Flipping is the worst job in real estate.
There are a lot of ways to make money in real estate, and I’ve done a lot of them:
I’ve been on the acquisitions side.
I’ve been a broker.
I’ve had a management company.
I’ve been in the turnkey space.
I’ve flipped houses.
I have privately loaned money.
I have borrowed private money.
I’ve been in every asset class, from multifamily to office to retail to self-storage and warehouse to new development, new construction.
I’ve done it all.
And I can definitively say that flipping houses is the worst of all of those different ways to make money in real estate. Here’s why.
So I was sitting on a discussion panel and being asked about social media and marketing, and I just brought it up. You can see that video here.
The idea wasn’t to sh*t on flipping houses. It was really that there’s a lot of things that people think are cool that really aren’t that cool. They make TV shows about it. And because other people who aren’t in the industry think that’s fascinating.
I was just talking about the flipping TV shows. And listen, I’ve got a bunch of very good friends who have TV shows on HGTV and stuff, and they’re phenomenal and fantastic humans.
But guess what? They don’t make their money from flipping houses. The only reason they do that is because of the influence that they get from being on a TV show.
You can make money from flipping houses, you can make a lot of money from flipping houses. But it’s not the best way to make money in real estate, is my contention.
So here’s what I’ve learned: you can develop a lot of skills in flipping real estate and flipping houses. You can go out and learn how to find good deals, negotiate with sellers, and how to deal with contractors.
At the same time, there are a lot of things that create constraints on you. For example, it’s hard to systematize the flipping of houses. Every house is different, so every design has to be customized. Different neighborhoods, different price points, different finishes: it’s ever-changing.
I’m not saying you can’t make money. There’s a lot of people who make a lot of money doing it and who are really, really good at doing it.
But it’s hard to scale and there’s zero enterprise value. You can’t sell a flipping business, right? It provides a good income, but every time you sell a house, you have to go and do it again in order to get paid again.
Usually people get out of their job and into real estate to get out of the rat race. But that’s like hopping out of the pan and into the fire! It’s the exact same position that they were in.
Maybe the check size is a little bit bigger, but if you don’t have some way to build long-term enterprise value, you’re on the same hamster wheel that you’ve always been on.
So here’s my point: If you don’t know that there are other ways to build wealth and make that upfront cash that you make in flipping, you just don’t know what you don’t know.
I’m not here to upset you or sh*t on what you’re doing in business. I’m here to tell you that there are other ways that you can make the same amount of money AND build some real wealth. Then you can offset the upfront money that you’re making in flipping houses with depreciation and tax advantages from doing things a little bit differently.
Let me give you an example. Instead of flipping a house, which takes a lot of time to source the deal, negotiate the deal with the seller, come up with the funding, go to closing, make sure you’ve got a clean title, lining up the contractors, putting a scope of work together, overseeing that scope of work, getting draws from your lender potentially if it’s not private money and easy to work through.
There’s a lot of work. You work with a realtor, you go and sell it on the open market, and you have a buyer who, based on their tastes and preferences, comes in and either likes it or doesn’t like it, moves quickly, or maybe moves really slowly.
Meanwhile, it’s not generating any cash flow and there are all these holding costs.
Now let me challenge you. What if you went and you bought a multifamily property? Or what if you bought a warehouse?
Or what if you bought an office building or a retail strip or something that was a cash-flowing asset?
Hear me out.
You go through the same amount of work to source the deal, the same amount of negotiating with a singular seller. But there’s multiple units.
The same amount of talking to your lender – just like there are hard money lenders when flipping houses, there are hard money lenders in the commercial world that’ll just write a check and give you all the money.
It’s just valued a little bit differently.
It’s not valued based on the comp down the street that sold with the same number of bedrooms and bathrooms and square footage, it’s valued based on the income that the property can produce once it’s stabilized, once it’s all leased up, and everybody’s at market rate rents.
So it’s just a few little nuances that you can absolutely learn. It’s the same overall process. My point here is you’re doing the work already. Why not add a zero and reduce risk by doing it for a cash flowing asset that’s a little bit bigger, right?
An asset that can be rented out can maybe reduce the ongoing carrying costs because you’ve got, say ten units in a building, whether that’s a retail building, an office building, or a multifamily building. If you’ve got ten units and five of them are rented, that’s at least covering your carrying costs and your operating expenses. Then you’re able to renovate the other five units, get those leased out, go back to the original five tenants, and either sign new leases and keep them as is, or increase the rents a little bit.
There are a lot of different angles that you can take on it without having the ongoing carrying costs, without having the liability of something sitting there, and having a predictable buyer at the end because they know that this investment fund or this long-term hold investor will come in and buy this thing at a 7% cap rate.
If you can be into it for a 10% cap rate at your cost basis, say you’re into it for a million bucks and it produces $100,000 a year of net operating income, and somebody else is willing to buy it at a 7% cap rate. That essentially means you can make about $300- $400,000 on this property with the same amount of effort, the same amount of time, usually with a lot lower risk because it’s cash flowing and it’s typically a bigger check size for doing the exact same amount of work.
So I’m not sh*tting on flipping houses. I’m sh*tting on the person who is so closed-minded to looking at other ways of making money and other ways to scale their business, that they’re just doing the same thing time and time again.
If you have the same problem five years into business or ten years – and I’ve seen people 20, 30 years in the business who still have the same problems 20 years later – that’s not good.
How do you still have the same problem? How are you still doing the exact same thing without progressing? I’m here to tell you there are better ways to make money, more tax advantaged ways to make money than flipping real estate.
If you can flip an apartment complex or you can flip a retail strip outside of 12 months (even 12 months and a day) all of a sudden it turns into long-term capital gains.
The other thing is, because it’s rental property, you can do a 1031 exchange that’s tax advantaged. You can’t do that on something that’s not a rental property. At least it’s frowned upon in the eyes of the IRS.
Or you say, I’m not going to frigging sell this thing. And instead of selling it and making your $300,000 pop, maybe you just go and get a new loan and you take all your chips off the table, and they appraise it for $1.3-$1.4 million, and they give you a 7.5% loan on it.
You get your million dollars back off the table, pay your lender back, and now it’s house money in play. But you have an actual asset with $300,000 of equity in it that’s built your balance sheet and increased your net worth. That makes you more bankable.
Every single month that those tenants are paying rent, it pays down the principal balance on your loan. And every single year, as those rents bump up in rental rate, it increases the value of the building. All of a sudden you pick your head up ten years from now and there’s a spread of paying down principal and rent growth and you’re like, hey, this thing is now worth $1.6 million, and you’ve created this forced savings of equity growth and true enterprise value while you take your million dollars and go and do it again and again and again.
You might say “Well, Tim, I need that $300,000 to live off of.”
No problem.
Maybe you take a 5% or a 10% acquisition fee, meaning instead of being into it for a million bucks, now you’re in it for $1.1 million. You take $100,000, you put it in your pocket and you take this acquisition fee.
“Well, oh, all I’m doing is borrowing from my own deal.”
Yeah, but it’s not you or your investors paying that money. It’s your tenants paying rent every single month that’s paying you to have that money in your pocket.
So that’s the beauty of it. Not only are you still making money upfront, but you actually are building enterprise value with tax advantages and long-term equity growth, while still having that midterm money that YOU control. I’m not worried about a buyer coming and buying the property. It’s one less thing I’ve got to deal with.
Now, you do have to deal with asset management or property management. If you have enough property, you can build that out in-house. You can find a decent property manager to then manage the property.
Or maybe you have retail tenants and office tenants, business tenants that are on triple net leases that you don’t really have to babysit. They’re responsible for taxes and insurance and maintenance and the upkeep and utilities and all the other things in that unit.
I’ve got a buddy who owns $100 million+ of office and retail assets, and he has ONE employee. That’s it. He has an admin to make sure that’s all taken care of, who sends stuff over to the bookkeeper – a third-party bookkeeper. And they just make sure he’s got a profit and loss statement every single month, and everything’s clean and easy to manage because he just goes business to business as opposed to having a bunch of tenants.
Personally, I’ve built out an in-house management company, so we don’t mind having the tenants. There’s a lot more that goes into that, a lot more moving parts and in and out.
But I can tell you that for me, as soon as I realized that this was feasible, I got the hell out of flipping houses. I couldn’t get out of there fast enough.
As soon as I understood that I could take all those skills and move into buying and holding commercial assets, it was game over. My net worth went from a million bucks to multiple eight figures within a span of a couple of years, just because I focused on long-term enterprise growth and building it that way.
So I’m not here to rattle your cage. Well, I guess I kind of am, but I’m not here to offend you. I don’t want you to be offended. If you get a little bit upset, it’s probably because you needed to hear this. Usually you don’t like the news that you hear the moment that you hear it, but then once it sits with you, you’re like, “hate to admit it, but he had a point.”
I want you to sit with this. I want you to understand that there’s something better out there, there’s better ways to make money. And if you have interest in learning a little bit more about this stuff, hit me up. I’ll point you in the right direction. I’ll give you some insights. I post content nonstop for free on social media, so make sure that you plug in to it and ask me questions.
Let me be a resource for you as you’re on this journey.
But if you’re always doing what you always did and you’re not trying to move the needle and not trying to grow and not trying to get outside of your comfort zone, you’re doing the wrong thing. There’s a rule of life that you’re either growing or you’re dying.
If you’re not growing, you’re staying stagnant, and that will eat you up over time. So take a look at some of these other things. I’m not saying to get fully out of flipping. If you’ve got a great business, if it’s automated, and good active income that you can create while you’re building up your portfolio, then fine.
But everybody I know who’s gone from single family into commercial, I’ve never seen go back to single family.
So make sure you’re following us. I’d love to hear your takeaways or some of your insights. Tell me a little bit more about your story as you’re going along. And if I can be a resource, don’t hesitate to reach out.
I appreciate you being here. Until next time, be your best.
We made a video on this! Watch it on the Legacy Wealth YouTube channel here: https://www.youtube.com/watch?v=vNJeQTQcOio
