Fix N Flip vs Buy & Hold (cont’d)
In part one of this article series, we discussed some of the pros and cons, along with some commonly overlooked variables and costly mistakes many newcomers make, when it comes to ﬁxing and ﬂipping houses. In part two, I want to discuss how those who create true wealth, do so by leveraging their assets to ensure long term growth as opposed to trying to make a quick buck ﬂipping houses.
Question? Do you know the rate of return you’re getting right now from your real estate investments?
If not, that’s ok. You’re not alone. Most people have no idea. So, what I’d like to do is illustrate the type of returns you could and should be getting by using some simple math.
Let’s say you and I came across two identical houses. They sit right next door to each other. They are both priced at $200,000. And we’re each going to buy one and rent them out. I decide to pay all cash ($200k) for mine. But you put 20% down ($40k) and take out a conventional mortgage for the remaining $160k at 4.5 to 5% interest. We’re now both collecting monthly rents. I have no loan. And you have a loan for $160,000.
So, who has more positive cash ﬂow?
Well, I have $200k negative cash ﬂow from day one, which no amount of rent will ever recover very quickly, which brings me to my ﬁrst point that positive cash ﬂow can be a HUGE misnomer. Granted, this isn’t likely to happen, but to keep the math simple, let’s just say both properties go up in value by 10% or $20k, in the ﬁrst year. What is the rate of return in year one for each of us?
By dividing the return of $20k by the amount invested, we can see that I would generate a 10% return on my investment. BUT you would generate 5 times that for a 50% return because you only paid $40,000 for the property and you have a tenant paying oﬀ the other 80%.
So, who really has the higher rate of return? Obviously, you do!
The third and ﬁnal point I’d like to make, is that both houses will double in value over a period of time. It may take 10 or 15 years or more. But I’m sure we both agree that at some point, both will double in value. At which point, both houses will be worth $400,000. And I will have made $200k. BUT you could, and probably would, have bought ﬁve houses by leveraging that same $200k, which would produce a combined value of $1 Million or more.
SO, the BIG TAKEAWAY is that you want to take the money you have and leverage it as many times as you can.
In part 3 of this article series, we’ll be using data directly from the Multiple Listing Service to emphasize the true potential of this strategy. We will also further demonstrate that if you’re not making at least a 40 to 60% Annual Return on your real estate investment, you’re probably doing something wrong!
In the meantime, whether you are a ﬁx and ﬂipper or a buy and hold investor, there is no better way to locate and research proﬁtable real estate deals than our Smart Map Comping System. Smart Map is provided as a free service to our clients.
Be sure to visit www.TheEquityFinders.com for complete details.
by Laura Leatherdale