One of the main concerns I repeatedly hear from new real estate investors clients is: should we fix the property and flip meaning sell for a profit, or rent out?
Many excellent books and seminars were written about how to actually buy and keep properties over your working years as full time or a part time job. The following article is not meant for teaching ‘how to’ but rather, summing up the reasons why Keeping is the better choice for most americans and possibly for others in the world. If you wish to educate yourself and learn more, the VERY recommended authors are: Roger Dawson and Mike Summey, Bryan Chavis, Robert G. Allen, Robert Kiyosaki and Dolf de Roos to name a few. Read everything they wrote that you can put your hands on.
Firstly, the main point in any case is the fixing part. It’s important to improve the property, to bring to a better place where it was before, to make it a little or a lot better then how you found it. As the late Jim Rohn used to say (and I’m paraphrasing here): “This is what its all about, taking something and make it better. Teaching our children to take an old bicycle, clean it up, paint it and sell for a profit”.
So regardless of what approach we take towards ‘real estate investment’ its crucial to have in mind the improvement factor. It’s like the ethics rule of golf: always leave the course in a better condition then you found it. If you are at the golf course and see a piece of paper on the lawn, simply pick it up and put in the trash. If we’d all have the attitude of improving stuff for the sake of making things better, prior to the selfish desire for profits and money, but rather for the sake of making the homes we and ours live in nicer, cleaner, and more comfortable, we would all live better and benefit from the results. It’s also the right and moral thing to do, which shall entitle us for the profits proceeding from the action of ‘making it better’.
While flipping houses are rewarding in both aspects, making the property better and in terms of quick profits, I’d argue that keeping the property is a better approach for the long run.
1. Keeping is a stable business
Keeping a property and renting it allows you to run a stable business. The landlord business. It’s a business like any other, with: income, expenses, inventory, raw materials, clients, accounting, vendors etc. The flipping business on the other hand is more speculative since markets go up and down, and the actual cost of renovation is usually higher then the initial estimate you have when starting up. So by the time you actually complete the project, put it on the market, receive an offer and close, your profits could potentially shrink, not even mention the percentage of deals falling through due to lenders not approving the buyer’s loan in the last moment, and other various reasons that delay the sale while the property stays vacant and losing money. So when taking all of these components under consideration, plus the amount of work put into the project, unless you can demonstrate a great markup (buying really low and selling really high), it could mean low profits and high risk.
With the ‘keeping’ business, like with any other business, your main goal as the owner is to work ON your business instead of working IN it. Meaning, that you want to eventually delegate all of the aspects of running your “landlord business” to others and focus your job on only 2 things: reviewing the reports monthly or weekly and more important acquiring more property – hence growing your business.
- Your inventory is the actual properties.
- Your clients are your tenants
- Your vendors are professionals like the property management
- Your income is the rental paid by the tenants
- Your expenses are: taxes, some utilities, loan related costs, closing costs (when purchasing), city and state fees, insurances, repairs and maintenance, broker’s fees, vacancies costs, professionals such as property manager, lawyer and accountant.
- Your raw materials are materials and labor used for repairs and maintenance.
Delegating the different tasks in managing the landlord business is relatively easy, as brokers /agents work for free for you and get paid only once they find what you consider good deals.
Property Managers get paid a percentage of the rent received by the tenants.
Your accounting can be easily done with software that works almost automatically nowadays, syncs with your bank and credit card accounts, and which later you give access to your accountant for filing taxes.
2. Keeping is your retirement plan
Flipping makes us money now rather then later, and therefore raising our “richness” and our standard of living. Our western nature /culture makes us spend more when we have more, with less thought about the future. If I can afford a nicer car today, or a longer vacation or a more expensive furniture, or a little better toys for the children, or a bigger house now – I’ll take it. So unless you have a super self discipline ability to combat the endless temptations to spend more today and save the difference for a better future, you will spend more when you have more. Moreover, if you make higher profits today and want to save for the future, what method are you going to use as your savings? Simply putting the money in a savings account, money market account or bonds might pay you much less then real estate investments, precisely for the reason that you’re being rewarded in real estate for improving properties` conditions, improving neighborhoods, and providing people with rentals solutions in a stage of their life when they can’t or don’t want to purchase their own house.
Keeping the properties, and adding more and more to your portfolio over the years building your business slowly but safely. Markets can go up and down but one way or another, you will find tenants to occupy your properties. The actual property has equity that can be refinanced against at any point if you need cash for buying additional properties or just for personal expenses. And the most fundamental point is, by the time you reach a retirement age and can no longer work, you have your own passive monthly income as well as equity built, plus the ability to provide your children and loved ones with roof over their head by allowing them to use one or more of your properties to live in while they also hopefully continuing the legacy and do likewise and buying more properties to build their own lifetime portfolios.
3. Keeping will make your family wealthy
Flipping can make you rich but flipping can make you and your family wealthy. What’s the difference?
Well, rich to me means I make high profits and can live well however it also means it could be temporary. I can lose money for various reasons and therefore live not as well or even lose everything. After all once flipping is over and the property is sold, you will never profit from this property again. If it appreciates 100% in the next 7 years, this will be the new owner’s wealth. If rentals go up it will be the new landlord’s income increase. If the market crashes or a depression is happening this dwelling can still serve as a roof over the owner’s head. And so riches is something that could be temporary, and go up and down all the time and is based on a shaky ground.
Wealth has a totally different meaning. With wealth building the approach taken is a safer one. Putting “one brick on top of the other”. Taking less risk on one hand which makes the process usually slower however, on the other hand, keeps the money acquired growing in a rapid, systematic and safer way. Wealth building is a long term plan when getting rich is a short term one. Wealth building is thinking about what you give the world and only later, in return, considers the monetary compensation, while getting rich involves a more income oriented approach in mind –
“how much I’d profit from this gig” as opposed to
“how can I help people by doing something better then others, which creates value, which creates eventually a hansom compensation for me as well”
Wealth is thinking about the next generation, my children, grandchildren and so on, when getting rich is more about me, and what I can afford to buy my children.
Buying 2 rental properties a year for 20 years, using 15 year loans, refinancing one property to purchase the next one, dealing with tenants and keeping the properties in a good condition, year after year is hard work, requires long term planning and does not necessarily increases your standard of living during this 20 years. However, if you do it right, in the end of the 20 years you own 40 properties, and within about another 10 years they are all ‘free and clear’. So If started at the age of 25 for example, by the time you’re 55 you own a nice portfolio of 40 rental properties that would net you thousands of dollars in monthly passive income.
Of course with some luck the value of your homes will increase and from time to time you will encounter an excellent, better then the average, deal that will expedite the entire process of paying off and will allow you to either purchase more or retire earlier – depending on your main goals.
With flipping 2 properties a year, you can also make a very good living and even become rich. However in the end of the process, when you are older and cannot work as much as you used to, you own nothing that generates monthly income, and as discussed above, since you’ve been making ‘good money’ every working year, your expenses might have increased as well to accommodate your “level of income” not even mention the fact that your income taxes would potentially been a lot higher every time you “cashed out” your profits to buy that awesome BMW, or that fancy vacation. In addition your children observe and learn the quicker, higher stakes approach to life which in my opinion is riskier as they will also learn to spend more and potentially lose it all after you pass away and leave them on their own.
To sum up, any approach you take towards a career in real estate investment must include the attitude of improving, even a little, the properties you involved in and use as your “money making vehicle”. This is a basic rule in capitalism. Now between the two choices of selling for more then the cost of buying and fixing, as oppose to never sell, rent out and keep for lifetime, the latter is the better, safer, stabler, nobler method that shall make your family wealthier, and protect your retirement and perhaps more important, the legacy you leave for your children and generations to come.