Flipping Houses vs Owning Rental Real Estate

Flipping Houses vs Owning Rental Real Estate



should you flip your house or should you hold it for cash flow from a cash flowing tenant that's today's video let's dive in okay they're in Clayton Morris on the founder of Morris invest I'm a long time real estate investor I flipped houses I own rental real estate I've done hundreds of rehabs and today we're going to talk about whether or not you should flip houses or hold them for cash flow but before we do that I want to remind you to subscribe to my channel if you're not already subscribed hit the little subscribe button down there and hit the little bell as well because it'll remind you as soon as the new video is uploaded you'll get that notification and you can jump in and watch it so today we're going to talk about the differences between flipping and cash flow and where I come down on this very interesting you know very interesting niche now I work with and I have I flipped a lot of houses in my time but I've also worked with a lot of flippers I want to give you sort of an average year in the life of a typical flipper who maybe does five projects okay five projects in let's say the New Jersey area of the country which is what I know very well and what a typical project that doesn't need like a build-out like they're going to add a you know on the second story to the house they're not going to add anything to the footprint of the house takes about five maybe six months of work to get a property like that up and running so let's say it's a four-bedroom two-bath house they're not adding anything to the footprint of the house can take them pulling permits getting all their contractors in line all their subcontractors in line can really take four five six months of work and at the end of it they may walk away with 40 50 60 70 thousand dollars in positive returns that's great and that's what they sold the house for and they walk away with that kind of cash in their pocket wonderful congratulations that's fantastic and that's the allure of it's right is that I'm going to make that much money it's going to take me that much amount of time and I'm going to have that much cash in my pocket a couple things to consider of course is that they're going to pay taxes on that they're owning the property for less than a year they're going to pay capital gains on that that's a huge chunk of that cash taken right off the top in the profit Department and that house after it's sold is no longer producing cash for the owner of that house the flipper of that house they're paying back interest on loans that they probably took out in order to do the to do the construction on the property and again they're paying taxes on that money to me flipping is great however it is a transactional business meaning it's like a paycheck except the paycheck takes five six months to get and you have to rinse and repeat and start all over again you're not on easy street so when you're halfway through that project many of the flippers that I know would be reaching out and saying hey I'm ready for my next property do you have anything because this one's about to wrap up in a month we're going to sell that bond but we need our next project so while you're knee-deep in a project you're having to think about your next project and you're having to start to put the pieces in place for property number two because again it's a paycheck and you technically are living paycheck to paycheck with each flip now I just mentioned a property that was not increasing the footprint of the house now what about a property that is small and they want to increase the square footage of the house or you need to pour a new foundation and you need cold pull all kinds of permits for expanding the setback of the house you need to check with the city to make sure that you're not encroaching on areas of setbacks that you're not allowed do you have to get a variance all of these crazy things that you may have to consider if you're increasing the square footage of the house additionally if you're doing a build-out on a property that's what that's called you could push your rehab beyond six weeks or six months into a year I have seen 5,000 square foot homes with flippers and builders that I work with personally takes about a year to get them done they're big they're massive they've got a poor foundations all kinds of permits are required and you're pushing into that year mark to get it done and sold think about the holding costs on a property like that the whole costs from the bank on your construction loans and think about how you know again having to pay those capital gains taxes when you're done then having to find your next project and rinse and repeat you're getting one paycheck in that one year unless you're running multiple projects at a time but again it's still a transactional business flipping which brings me to why I love buy and hold real estate buy and hold real estate produces for you constantly it produces for you over and over again as you own that property number one you've increased your net worth by owning that property your overall let's say you buy a fifty thousand dollar house but it's worth sixty your net worth is now $60,000 higher than it was before you owned it you also have cash flow coming in every month from a cash flowing tenant who lives in the property so maybe a cash flows $700 a month eight hundred dollars a month you're going to have that for the rest of your life unless you sell the house you also get to claim depreciation on your taxes the tax benefits are way different than if you flip that house right instead of paying capital gains taxes on flipping that house now the government is helping you by being able to defer and offset the other income that you have coming into your house cash flowing rental real estate when you compare it to flippin real estate there is zero contest in my brain about this I am all about holding those properties for the rest of my life and of course you can assess your portfolio let's say you have thirty rental properties and one maybe isn't performing as well as the other 29 and you've had it for five years fine consider selling that one out of your portfolio but I would even caution you against selling it because you're going to pay capital gains taxes on that property so what I would even rather have you do instead of selling it is do some sort of a seller financing option with someone who might want to move in and live in the property or selling it to another landlord who would like to own rental property therefore you're able to mitigate your capital gains taxes you would have to pay by selling the property so to me rental real estate is the best way to build wealth in this country and to me it's the best way to invest in real estate it's the best vehicle in order to create wealth and remember that property is going to produce for you every month it's producing streams of cash when that guys flip in that house it's not doing anything for them in fact it's sucking money out of his bank account every day that a contractor sleeps in or every day that a contractor is sick or they order drywall and it didn't show up to the jobsite that is money out of their pocket owning rental real estate every day is putting money in your pocket and making you wealthier I'd love to hear your comments about this video but first I want you to subscribe click the subscribe button right here the big circle and subscribe to the channel but in the comment thread below I'd love to hear your thoughts about this are you a flipper if you own rental real estate or were you considering one one or the other and again nothing against my flipping friends I love those guys I just don't have the stomach for it and I would much rather have my net worth increase in my cash flow basically letting me be financially free how I do it and also check out our great playlists here on the channel as well we'll see you back here next time with another great video everyone take care