“You do not want to put all your eggs in one basket” – Jorge Vasquez
Are you thinking of starting in real estate and unsure where to put your money? Want to learn more about the advantages of real estate rentals and flips? Then join Jorge and Rafi, as they discuss the benefits of starting your career in rentals.
Note – This article has been created based on the YouTube video titled “Why rentals are a good investment?” by Rafael Castro and Jorge Vazquez.
Rafi: The topic we have for today is Why are rentals a good investment in real estate?
Jorge: One of the reasons for buying rental properties as an investment is because it is a tangible asset. You have a house vs. a piece of paper when you buy stocks. Another reason is cash flow. In the best-case scenario, you can add a 10% cap rate a year.
Rafi: I think the banks are paying only around .08%!
Jorge: Right, as a former financial advisor and banker, most people are thinking of 401k’s, money markets, and CDs (Certificate of Deposit), which make you around 1%-3%. But with a rental, even in a worst-case scenario in a rental property, you can earn about 4%-5% more, and this is only the cash flow and not the equity or appreciation.
Rafi: Got it. In terms of comparing it to flips, why would they put that amount of money in rentals? If I was a real estate investor, why do you think I should start with rents and then do flips?
Rentals are better
Jorge: I have two reasons. The risk and it requires more cash.
Rafi: For the risk perspective, why are rentals less risky than flips?
Jorge: Most flips require more money and funds. You have the acquisition and repairs. In a lot of cases in rentals, you can do the bare minimum. 9 times out of 10, you need to fix in order to flip.
Rafi: There’s a big difference with the scope of the rehab of a flip compared to a rental.
Jorge: So if you are a rookie and you start with flips, the payoff is more. The chances of earning more money is there, but there’s also a greater chance of losing money. Flips are riskier.
Rafi: Got it. So for a beginner, rentals are better?
Rafi: What is the second reason, Jorge?
Jorge: The second reason is taxation. Every time you flip, you will get killed in taxes. You get taxed on all of it. In a rental, you only get taxed when income is coming in. It’s a little easier than getting hit with more taxes.
Jorge: If you take the time to calculate the amount that you make in 6 months doing flips, then take taxation into account, you will notice that you will most likely make the same as rentals.
Rafi: Most of the time, because of the scope of the rehab, the entry-level in terms of budget is lower for rentals.
Jorge: You also more money to do flips. I would only do a flip if I only have enough to do three. If I have enough money to do three flips, then I would do one flip.
Rafi: So if a flip costs at $150,000, you will only go through it if you have $450,000?
Jorge: The reason behind this is, if one of them fails, you have the other two as a backup.
Jorge: You do not want to put all your eggs in one basket, then you are pressured to liquidate the property.
Rafi: For the flips that you buy, you still need a plan B with renting it. If we rented it, would we get something close to that 10%? If we buy a flip that we know we can rent in most situations, we can get close to that 10%. We can rent it for a year or two and come out still okay.
Jorge: Let me add more to what I said before. It is not that you need $450,000. It can be used for lending as well. You have to have enough, so even if your lenders offer you 80%, you have enough for planning and repairs.
Jorge: If you go into flipping intending to do only one, that is not going to work. You will end up working on it for half a year, and when you do the math, it will come out to be the same as a rental.
Rafi: In retrospect, you could have had at least three rentals. And, once you have six to eight, then you can start taking a look at which one you can do a major rehab and flip.
Jorge: Typically, when you flip a rental, you want to give it a couple of years to appreciate. You will have proof of rent from your property for an x amount of time, which will be very easy to take to an investor and increase the price.
Rafi: Ok, That’s all for today!
Jorge: For more information, deals, lending and wholesale properties visit us at home4income.com.