Cash flow or flipper?

People lately have been asking me what the best place to put their investment capital and energy is now that the real estate market is showing signs of becoming a bull market again. This question is a challenging one to answer because there are so many variables. Not the least of which is a person’s risk tolerance.

A good flipper can hit 30-35% return on their cash invested and turn two or three properties a year, for annualized returns of up to 100%. However, this requires a lot of time, skill, and a fairly high tolerance for risk. In a flip there are just so many un-known factors to be considered low risk.

A person with cash-flow property goals can follow a simple 10 times rent multiplier rule and see returns of 20% on their equity. This is playing the long game. Cash flow is only one part of the equation as I’ve shared many times in previous articles. The true returns will never be known until it comes time to sell and you factor in your mortgage pay down (none of which came from you) and your market appreciation. A five year hold often produces overall returns that would rival the best flipper and the risk is much lower. It’s also far less effort to manage a duplex then it is to manage multiple, successful flips per year.

Now it may sound like I am steering you towards cash flow properties over flippers but in actuality I recommend a healthy mix of both. In my own real estate journey I’ve always tried to use the capital from one to fund the other. This can work in either direction because both require adding value to the property whether it be to flip, or to hold.

My previous article about how far 100k could take an investor seemed to resonate with a lot of people, so consider this a continuation of that train of thought. 100k invested into a duplex around 450,000 in need of some renovations, would be a great place to start.

*Bring its value up to $550,000 by finishing basements or upgrades and re-capture your 80k on a line of credit.

80% of 550,000 = $440,000

Current Mortgage $360,000

Available Equity = $ 80,000

 

Now take this 80k and buy a 250k townhouse and put 20k into it to create a nice, 320k resale property. When the smoke clears you will have your 100k back in the till and should be looking to add another holding property to the portfolio.

This system will work until the banks decide that they won't give you any more mortgages, which will happen at about the five properties in your name level. This makes absolutely no sense, but banks seem to prefer rookie investors to professional ones - go figure. At that stage it's time to go multi family (5 units or more) and then you deal with the commercial department of a bank and it’s a whole new ball game. More on that in my next article!

So for now if you are stuck and want to know where to start, feel free to reach out, I’m always happy to help people gain control of their finances and income through the exciting world of real estate investing. There truly is nothing like it in the world. Show me another investment or stock that you can choose to add value to whenever you want, you can live in it, you create a home for someone else. You can borrow against it, subdivide it, farm it and on an on it goes. It really is in a league of its own and that is why I live, breath eat and sleep this stuff.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.