“Do you flip houses?”
I’ve been asked this question several hundred times. My answer is always the same… “No!”
But the truth be told, I do flip houses. However, I don’t sell the flipped home for cash. I keep the home and collect monthly income. I buy homes that need work at discounted prices. I fix these homes up and then create monthly income by renting the home, or by selling the home with financing. I NEVER sell for cash.
Here is a home I purchased in 2014 for $17,000:
This is actually a 3 bedroom/2bath doublewide mobile home. This home has a permanent foundation and is on it’s own private lot. It’s not in a mobile home park. When I bought the home, it was a wreck. It was actually an estate sale and had been on the market for over a year without a sale. Nobody was interested in buying this home, because it was a “mobile home” and it needed a lot of work.
After buying the home, I invested another $10,000 to renovate the bathrooms and kitchen. I also had the interior of home painted and installed new flooring. My total investment was just under $30,000. I probably could have sold this home for $50,000 and walked away with a $15,000 profit after closing costs.
Instead I rented the the home at $745 a month. The property taxes and insurance are around $150 a month providing a monthly positive cashflow of around $600. Since renting this home, I’ve collected around $15,000 in cashflow after expenses from 2014 through today. This is about the same profit I would have received had I sold the renovated home in 2014. In two years, I’ve made the same profit I would have made flipping the home AND I still own the home.
This is why I’m not, and never will be, a real flipper. In my area it is far more profitable to keep the home and collect monthly income than it is to sell the home for a quick profit.
If I keep this home for another two years, which I plan to do, I’ll have my entire $30,000 investment back. The tenant living in this home wants to buy the home and I’ve declined their offer. Why would I sell such a profitable investment? That would be crazy.
This same scenario has repeated in different properties. I could sell the property for a nice profit, or I can keep it for an enormous profit. It’s an easy choice to make.
Each year I keep this home, I’ll collect around $7,200 of income.
10 years of income = $72,000 + the home
20 years of income = $144,000 + the home
30 years of income = $216,000 + the home
Had I sold the renovated home, I would have lost a substantial amount of money. I would have traded away $216,000 payable to me in annual installments of $7,200 for a measly $15,000.
Here’s the thing…
When you keep the renovated home instead of selling it, you’re basically reinvesting the profit made on the flip at the rate of return provided by the home.
In this particular property, the annual ROI is around 24%.
($7,200 of annual income divided by $30,000 invested)
So by keeping this home, I’ve invested my $15,000 “flip” profit at 24%.
The only way I could have increased the return on investment would be to sell the home for cash and invest it into a new investment offering more than 24% annually.
Why bother? Seems easier to keep the home and collect 24% each year. Maybe take a nap instead! I kinda like naps.
My market is obviously different than your market. Had this investment only provided an annual return of 5% or 6%, I may have sold it and reinvested the money at higher rates of return. I guess it always comes down to math.
Oddly enough, this “ugly” mobile home that nobody wanted has become a very attractive long-term investment!
Note: A major benefit to not selling homes for cash is you don’t need to invest in high end finishes. When I renovate ugly homes, I don’t waste money on granite counter tops, maple cabinets and expensive flooring. My goal is to make the home as nice as possible with the least amount of money invested. Every extra dollar I invest into the home reduces my return on investment. This is one of the reasons renting is more profitable then selling.
1 Response to "“Do You Flip Houses?” Plus A Look At One Of My UGLY Investments…"
Hi Rob:
Pyramiding.
Here in Canada Capital gains tax on the sale of a principal residence is entirely tax free however interest on mortgages on a principal residence is not tax deductible On investment property interest on money borrowed like on mortgages is tax deductible but capital gains on a sale is due upon sale at the rate of 1/2 of the gain over the purchase price less improvement costs. It all works out to approx 25% tax on the 1/2 of the gain. However there are further caveats that the CRA [Canadian Revenue Agency] watches like any more than three sales declaring a capital gain runs the risk of being re assessed as ordinary earned income and taxed accordingly. But why ever sell the golden goose as you’ve outlined?
I followed you former rent to own thoughts and that of your Mississauga associates [commissioned realtors] and could never get my head around selling to access profits that triggered tax plus commission shrinkage only to take the net shrinkage proceeds and buy another “flip”. That strategy only benefited the CRA and the commissioned realtors.
Pyramiding is a much better strategy by simply leveraging increasing equity to buy more, always staying within prudent borrowing limits. Its worked well. . No tax, no commission, only growing equity that can be tapped into periodically tax free.