Flipping Houses vs. Real Estate Investing (They Are Two Different Things)

Flipping Houses vs. Real Estate Investing: They Are Two Different Things

When you think about making money, you have to think about helping and serving others. Why? Because that is where money comes from. Other people.

You just want to choose the vehicle to serve other people that most quickly and effectively takes you where you want to go.

There are two main ways to serve other people. You either add value to their lives or you provide a service to them.

In the real estate context, this is the difference between the dealer (flipper) and the investor. The dealer, bird-dog or flipper is the add value person. The investor is the service provider.

Let’s start with the dealer. You go out to a neighborhood where you properly evaluate a home to be worth $120,000. That is the after repaired value or ARV. Because of reasons such as death, deferred maintenance, divorce, foreclosure or taxes, you are able to buy it for $75,000. In this case we’ll say $20K in deferred maintenance is the reason for the low price. You now purchase the property for $75,000, put $20,000 into rehab and have about $5000 in holding and closing costs. This puts you all in at $100,000. You put it on the market and sell the property in a couple of months for $120,000. This gives you a net profit of $20,000.

First let’s look at where the $20,000 came from. Did the real estate give you any money? No. It was the family that bought the property that gave you the money. You made money because you added value to other peoples lives.

Now let’s look at the investor. Take your average 40 unit apartment complex or 20 single family homes. You are going to net about $4000 per month if run effectively. Where does that money come from? Again, it comes from other people. It comes from providing a service to the families that you are providing a place to live.

It is important here to make a distinction between the dealer and the investor. If you will think about the $20,000 versus the $4000 it can sometimes look like the dealer is the better deal. However, let’s look closer.

If you’re a dealer and you buy, fix-up and sell a house profiting $20,000, how long does it take you to spend that money? For most people it’s not very long.

Remember that dealing is not investing. It is earned income so it is taxed differently. First you have to pay both sides of the social security and Medicare. That is about 15% right there. Then you have to pay your income tax and that can be an additional 25 to 35%. So if you have to pay the lower tax, that means that 40% of that $20,000 is gone the minute you close the deal. You are left with $12,000.

Now let’s say that your bills, car note, house note, food, toothpaste…everything comes to $4000 a month. How long does it take to spend that $12,000? Just 3 months.

To get another $20,000 what do you have to do? You must go out and find another house and do it all over again. This is active or earned income and you are taxed as such.

Now let’s look at the investor with the 20 rent houses and $4000 a month profit. If their bills are $4000 a month and every month those 20 rent houses hand them $4000 a month, when do they have to go back to work? They don’t.

This is the difference between financial independence and self-employment. A dealer or flipper is just self-employed. He or she is constantly working to get that next house and get that next quick fix.

An investor is done. They are truly financially independent.

Now, is there anything wrong with flipping? No. Just be sure that you understand it and only use it for what it is, quick cash.

Make sure that you are working on something, investment real estate, which can actually take you where you want to go financially.

Comments

  1. David Magouirk says:

    I would like to move forward with investing. I do not have the up front cash to pay for a property. I do not want to risk my home with debt. What is the best plan to insure cash flow while acquiring properties?

  2. I live in a resort area where there are thousands of condos but however, there are some surrounding area neighborhoods that should have some good potential for flipping or long term investment. There doesn’t seem to be many investors working this area, at least from what I see.

  3. Excellent article. I must go with investor because you can sit and watch your income comes into your hands. Though you have low income but you are going to have low taxes and everything comparing with dealer or flipper.

    • Your not going to sit back and cash checks with 20 rentals. Unless they are brand new with very stable tenants, You are going to run around fixing things and showing vacant units to new tenants. At $200/month cash flow, one month vacant wipes out most of a years revenue. Add a repair or two and your in the red for a year on that unit. if your average tenant stays 2 years you’ll wipe out one of those years every time some one moves out and you have to fix a few things, so cut your income estimate in half. Now you have 20 units and your making $2000/month and you need a job to get by … lol

      • If you listen to Dels radio shows or Podcasts, or if you have attended his seminar, you will hear him talk about the investment methodology that negates much of what you mention here. It is the key to successful single family investing…

        1. You fix everything that is likely to break in the first 5 years of operation upfront in your initial rehab.
        2. You rehab the property to be the best product in the neighborhood. That means it is the same quality as the other properties for rent in the submarket with some feature that is better, perhaps all new light fixtures and hardware, perhaps a wood look flooring instead of carpet etc…
        3. You screen your tenants and maintain high standards for living in your rental properties.
        4. You enforce your lease and be a great landlord responding promptly to any and all issues.
        5. Sell the property in 2-5 years before another rehab is needed and 1031 exchange into other properties to defer taxes.

        Using this methodology you will not have vacancies unless no one at all is looking to live in your submarket, which indicates a failure to properly evaluate the property location before purchase. It’s not rocket science, but this approach works quite well.

        We do agree that apartments are easier to manage because you can leverage the economies of scale. We will always prefer 20 doors in an apartment complex or two to 20 single family homes spread out across a metro area. Hope this helps!

        Here’s to your investing success!

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