Why Flipping Properties is Not Real Estate Investing

I have been talking a lot about my focus on flipping properties lately and it has got tons of attention.  I have people calling, texting and messaging me asking me how they can get started flipping.  That’s because everything thinks that flipping is ‘sexy’

I have been ‘flipping’ properties for over 12 years, but I have been using the BRRR strategy (essentially renovating a property and then flipping it to myself) by refinancing it for most of this time.  This allowed us to pull out our capital fairly quickly, keep the property and rent it out.  It also caused us to force appreciation on the property through these capital improvements.

Ultimately I am a HUGE believer in the buy in hold strategy.

We have grown our portfolio over the last 10 years to a sizeable amount and self manage our units.

Our focus on growing our wealth through buying cash flow positive real estate has allowed us to live a comfortable life knowing we have a cushion that will be continue to carry itself and hopefully allow us to leave something significant for our children and grandchildren.

But it is not a source of INCOME for us.

To me, flipping is a way to generate INCOME – not wealth.  True wealth building comes from buying and holding real estate.

In economics, wealth is the net worth of an individual (measured as assets – liabilities).  Pretty straight forward right.

Now while wealth represents what a person owns, income is what he earns, and it consists of the inflow of cash. In the long run, income creates wealth if it is properly managed. A person may have a huge income, but if he doesn’t save and invest this income, he will not be able to accumulate wealth.

Most of the strategies I employ in real estate are for wealth building purposes (buy and hold good homes in good neighbourhoods).  My tenants pay down my mortgage, my properties appreciate and I usually reinvest any cashflow that I receive – so in other words my money is working hard for me!  And best of all, most of my wealth is not taxed the same way income is!

Every time we buy a property, we ask ourselves “Am I proud of this property” as we want to have long term investments that we can pass on to our children.  We have no intention of selling as real estate is a wealth building tool for us.

Now don’t get me wrong, income is important too!  Income is what affords our standard of living and allows us to indulge in the experiences we value.  We need income in order to survive.  And that is why we have now altered our strategy to flipping homes as a source of INCOME.

Flipping houses is a business for us, and we use the money that we save from this to buy properties, which is where the ultimate long term wealth lies.

Let me show you some numbers:

BUY and HOLD Strategy – Price $375,000

Down payment – (20%) – $75,000 + closing costs = $80,000

Slight cosmetic renovations – $5000

Rental income – $1850 (gross) – $200/month net ($1200/yr of positive cashflow)

Now this property will have a mortgage payment of approximately $1250/month of which let’s say $600/month goes to Principal Paydown.

Principal paydown/year = $7200

Appreciation (5%) = $18,750 (remember – some years we have had much stronger appreciation than this!)

Overall – your investment was $90,000 and your return was (1200 + 7200 + 20,000) = $28,400

That is over 30% Return on Investment (ROI) – AND THAT IS JUST IN ONE YEAR!  Think about owning this property for 5, 10 ++ years!

Now in year 2 – you can either do it again or you can wait it out if you don’t have the capital.  I would say that by year 4 you have the potential to refinance this property and pull out enough cash to make another purchase.

FLIP Strategy

Sample property in Brampton ON – beginner flip (minor cosmetic renovations)

Purchase Price – $540, 000 (usually private off market deals)

Renovation Budget – $35, 000

Sell – $675, 000

There is roughly $30,000 in net profits to be made in a deal like this after factoring in costs like, land transfer tax, realtor fees when you sell, carrying costs and lender fees.

Once you become a more experienced flipper and are able to find bigger deals (especially in the city), you can start to loo at 6 figure returns on a single deal, but these projects are intense and require both time, a key understanding of renovations and the market.  Not to mention that they are much more capital intensive (six figure renovation budgets).

So I hope that helps give you clarity on the different strategies you can employ.

So until next time, happy Ontario Real Estate Investing.

Jose Jafferji, REIA