Posted by Ed Garcia on March 03, 2006 at 12:00:18:
Mike,
One cliché is ?A quick nickel, is better than a slow dime?
meaning turning deals can can be not only good short term, but in the long run be more profitable. Here is an answer to a post I gave a few weeks ago that might shed some light on Real-estate Investing for you.
Real Estate Investing as a BUSINESS
Howard, I?m sorry but I disagree with you and your wife. If you?re going to buy houses, flipping is the way to go in Texas.
If you bought 5 houses, you?d be lucky to eke out positive cash flow, houses in Texas won?t appreciate like in California and meanwhile you?ll be Mr. Fix-it as a Landlord.
I?m sure your thoughts were, if we buy and hold we?ll have residual income to retire on. OK, nothing wrong with that thinking, but your holding the wrong properties to accomplish that goal. The properties that we should portfolio are the type of properties that are designed to make money, (Commercial Property). This can be a Commercial building, Strip Center, Apartment buildings etc. These properties make us money by design. Houses only make us money if we steal them and can sell them at a higher price.
Howard, I teach people how to do REI as a business. Don?t worry; you couldn?t go to my workshop because you?ve never done a deal, so I?m not soliciting you. I just want to tell you who I am, what I do, so that you can understand why I say the things I do to introduce you to my kind of thinking.
The old thinking or most small investors think to get in the business, I?ll buy a few houses and piece by piece build me a portfolio of properties that hopefully one day will be paid off and I can retire off of the income of my portfolio. It?s true that if you bought 10 houses and put 30 year self liquidation loans on each of them in 30 years or there about they will be paid for and you and your wife can live off of the income. However there is a better way to do it.
EXAMPLE:
You buy 10 houses and you do exactly what we?ve just discussed. You?ve got 10 roofs to fix, 10 garbage disposals to fix, 10 houses to maintain and will have to go from house to house in you pick up truck fixing whatever needs to be fixed. This is not exactly the ideal way to retire.
Wouldn?t it be better if you owned a 10 unit Apartment building that?s much more maintenance free and you have a manager taking care of it for you?
Instead of 10 houses all over town and driving all over town fixing and maintaining up keep, it?s all at one location and not as management intensive.
As far as return on investment and cash flow, 10 houses will cost you a lot more money then a 10 unit Apartment complex, so you would have a lot bigger investment and exposure in owning 10 houses. From the standpoint of Risk/Reward you get a lot more bang for you buck owning a 10 unit building.
I know what you?re thinking. Sounds great, but at this time I?m not in a position to buy a 10 unit Apartment building. Most people aren?t, and that?s why flipping is advantages.
You can buy fix and sell, until you done enough deals to work your way up. You can buy duplexes, triplexes, and fourplexes, just as easily as a house. You can buy them with 5% down by doing a 90-5-5 meaning 90% financing, with 5% down and 5% seller carry-back. This will also give you leverage. So you can see that there?s more then one way to skin a cat.
FLIPPING houses vs HOLDING houses.
If you buy a house to hold. How much do you think it will appreciate each year? Just for the sake of this post, lets say in Texas it will appreciate 5%. In a 5 year period of time assuming the market stays strong, the property will increase in value 25%.
So if I bought a house regardless of price, over 5 years it will go up 25%.
Howard, I have investors who have attended my workshop from Texas who buy between 50 and 60 cents on the dollar. These investors try to be in a deal after fix-up no more then 70% LTV (Loan To Value).
After saying that, lets say you bought a house for $55,000 put $10,000 into it for fix up and it?s now worth $100,000. You hold it for 5 years and now it?s worth $125,000. You now have a house worth $125,000 that you only owe $65,000 and have $60,000 in equity. Not bad and nothing wrong with this scenario.
However, what if you bought a house using the same numbers and sold it 4 months later for $100,000 making $35,000 and then purchased another house the same way doing the same thing in another 4 months. Do that 3 times a year and you made $105,000 in just one year. Conceptually, instead of making $60,000 over a 5 year period of time you could make $525,000. I have a student in Huston named Charlie Fuller who did over100 houses that way last year.
Food for thought,
Ed Garcia