| by Kenneth Chase | 62 comments

Flipping Houses vs Owning Rental Real Estate


Should you flip your
house or should you hold it for cash flow from
a cash flowing tenant? That’s today’s video. Let’s dive in. Hey there, I’m Clayton Morris. I’m the founder
of Morris Invest. I’m a longtime real
estate investor. I flip houses, I own
rental real estate, I’ve done hundreds of rehabs. And today we’re going to
talk about whether or not you should flip houses or
hold them for cash flow. But before we do
that, I want to remind you to subscribe to my channel. If you’re not
already a subscriber, hit the little Subscribe
button down there. And hit the little bell, as
well, because it’ll remind you, as soon as a new
video is uploaded, you get that notification. And you can jump
in and watch it. So today we’re going to
talk about the differences between flipping and
cash flow, and where I come down on this
very interesting, you know, very
interesting niche. Now, I work with
and I have flipped a lot of houses in my
time, but I’ve also worked with a lot of flippers. I want to give you
sort of an average year in the life of a typical flipper
who maybe does five projects, OK– five projects in, let’s
say, the New Jersey area of the country, which
is what I know very well– and what a typical project, that
doesn’t need like a build out, like they’re going
to add a, you know, a second story to the
house, they’re not going to add anything to
the footprint of the house, takes about five, maybe
six months of work to get a property like
that up and running. So let’s say it’s a
four-bedroom, two-bath house. They’re not adding anything
to the footprint of the house. It can take them
pulling permits, getting all their contractors
in line, all their subcontractors in
line, can really take four, five, six months of work. And at the end of it, they
may walk away with $40,000 $50,000, $60,000, $70,000
in positive return. That’s great. And that’s what they
sold the house for. And they walk away with that
kind of cash in their pocket. Wonderful. Congratulations. That’s fantastic. And that’s the
allure of it, right, is that I’m going to
make that much money. It’s going to take me
that much amount of time. And I’m going to have that
much cash in my pocket. A couple things to
consider, of course, is that they’re going
to pay taxes on that. They’re owning the property
for less than a year. They’re going to pay
capital gains on that. That’s a huge chunk of that
cash taken right off the top in the profit department. And that house after
it’s sold, is no longer producing cash for the
owner of that house, the flipper of that house. They’re paying back interest
on loans that they probably took out, in order to do
the, to do the construction on the property. And again they’re paying
taxes on that money. To me, flipping is great. However, it is a
transactional business, meaning it’s like a paycheck– except the paycheck takes
five, six months to get. And you have to rinse and
repeat and start all over again. You’re not on Easy Street. So when you’re halfway
through that project, many of the flippers
that I know would be reaching out and saying, hey,
I’m ready for my next property. Do you have anything
because this one’s about to wrap up in a month? We’re going to sell that one,
but we need our next project. So while you’re
knee-deep in a project, you’re having to think
about your next project. And you’re having to start
to put the pieces in place for property number two
because, again, it’s a paycheck. And you technically
are living paycheck to paycheck with each flip. Now I just mentioned a property
that was not increasing the footprint of the house. Now what about a
property that is small and they want to increase the
square footage of the house– where you need to
pour a new foundation and you need to pull
all kinds of permits for expanding the
setback of the house? You need to check with
the city to make sure that you’re not encroaching
on areas of setbacks that you’re not allowed. Do you have to get a variance? All of these crazy
things that you may have to consider if you’re
increasing the square footage of the house. Additionally, if you’re doing
a build-out on a property– that’s what that’s called– you could push your rehab
beyond six weeks or six months into a year. I’ve seen 5,000
square foot homes with flippers and builders that
I work with personally, takes about a year to get them done. They’re big, they’re massive,
they’ve got a poor foundations, all kinds of permits
are required. And you’re pushing
into that year mark to get it done and sold. Think about the holding
costs on a property like that– the holding
costs from the bank on your construction loan. And then think about
how, you know again, having to pay those capital
gains taxes when you’re done, then having to find your next
project, and rinse and repeat. You’re getting one
paycheck in that one year unless you’re running
multiple projects at a time. But again it’s still a
transactional business– flipping– which
brings me to why I love Buy & Hold real estate. Buy & Hold real estate
produces for you constantly. It produces for you
over and over again. As you own that
property, number one, you’ve increased your net
worth by owning that property. Your overall– let’s say
you buy a $50,000 house but it’s worth
$60,000– your net worth is now $60,000 higher than
it was before you owned it. You also have cash flow
coming in every month from a cash flowing tenant
who lives in the property. So maybe it cash flows
$700 a month, $800 a month. You’re going to have that
for the rest of your life unless you sell the house. You also get to claim
depreciation on your taxes. The tax benefits are way
different than if you flip that house, right? Instead of paying capital gains
taxes on flipping that house, now the government
is helping you by being able to
defer and offset the other income that you
have coming into your house. Cash flowing rental real
estate, when you compare it to flipping real estate,
there is zero contest in my brain about this. I am all about holding
those properties for the rest of my life. And of course, you can
assess your portfolio. Let’s say you have
30 rental properties. And one, maybe, isn’t performing
as well as the other 29. And you’ve had it
for five years. Fine, consider selling that
one out of your portfolio. But I would even caution
you against selling it because you’re going to
pay capital gains taxes on that property. So what I would even rather have
you do instead of selling it, is do some sort of a
seller financing option with someone who might want to
move and live in the property, or selling it to another
landlord who would like to own rental property. Therefore, you’re able to
mitigate your capital gains taxes that you would have to
pay by selling the property. So to me, rental real
estate is the best way to build wealth in this country. And to me, it’s the best way
to invest in real estate. It’s the best vehicle in
order to create wealth. And remember, that
property is going to produce for you every month. It’s producing streams of cash. When that guy’s
flipping that house, it’s not doing anything for him. In fact, it’s sucking money
out of his bank account. Every day that a
contractor sleeps in, or every day that a contractor
is sick, or they order drywall and it didn’t show
up to the job site, that is money out
of their pocket. Owning rental real
estate every day is putting money in your pocket
and making you wealthier. I’d love to hear your
comments about this video, but first I want
you to subscribe. Click the Subscribe button
right here, the big circle, and subscribe to the channel. But in the comment
thread below, I’d love to hear your
thoughts about this. Are you a flipper? Do you own rental real estate? Or were you considering
one or the other? And again, nothing against
my flipping friends. I love those guys. I just don’t have
the stomach for it. And I would much rather have my
net worth increase and my cash flow– basically letting me
be financially free. That’s how I do it. And also check out our great
play lists here on the channel, as well. We’ll see you back
here next time with another great
video, everyone. Take care.

62 Comments

Matthew Glover

Feb 2, 2017, 4:38 pm Reply

Wife and I have been debating this for awhile. Thanks for the insight!!

Husshpupppy

Feb 2, 2017, 4:41 pm Reply

Ummm….Selling it via seller financing or to another landlord is still selling it and will still incur capital gains taxes, it doesn't mitigate anything. I don't think you really have a clue what you are talking about. You can sell a property and avoid capital gains taxes by using a 1031 exchange. Is everyone just making dumb ass yt videos on real estate now? Most people learn that their first year as investors. I think you're a poser.

Kevin McMullen

Feb 2, 2017, 8:16 pm Reply

I have a house that I bought three years ago for 58,000 with the intent of eventually renting it out. The time has come and I bought a bigger house across the street from the same house. But now the market has changed and the house is worth 80,000. I have a friend who wants to rent it and at the same time wants to buy it. My interest rate is only 3.5 percent and I own just under 53,000 on it. If I sold it to my friend I would walk away with around 25,000. Since we are in a bubble I am wondering if I should sell it or keep it as a rental. Rented it will make me 326 dollars a month positive cash flow after expenses. The house is directly across the street from me but is a solid house. I am on the fence about it and would love your input on this thanks in advance.

corice

Feb 2, 2017, 12:26 am Reply

I have done all of them, flip, hold and take back mortgages. I have found that the market conditions dictate. You have to go with the market. You are not always going to be able to buy those properties with high returns. When you can, then buy as many as you can. In that market, I was flipping some to get the down payment money to buy more. Tried to buy as many as I could without using my money. Living off rental income now. Not a fan of take back mortgages, interest rates are too low, would rather put the money in another property.

Filomena Dapaz

Feb 2, 2017, 5:53 am Reply

i have a house that igot together with my son we fix and suposed to be a flip and took me 1 year to finish and we had to keep pay the loan till sell it

Filomena Dapaz

Feb 2, 2017, 5:59 am Reply

can you make a video about if i decide to sell a rental I got for $60.000 fix for 20.000 now is worth $120.000 five years later ,,how much is the capital gains on 80.000 or 120.000?

Andrew Sokol

Feb 2, 2017, 7:13 am Reply

Your video makes the case that the rehab part of a flip is the most difficult and potentially expensive part of a flip strategy. But don't you rehab the houses we purchase through you? Why isn't it equally expensive and time consuming for you? I'm guessing your answer will be that you have qualified and experienced contractors you work with. If that's the case, and we have similar contractors in our market, doesn't that remove the rehab problem for us?

José Amaral

Mar 3, 2017, 11:06 pm Reply

Hi Morris hello from Portugal in fact your ideia is also my idea i have two houses one i've rented, i spent two years saving money and paid the loan i had, so i would like as you say a portfolio of over 10 to 15 houses but the amount of capital to do That it's not easy to get at least in portugal, maybe the concept of flip some houses to get capital to invest makes sense on the first years of investment… thanks for the tips ??

Filomena Dapaz

Mar 3, 2017, 5:09 am Reply

isn't buy.fix.and flip, what you do with turnkeys homes ? so you recommend to do both?

Radnally

Mar 3, 2017, 10:54 pm Reply

ive flipped and been a landlord. i can flip when i want and then have no responsiblity. and get a big chunk of money.
as a landlord, i have to manage tenants, house repairs. pay insurance and taxes. maybe mortgage as well. make no mistake, landlording is a real job and serious responsibility thats lasts the duration of your ownership. the cash is also coming in drips and drabs. in my experience, it takes at least 3 to 5 years of rent to equal the cash for flipping.and all the while youve got the hassle of being a landlord. im a contractor, so i also do my rehabs. This helps with my bias towards flipping. you can claim a lot if deductions against your cap gains as well if you know the system. a good accountant will know them.

Elsa N.

Mar 3, 2017, 8:56 am Reply

Good to know. Thanks!!!

Familia Gallardo

May 5, 2017, 1:56 am Reply

Yes buy and hold all the way! Thank you for your videos. I was on the fence about leveraging or paying off my 3 mortgages. After digesting some of your sage advice, I dropped a few thousand into a mortgage today!! Going to keep this up every month until everything is paid off within 9 years or sooner :]]

wave

Jun 6, 2017, 1:17 am Reply

so if you own the house for more than a year you dont pay capital gains ?

Justin Olsen

Jul 7, 2017, 4:15 am Reply

Are the capital gains taxed the same if you buy and sell as an LLC? If not, what is the difference

xquizts

Jul 7, 2017, 6:45 pm Reply

+Morris Invest, with regards to your point against selling and capital gains tax. What to you mean by seller financing option with someone who wants to move in? Or selling to another landlord? How does that avoid the capital gains tax issue? In the end there is still selling and still has to pay the tax right? Please advise Thanks in advance!

April

Jul 7, 2017, 5:52 pm Reply

I really like this video. I am a landlord and a flipper. Although I don't like getting those after hour calls being a landlord, I was getting tired of finding new properties to flip with its long rehab. period. This video gave me a better numbers perspective on the financial advantages of owning rentals. Love the idea of owner financing and claiming depreciations on my taxes and not paying enormous capital gains.

Too Whom It May Concern

Aug 8, 2017, 5:37 am Reply

Looking for an investor/partner I'm military investing in rental properties. I need capital for down payments. Most properties I invest in are turn key some in college towns, military towns. Gross Multiplier at between 10% and 12%. New up coming investor please contact me if your interested. Thanks!

shipdog44

Aug 8, 2017, 6:22 am Reply

I agree. Keep the property and rent it. Don't be the cheap landlord be the best. Don't cut corners and you can attract better tenants and will have less problems. I have a full time job and I buy and remodel two per year. I keep putting all the profit back into more property. I have been doing this just over three years. I did flip one and made a lot of money to get started but it took a year. I have almost matched my job income and in three more years I'll retire at 55 with over a million dollars in rental property and collecting over $!5K per month managing 12 properties. Keep them.

Dimitri White

Aug 8, 2017, 3:19 am Reply

Loved the video would you consider making one focused a little more on tax depreciation

Dimitri White

Aug 8, 2017, 12:23 am Reply

Thank you

song dong

Aug 8, 2017, 12:22 pm Reply

I like the way you are doing -buy and hold

obalajadia

Sep 9, 2017, 8:51 am Reply

My wife and I buy a property and keep it for at least 3 years, or until our expected selling price comes. During that time of holding it, we rent it out. Once our target price comes, usually within a period of 3 years (but we keep on holding it over that period until our target selling price comes), we sell it. Out of the sale money we buy two other properties. We don't rely on renter's monthly pay, we wait for the big price. Timing is the factor here. Renting is too slow for us, that is why once the best money comes, we get it and out of it we buy other properties.

AZDuffman

Oct 10, 2017, 12:48 pm Reply

The biggest problem with flipping is you almost have to be absent a conscience to do it. What you see on TV is complete ********. It is very, very hard to do a good job and make a good profit when you sell. You can do good work and live in it or lower-grade work. A few small issues and profit evaporates.

Also, flipping is impossible in the markets of 3/1, $50-70K homes. You need a very high top-end to make a profit since the stuff at THD costs the same no matter what house you are putting it in. This is why those shows are almost always in a high-cost market like Vegas, North Jersey, LA, Chicago, or Long Island. You cannot dump $40K into a place in Akron, OH and make $50K.

Anyhow, partly because of your videos motivating me I am meeting my realtor to look at a few places in literally 2 hours from now!

Hector Idarza

Oct 10, 2017, 7:01 am Reply

What I have wondered was, if I only have enough to buy just one $50,000 home. How long would it take me to purchase a few others? I really want to own rental properties. Not sure if you understand my question.

Eddie

Nov 11, 2017, 7:04 am Reply

Absolutely great advice thank you my, friend keep up the good work.

Dank Spank

Nov 11, 2017, 6:07 pm Reply

I totally agree with you. We have flipped houses and looked back with regrets because of the unanticipated rise in their value. we flip and then payoff our rental houses. So, flipping is done to have free and clear houses faster.It works for us.

Logan Salt

Nov 11, 2017, 6:22 pm Reply

What is the minimum amount you accept for an investment ?

Panagiotis Poulos

Nov 11, 2017, 3:22 am Reply

I have a house that I recently renovated it was inherited to us and we stand to make about 115,000 in profit I was planning on selling this property in order to take 68,000 and pay off my existing three unit house which will save me around $900 a month in the mortgage and with the remainder buying another multiunit what do you think should I sell or keep? This house would rent for $1200 a month

Alex Corral

Dec 12, 2017, 1:04 am Reply

Great video, but when you talk about the cash flow you should mention that's gross. The mortgage still has to be paid for most of us who need to finance. So if the piti is $350, and rent is $700. That's $350 x the 60% after business expenses. $210 net. Still good but not $700. Is this right?

LOKHighest

Dec 12, 2017, 12:10 pm Reply

Should I structure my investment business as an LLC or S Corporation??

MikeG82

Jan 1, 2018, 4:41 am Reply

I have 118k, what should I do?

Ricardo De La Peña

Jan 1, 2018, 12:29 am Reply

Love your videos, always appreciate your insight & almost always agree with what you’re saying…please correct me if I’m wrong but my understanding is one doesn’t immediately increase his net worth by the price of the asset just purchased. The net worth is relatively the same in that moment (give/taken acquisition cost, immediate depreciation, etc) because he no longer has that amount in cash or has incurred negative debt . Its only with time (to hold or improve) that assets increase or decrease in value and/or provides dividends/cash flow.

Filipe B

Jan 1, 2018, 11:12 pm Reply

Hello buddy, please give me your advise in my case… I rented a house for one year with option to debt this ammount and buy it in the next year for low price, meanwhile I did a little flipping in just 15~30 furnished days to rent for tourists in high season and workers in low season, I furnished all the house, now it is an active business which generates almost 50% a year of the price I will buy… but I was wondering to do a quick cash reselling it as an active business for an investor for a higher price than I would pay and it still would be low compared to how much a kitnet costs here and with higher incomes from tenants as a shared house… I could make +/- 80% of profits if I do this transaction to sold to someone and pay the actual owner the price he gave me in the contract… how can I do it in a legal way? how can I sell a buying promise to a person, pay the owner and kept my profits and make everybody happy with a good deal? Ps. With the income of this transaction I would escalate to a little higher an bigger rented house to increase cash flow…

Marvin Rivera

Jan 1, 2018, 6:51 pm Reply

Great advice, i do believe that to be able to hold a good amount of property you need to make money…so correct me if i am wrong, but i do need to flip so that i can get those rental properties going.

Richard Murray, Jr.

Mar 3, 2018, 11:04 am Reply

your comments regarding capital gains taxes are to accurate regarding IRS taxes. New Jersey you may have too, not surprising, but the IRS treats its as regular income taxes.

juan c. rios

Mar 3, 2018, 1:46 am Reply

Thanks,Morris, that's what I have been doing for ten years,it is fun.

Mario Anchondo

Mar 3, 2018, 6:03 pm Reply

Hello, would you have a strategy video on flipping houses and using the profits to buy and hold?. My ultimate strategy is to buy and hold but I need the capitol to buy and hold. Thank you!

estero verde

Apr 4, 2018, 3:08 pm Reply

So if YOU were to sell a house how would you do it___
Like
hold it for a least a year so don't pay capital gains taxes _ etc to keep most of gains

Blanca Gutierrez

Apr 4, 2018, 4:45 am Reply

How can I start if I don't have 50000 dollars to buy a house

Will Dennis

Apr 4, 2018, 2:05 am Reply

When he says $800/mo. in cash flow, is he talking about a property that's paid off? From everything I've read you're lucky to cash flow $200/mo. per tenant…

xdsmastermia

May 5, 2018, 9:57 pm Reply

if this is true then why do you promote Morris invest? all you're doing is flipping -_-

Jeffy Tood

Jun 6, 2018, 11:19 pm Reply

What you don't own that you can if it's paid for you understand the system one lawsuit away from losing everything

Shelton Love Sr.

Jun 6, 2018, 4:09 pm Reply

Lol, “nothing against my filping friends”. Shut the front door, kiss my grits. Lol. Any-who, thanks. For the info I’m enjoying your videos, good sound info. Thanks. . I’m looking to start my real estate investment journey soon. Much continued success.

Joey Lightsey

Jul 7, 2018, 4:04 pm Reply

I want to get into buy and hold real estate. Seams like a fun and relaxing way to build wealth for early retirement…

Earth2Artholomew !

Jul 7, 2018, 4:54 am Reply

I don't get it. Buy a house for $50 k, rent it out for $750 per month. Earning $9 k per year. Taking 5.5 years to break even. Minus repairs and various other expenses. Besides long term ownership, equity loans etc . . . Where's the advantage ??

Ethan Schatzline

Jul 7, 2018, 5:04 pm Reply

I’m confused by when you say if you buy a $50,000 that’s actually worth $60,000 that your net worth is now $60,000 higher. Don’t you mean $10,000? Because you now have $50,000 less in cash

Dienekes

Jul 7, 2018, 5:57 pm Reply

It seems to me that it depends on your goals. Do you want to work your tail off and get cash fast or do you want to build up more slowly and have residual income? The latter is obviously better if you are looking into the future at all, but sometimes someone can use flipping to finance buy-and-hold real estate. These two things aren't exclusive, they can be used together to build up faster.

Dienekes

Jul 7, 2018, 5:59 pm Reply

As for selling off properties, it's actually a good tactic if you are keeping track of market cycles. If you buy properties in an up-and-coming market, hold onto them until the market peaks, then sell them off and move that money to another up-and-coming market, you can build a LOT of wealth VERY fast. You just have to know where those markets are.

Pavl

Aug 8, 2018, 8:20 am Reply

What about flipping or wholesaling really expensive houses like buying 1 million, selling 2 million after 300,000 rehab?

Jeffy Tood

Aug 8, 2018, 3:20 am Reply

Yeah money just send it to the bank to pay the mortgage on it and you tenants trip or something sue your ass

ruben gonzalez

Aug 8, 2018, 12:58 pm Reply

First time buyer with no credit at all (not even credit cards) and no experience with any kind of real estate but extremely interested in owning a rental home. WHERE DO I START MORRIS?!

Chuck Diggs

Aug 8, 2018, 3:24 pm Reply

I cannot wait to get involved and create a better life for me

Iris S

Sep 9, 2018, 6:12 pm Reply

Hi. I’m new to all these videos. I would like to be an investor. Just curious, say if your rental property appreciated say by $100,000, why is it wise to keep it for rental streams vs. selling it and getting around $100,000 back? I’m trying to figure this out. ?? thanks’

Fernando Galindo

Sep 9, 2018, 3:32 am Reply

If you buy a 60k house for 50k your net worth doesn’t increase by 60k. You’re trading one asset (cash) for another (house) and this would only increase by 10k. However, according to accounting standards the cost principle states you record value of assets at purchase price regardless of worth. Thus according to this your net worth hasn’t changed expect from becoming less liquid.

Level1 Life

Feb 2, 2019, 3:03 pm Reply

I'm starting a real estate partnership with a few people and this was a huge question I was struggling with but you've convinced me rentals is the way to go. What locations in the country do you think are good? Is Salt Lake City good?

Oz C

Feb 2, 2019, 6:44 pm Reply

HEY Morris it's sound advice for people who decide to be real estate investors , I question you is the state of New Jersey a pro tenant state or a pro landlord state ???

M K

Mar 3, 2019, 12:39 am Reply

Some advantages of just flipping that you don't have to deal with tenants toilets and termites

kross keyy

Mar 3, 2019, 11:36 am Reply

I love your opinion on this morris

Fatimoh Jinadu

Jun 6, 2019, 7:02 pm Reply

I prefer Buy and Hold. I did not have one yet, I am in process.

JerzboyG88

Jul 7, 2019, 10:50 am Reply

How do you feel about owning condos? I’m thinking about owning and renting it out, are they a hassle?

edinaldo rodrigues

Aug 8, 2019, 7:51 pm Reply

Hi Morris . I'm increasing my finance liberty and improving my english with you. Today , I'm richer than last year . thanks from Brasilia

Common Sense NOT too common

Aug 8, 2019, 3:44 am Reply

Never flip unless it has a rough time renting it in the error because you made a mistake on the area.

Tenants are something but if you keep adding properties to the portfolio then it really adds up quickly. At some point you can add a nice percentage each year. As long as you are growing your portfolio then you are on the right track. Find you niche. Be the expert!

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