Fix & Flip vs. Long Term Rental – Which is Better?

Once you get involved in real estate investing eventually you have to make a decision as to whether you want to quick flip or hold a particular property you are thinking about buying.

Have you ever wondered which of these two investment strategies is better over time? I was in a unique position to accurately compare. Back in 2001-2003 I did twelve fix and flips then I went and did some other strategies. What if I had of kept those properties and rented them out? Would my financial position be any different now? You bet!!

First, some assumptions: I assumed that instead of selling the properties I kept them as rentals. I pretended that the properties were appraised for the amount I sold them for and that I received a loan for 75% of that amount. Rather than try to figure out what rents were over the years I just assumed that the buildings cash flowed neutral over that time (i.e. neither a positive nor negative monthly cash flow). Then, to get current property values, I went on the city’s website to get the tax appraisal value (not perfect but close enough).

I have an amortization spreadsheet that shows what the mortgage amount would be after all those monthly payments on each property over the years. As a final step I took the current appraised value and subtracted the current mortgage amount. The results were very surprising.

My net worth would be around $4 million more today than it is if I had of simply held on to those twelve properties and kept them maintained and rented. I could have kept those rentals, went and got a real job for the past 12 or 13 years, never bought another property in the mean time and still have $4m in equity.

There are some other variables that you could argue would have affected that (like the incredible, once in a lifetime, run up in values we saw around 2006) but, even if I am 50% off, that would still be $2 million to the good.

That is amazing and really speaks to a) the power of real estate investing in helping you achieve financial independence and b) the value of time (which we talked about a couple of weeks ago). We have also talked before about the benefits of the merged strategy where you buy a distressed property, fix it up but instead of selling it you refinance and keep it. This is truly the best of both worlds.

My own personal experience is that it is better to hold than sell if you can. Think about that next time you go for the quick money with a flip.

Read more about this in Comparing Real Estate Strategies.

Advice For Investing In Real Estate at a Young Age

In last week’s blog we discussed the value of time in real estate investing and how starting early works out so well in the end. (http://www.sabanabooks.com/the-value-of-time-in-real-estate-investing/) Personally I started to read about real estate investing when I was 15 years old but didn’t buy my first investment property until I was 34. I lost a lot of time.

One of the reasons I didn’t pull the trigger earlier was that I thought I needed some money first. That isn’t necessarily true. In the first chapter of my book, ‘Cash Management in Real Estate Investing,’ I give various examples on how you can get started with little or no money – without having to resort to ‘BUY REAL ESTATE WITH NO MONEY DOWN!!!’ This was basically a letter to my younger self.

As the World War II generation passes on, they are leaving record levels of real estate and cash to the next generation, my generation, the Gen Xers. I urge the recipients of this inheritance to think about keeping the real estate they receive and investing any cash received into real estate. Getting the family involved in real estate is a great way to educate your kids about investing and set them up well financially.

Get your kids involved in their 20’s if possible. Urge them to invest their own money into real estate. Co-sign mortgages for them if you can and that makes sense. I often see people giving advice to the young to ‘live frugally and save your money’. That is certainly sound advice but it typically makes a young person’s eyes roll.

I would suggest that your 20’s is the time to take chances. You have lots of time to recover from mistakes. Look into doing some fix and flips to increase the amount of cash you have to invest or buy your first rental. From the age of 29 until I was 34, I lived and worked overseas. I made some really good money but more importantly had the time of my life and had some incredible experiences. I would highly recommend that to younger investors too. Step outside your comfort zone.

The amount I saved from those years allowed me to return home and really go hard in my real estate investments. I made some mistakes; made money and lost money in the following years. I almost went broke a couple of time while I figured stuff out. Who cares? I was young. You can afford those kind of setbacks when you are young far better than when you are older.

I heard a great quote the other day (sorry I don’t remember where so I can’t give proper credit), “When faced with a choice in life choose the path that will give you the best stories.” I have often taken chances in my life on the road to getting where I am today and I have some great stories.

Get your kids involved in real estate early. Teach them. Mentor them. Help them out financially if possible but most importantly let them try. Let them fail. Let them figure some things out for themselves. If they fail make sure they get back on the horse and try again. Don’t let them get caught up with naysayers or people who tell them it can’t be done. It certainly can. Time is your best friend when it comes to real estate investing. The trick is to start young.

Read more about this in Cash Management in Real Estate Investing.

The Value of Time In Real Estate Investing

The real secret to real estate investing is time. You start with buying a rental building for, let’s say, 25% down with the bank paying for the rest. Over time your buildings appreciate in value. As you go to refinance that increased value means the bank will be paying you back your 25%. Your tenants will be paying down your mortgage, bit by bit, month by month and you will be earning a positive monthly cash flow.

In effect, you put a bit down up front but over time your tenants and the bank buy your building for you and give you back your deposit. A few examples of the power of time in real estate:

A couple of years ago, I met a gentleman in his eighties. He was lamenting the fact that he didn’t buy rental properties back in the 1950’s. Apparently back then you could buy a small single-family home for $3,000. Those same properties are worth close to $1 million each today.

A J/V partner and I bought three apartment buildings from a man who had bought them in the late 1980’s for $10,000 per door. We paid close to $100,000 per door. His mortgages have long since been paid down so the money he received from us was pure profit. Not to mention the twenty five to thirty years of positive cash flow.

That same partner and I bought another eight condominium units last year.  The seller had purchased those units for less than $20,000 a door twenty years ago. My group paid $80,000 per door for them. Again, no mortgages left.

Yes, I know real estate doesn’t always appreciate every year but over time it almost always certainly does. It may appreciate slower in some areas vs. others. It may trend sideways for a while but over time it will appreciate. Buy real estate for the mortgage pay down and the monthly cash flow; appreciation will be the bonus. Let time work for you, but the secret is to start that clock ticking as soon as you can.

Read more about this in Cash Management in Real Estate Investing.