anothe r house. Months of hospitalization were followed by additional months of rehab, and a lifetime of on going care. Thankfully, John’s family had the money he had made, but in less than a year medical bills totaled several million dollars and much not cover ed by insurance. The drunk driver had no coverage, which left John’s wife spending family reserves. In just three years, they had sold all three homes and were living in a tiny three -bedroom house. John’s disability insurance had only lasted a couple of y ears and soon the family was struggling to make ends meet. In a matter of seconds everything had changed. Later John would say he should have died so that the houses would have been paid for and his family would have been set for the rest of their lives. John had planned for his death, not his disability. While caring for her husband, out of necessity, Sara became an investor. She purchased and sold houses like she had seen John do. However, she held some as rental property. Sara now owns more than 100 rental houses with a passive income that supports her well. John died a couple years ago and the children are grown. So what can be learned from their tragedy? If we buy and sell everything, and hold nothing, we have little stability. We can generat e lots of cash, but cash can go away quickly. If John had held some of his houses as rentals, a lot of misery could have been avoided. There are never any guarantees, but the more we can do to protect ourselves, the better off we are. On the other hand, the investor with 800 rental houses can get himself into trouble, if he does not have the capital to support his investment. Whether you own 8 properties or 800, you need adequate cash reserves to cover any and all problems that can arise. Most lenders require you have the reserves to make 6 payments; however, if you own four houses, they may not require you to multiply that by four. For example, if they require $3000 for your first loan, they may only require $3000 for your forth, fifth or sixth loan. While this makes buying houses very easy, it means you can easily get in over your head. You may not have the reserves to cover your payments if you have multiple properties vacant at one time. I advise investors to have enough cash assets to cover ALL your personal and Investment Property payments for a period of at least 6 months. This means, if you have a personal residence and four rental houses and total $3000 each month, you should have reserves totaling at least $18,000. It is advisable to have enough to make car payments, house payments, insurance payments, etc. This may require far more reserves than eighteen thousand dollars. What is the best way to assure you don’t get in over you head? Set goals! My wife and I have set several goals for the next month, six months, and one year and further. These goals include buying, hold, selling and giving away houses. That’s right, we are going to give away a house in the next two years. (More on that later) Only you can decide what goals are appropriate for you. Likewise, only you know what level of reserves you are comfortable with. If we think about our future and plan for the worst, we can be much better off. We would not buy a house without buying insurance. We would not drive a car without insurance. But, many of us are far underinsured in the event of our death or disability. I HATE INSURANCE and believe it’s equivalent to legalized thievery; however, in today’s world it’s a necessary evil. I hope through sharing this story, you will co nsider your future. Set goals and plan how to achieve them. To Rent or Not To Rent, that is the question.So many investors don’t want to rent because of the “headaches” associated with being a landlord. Others don’t want to sell anything because they give up future assets. I own an apartment building with commercial rental space on the first floor. If I sold this building, I could put over $100K in my pocket. However, if I hold the property for a little over 12 more years, I will own a building that should be worth over $700K and other people will have paid for it. There are two arguments. What’s worth more, $100K now or $700K in a few years? I think the answer lies in the Rate Of Return. If I paid cash and had $400,000 tied up in the building, my ROR would only be 5% per year. That’s better than a bank, but when you include inflation, (4%) your return is not much. On the other hand, if my investment were a $50K down payment, my ROR would be over 86% per year. The less I put in, the higher the ROR. On a single-family house, where the only cash out-of-pocket is the earnest money deposit, the ROR can be over 1000% per year. In fact, it can be MUCH higher. However, you only get this return if you keep the house and rent it, until paid for. Se lling the house in ten years can increase your ROR. Of you flip the house and sell it immediately you ROR will be lower, but your cash -onhand will be increased. The rental avenue will take years to generate cash and some of that will be required to make repairs. Selling gives you money now but lowers the ROR. Again, the final choice must be individually made. However, making the same choice every time, can cause problems, no matter how successful your investing business is. I have spoken to many investors all over the country and the most successful and the investors that strike in the middle. One example is a friend in Florida who wholesales and holds. I wholesales 4-6 houses per month and clears at least $5000 per deal; some more. When he finds the right deal, he pays cash, with the wholesale profit and refinances when the rehab is completed. However, instead of pulling out 80 -90%, the refinance is 50% or less of the value of the house. This puts the cash flow very high but lowers the ROR. Again, the more you put in, the lower the ROR. However, these goals have made him very successful and provide $10,000+ per month in passive positive cash flow. I hope this article has provided some insight into the choice of Rental or Flip. If I can answer any questions, please contact me directly, Thank you, Greg Gardner |
