When a new real estate investor sits down and looks at one of our cashflow analysis for the first time, she usually has a puzzled look on her face. And it’s understandable – Here she is looking at a financial projection where she invests $30,000 of her hard earned capital for an annual return of $3600-$4500 per year. Sure, 12-15% cash on cash return is nothing to sneeze at but in the end $4k per year won’t exactly change your life. It isn’t the lucrative, rich overnight image projected when people speak of real estate investing. It’s not the sexy buy-renovate-resell-double your money kind of strategy. So inevitably, the question comes up: Wouldn’t it make more sense to purchase a home to flip with that capital and earn much more money in a very short term? This is the part where I smile.
The debate over the merits of flipping homes versus investing in real estate long term is not even a close contest. As a matter of fact, they don’t even belong on the same debate stage and in this post I intend to show you why.
Our starting point is a look at the real math of flipping homes. Let’s look at the facts: even if you were able to acquire the property low enough, by the time you pay selling costs, closing costs, holding costs, rehab costs and Uncle Sam, your true return on investment isn’t exactly what you expected even in the most optimistic of scenarios. But let’s assume you are reasonably successful and don’t make any major mistakes. In normal times, reasonably successful flips take 100-150 days to complete – purchase to resale. So, assuming that you’re not running multiple crews (which most new investors don’t) you could complete two to three flips a year and make $35k-45k per year after tax. That’s if none of those flips end up being break even deals or worse, money losers. In a perfect world with no market downturns that wipe out more flippers than a Japanese tsunami, you could make $350k to $450k in a ten year period. No income. If you want to take a break from flipping homes, the money flow grinds to a halt.
Now let’s look at a similar situation where the investor executes a long term investment strategy instead. The investor methodically acquires nine investment properties in great locations with high tenant demand over 36-48 months. On our advice, she opts to go for capital growth first and income later. So, she grows her capital by aggressively paying down the mortgages on her properties according to our Domino Strategy using positive cashflow from the properties themselves and her job income. All in all, she invests $300-340k of her capital and ends up with a free and clear portfolio in 10-12 years. This portfolio is worth $1.2M without a penny in appreciation over that time frame. In addition, her portfolio provides our investor with over $100k in annual income thereafter. So let’s do some arithmetic: From $300k to $1.2M in 10 years is $900,000 of capital growth or $90,000 per year. And on top of that there’s $100k of annual income to boot? And you didn’t have to deal with contractors for 10 years of your life, nonstop? And you can take off to your favorite island for a month or two while income still flows to your account regularly? As I said, not even close.
Incorrect. Your numbers on flipping are highly inaccurate. You show a very unbalanced opinion for long term investing.
This study is based mostly on opinions by the author, and not facts in the real estate solution industry. It is quite clear as Brett has addressed, that the author is heavily sided with long-term investing and shows supporting facts to that, and opinions to the other side.
We started 3 years ago as a real estate solution provider that purchases, sells, wholesales and now transact over 200 purchases per year and over 150 sales and 50 wholesales per year as an 8 person firm. We average about 12 million in gross profits per annum on the northeast.
There are many other small firms just like us nationwide doing the same thing and there are some smaller and some doing upwards of 300 per year and earning $15,000,000 or more in gross profits annually. We are hoping to be around 300 flips in 2017 as we move into new cities and neighborhoods.
The organization I am a member of has 10,000 members nationwide and we track this data constantly. 2017 will be an even larger year for businesses like mine as well as my own, because more product will be coming to the market from builders.