Should You Be Flipping or Holding Right Now?
Most real estate investors these days seem to prefer flipping properties vs. buying and holding.
Auction.com, an online real estate marketplace, analyzed the intent of investors bidding on homes at auction in the fourth quarter of 2014 … and found that more than 50% of the people it polled planned to flip the homes for a profit.
How many planned to rent the homes out instead? Just over 47%.
But of course, all real estate is local, right? So responses varied based on where the investors were buying.
For example, 70.3% of the bidders polled in California were primarily wanting to flip. The rate was 72% in Washington, and 71% in Nevada.
But in the South, 58% of all bidders planned to hold and rent out.
Makes sense, right?
The higher-priced markets tend to see more flipping activity because it’s more difficult to rent out profitably or get decent returns.
And you can typically get a much better return on investment on properties in areas like the Midwest and South.
Another factor at play in some of these higher-priced markets is tight supply … which lends itself well to savvy investors who can buy, rehab, and sell a property quickly and efficiently.
So what’s the right approach …Should you be a flipper in this market? Or a holder?
There really is no right or wrong answer in my opinion. And I really think it depends more so on your own personal circumstances. And what your goals/objectives are.
My Own Personal Investing Philosophy …
Before you even “think” about buying & holding anything, I really think you should FIRST have some working capital/cash reserves built up.
I think you should have at least $50k-$100k in walking around cash (or whatever amount gives you some peace of mind) before you start considering a long-term rental.
On top of that, I also believe it’s smart to have 2-5k in cash reserves for each 1-4 unit rental property that you acquire.
Why? You really don’t want to be in a situation where you own a bunch of property … but can’t pay the electricity bill.
How do you think I know this?
It’s something I got a chance to learn first-hand early on in my career.
Trust me, being equity rich and cash poor is NOT where you want to be!
Now, this cash reserve requirement isn’t as crucial if you sock your long-term hold money into ‘professionally-managed’ apartments and commercial deals. So that’s a plus.
Another one is the fact that 100% of your money is in play. And there’s no ‘dead equity’.
Here’s what I mean: If you invest 100k in a professionally-managed apartment/commercial opportunity, you’re getting a return on your FULL $100k investment.
If you invest that same $100k in say, a single family home, that home typically builds up equity over time … that you’re not earning a return on. That’s what I mean by dead equity.
Those are just a couple of reasons why my preference is to park long-term money into apartments & commercial property these days. Plus, it can really be what I call “mailbox money” … or true passive income.
But however you want to do it, the bottom line is as long as you’re building a residual income stream, both can be great approaches. There is no right or wrong!
Anyway, getting into a spot where I had a ton of equity, but couldn’t take my girlfriend out for a nice dinner those many years ago, is what really forced me into a new practice of flipping 3 properties for every 1 property that I held, an approach I affectionately call …
Pump & Dump
I know that sounds a little crude, so let me explain …
“Pump” is your active business operations where you flip properties (primarily on 1-4 unit residential properties utilizing the strategies of wholesaling, seller financing, lease options, and/or rehabbing) to generate lump sums of cash and cash flow … and “dump” is where you take all or a portion of your profits from your flips … and sink it into a long-term rental that spins off residual cash flow.
I’ve found it to be an ideal approach that can keep you in a good balance between equity and liquidity … in a position to take advantage of a good percentage of the deals that come your way … and doing business with some clarity and peace of mind.
It’s a strategy and approach I still use today! And it’s one that I encourage you to consider adopting as well