11–13 minutes to read

Is “Flipping” or “Buying and Holding” Real Estate a Better Strategy

October 2016.

That’s when I created my arbitrary goal to accumulate one million dollars in real estate gross earnings.

This goal followed shortly after I closed on two properties that I purchased for rental income in the suburbs of Memphis, TN.

While many people use real estate to create passive income, build wealth, and obtain financial freedom, I realized after long deliberation that the buy and hold strategy isn’t something that I want or need to do.

Why I don’t need a goal to create a portfolio of real estate properties

Lots of people get inspired by the idea of creating passive income from real estate.

The idea is simple.

Once you have enough net real estate income to cover your living expenses, you’re essentially financially free from working a job.

This can theoretically be obtained with one large multifamily property or many single residential properties.  Or somewhere in between those two investments.

Cover your expenses with your real estate investments and you’d be set

If, for example, your living expenses are $3,000 monthly, you’d only need $3,000 in net rental income.

But, this can take a while if you don’t have a bunch of cash.

The majority of people, including myself, will likely have to use some sort of financing to build a real estate portfolio to help them achieve their financial goal.

For example, let’s say someone purchased one property for $100,000 that has a mortgage payment (including interest, taxes, and insurance) of $700 monthly. Further, let’s assume they can get $1,000 monthly for rent. If there are no breaks in their rental payments, they can yield $300 monthly in net income.

If you were to take action on the above example ten times, you’ll eventually get to a $3,000 monthly net income goal and can then technically declare yourself financially free.

But, there are some caveats.

Although you’ll have $3,000 monthly in net rental income, if you have $3,0000 in living expenses you’ll have to ensure that you collect every penny of rent, every month.

If this doesn’t happen, your options will be to either decrease your living expenses or increase your rental income.

In order to keep the same standard of living, you’ll most likely continue pursing more rental properties.

However, having already accumulated 10 rental properties and one million dollars in real estate debt, it won’t be easy getting further conventional financing.

You’ll have to find a portfolio lender (if you hadn’t already done so after financing property number four), learn some creative financing techniques, or pay off a few of your mortgages.

The above can be done, and it’s done by many real estate investors all over the world.

Why I’d rather flip than buy and hold real estate

I, too, had a goal of having lots of rental properties. I wanted at least three. But now, my goal has changed.

A goal to accumulate one million dollars in real estate is a better goal for me. Here’s why:

1. I am vested in a lifetime pension.

I’m a few years away from obtaining a lifetime pension – In 2020, I’ll retire from my career of more than 20 years with a lifetime monthly pension. Not only will my pension cover my expenses twice over, it’ll be adjusted for inflation every year for the rest of my life.

I’ll be financially free…

…without the need to have multiple rental properties.

Of course, many would say I can always have more. To that I say, you don’t need more as long as you learn to live within your current financial situation. Anything more is just a bonus.

The goal to have a pension that covers all one’s expenses is a financial goal that many real estate investors (and stock market investors) dream to obtain.

The 4% rule is based on this concept: Accumulate one million dollars, withdraw 4% per year, and you’ll have approximately $40,000 to live on for the rest of your life.

My pension is essentially my 4% rule.

The rental properties that I currently have will only act to supplement my pension.

With expenses less than $2,500 monthly and a pension plus rental income of over $4,500 monthly, I really have no financial need to purchase a bunch of properties. In fact..

2. I don’t want a bunch of properties.

I like the idea of having a bunch of rental properties. But I also understand I don’t want to have too many demands on my resources or time once I retire in a few years.

The more loans I obtain, the greater financial risk I take. And, I’m not interested in the idea of holding more than a half million dollars in real estate debt.

Right now my real estate debt is around $350,000, including my primary residence.

While it’s true that more properties would increase the diversity of my portfolio and lessen my financial risk, having more properties still isn’t the answer for me. For me, three rental properties are enough.

Even though there are ways to outsource the management of my rental properties, I’d still have to  manage the property management.

I want the work that I do in retirement to be a hobby not a job.

3.  Purchasing and holding multiple properties (without the use of creative financing) ties up cash reserves

Right after purchasing two rental properties, I quickly saw my cash reserves reduced by $50,000 in a matter of a month. Because my purchase prices were $115,000 and $120,000, respectively, approximately $40,000 went towards down payments. Another $10,000 went into fixing up one of the properties.

Now that the properties are purchased and being held, all $50,000 is tied up into the property. Of course, I can refinance to pull some of the money out, but refinancing is really expensive. So, I’m just coping with the situation that my $50,000 is gone until I sell the properties some time in the future.

4. Purchasing properties to buy and hold is boring 

The most important reason why buy and hold is not for me is I believe it’s a boring strategy.

In contrast, getting a property at a great price, making it look great, and then selling it at a profit is exciting. And once the project is complete, I get to do it all over again.

This is the part of real estate that I love. Sourcing deals, bargaining, buying, fixing, and selling.

It gives me something to do on my weekends. What can I say?

I like the idea of managing a project, reaping a profit, and then using the investment proceeds to do it all over again, which is why I decided to make a financial goal out of it.

I want to keep flipping properties until I meet or exceed a net income goal of one million dollars in real estate.

So, which is better, flipping or buying and holding?

So for me, when people ask is flipping or buying and holding real estate a better strategy, I say it depends on your goals.

If you want a portfolio of real estate to cover your expenses so you can eventually escape the 9-to-5 grind, you may want to make buy and hold your primary real estate strategy. You can always change your strategy once your goal is met.

But if you like the excitement of real estate just for the sheer joy that it brings, regardless of the financial wealth you can build, you may want to make flipping your primary real estate strategy.

In the end, you can also choose a hybrid.

I have rental properties to give me an extra monthly cash flow, but I’m also going to flip. You really don’t have to choose. Do both, depending on your own goals.

Comments

  1. It sounds like with your pension as your safety net that you have an incredible opportunity to follow your passion. Congrats on your opportunity and it sounds like you are going to be incredibly successful. I look forward to reading about your financial journey!!! Thanks for sharing.

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