Should You Flip or Rent Your Rehab or New Build? Here's How to Know for Sure!
- The Flip or Rent Calculator
Note: you will need Microsoft Excel to use this. Download it, save it to your computer and put it to good use!
How do you TRULY know whether you should flip your rehab or new build OR hold it long term? Do you know for sure you're not leaving massive money on the table to flipping or selling too early? Watch this online real estate training - it will be quite eye-opening! This video will show you how to determine your initial profit from a house flip or potential rental income from a rehab project. Then you will discover a framework for figuring out exactly which real estate assets you should flip/sell and which ones you need to rent out and keep for long-term wealth accumulation.
We'll also show you how to create a free Rehab Valuator software account to make this analysis easier AND how to download a special supplement Flip or Rent Calculator at no cost as well! Learn more about how to determine if you should flip or rent real estate properties with this informative video.
Hey. Daniil Kleyman here, and this is going to be pretty short and sweet training, but one that I think almost everyone should watch. This is called To Flip Or To Rent - That is the question. Or rather, it should be the question. Honestly, I think what you're about to see is going to apply to your situation no matter where you are currently. Even if you're wholesaling or maybe you're doing fix and flips or maybe you're already buying rentals, this video and these concepts are going to be fairly eye-opening, I think, for almost everyone.
So, why should this be the question for a lot of people? Well, I see a whole lot of investors for go major long-term wealth in favor of quick profits, right? If you're taking a quick five or $10,000 wholesale profit, or let's say you're doing your fix and flip and you're taking a 30, $40,000 profit on that fix and flip, well, that 30, $40,000 may seem pretty nice, but I think you might be ignoring the many benefits of long-term real estate ownership. Because what's going to happen is you're going to take the quick profits only to get taxed to death by Uncle Sam. Capital gains are ugly and you're going to find yourself needing to do another deal to earn the next check and the next check and the next check. Does this maybe sound familiar?
But look, sometimes it's hard to know when to keep a deal, and taking the quick profit seems like the safest way to go. But what if you had a better decision making framework? What if you had an easy decision making framework for being able to say, "Okay, I'm going to sell this property and take the quick flip profits, or this one, I'm going to cherry pick it. I'm going to add to my rental portfolio." And the link that you see at the bottom, rehabvaluator.com/developers, it's a content area for our subscribers and clients where we are adding more and more real world content on real estate development.
Now, development can mean fix and flipping. It can mean new construction, but this is a content area geared towards developers; fix and flippers, builders, developers of apartment buildings. There is a wealth of information there, so that's what I'm going to show you in this training; how to create a better decision making framework for yourself and be able to quickly say, "Okay, I'll keep this one or I'll rent this one." I was originally going to create this exclusively for our Rehab Valuator inner circle members, but last minute I decided to make an available to everybody because again, I think this training is going to be very applicable to almost everyone in the real estate business.
But I'm not just going to give you this training. You're going to need least a free version of Rehab Valuator for this analysis, and you can go to rehabvaluator.com if you don't already have an account. The light account is absolutely free and will allow you to do all of the analysis that I'm going to how you today. And I'm also ... you're going to need the supplemental spreadsheet that I built specifically for this training, and it looks like this. And you can download below this video if you're watching this on our site, or you can go and find this training at rehabvaluator.com/developers and download the spreadsheet. It's yours to keep, no strings attached. Download, use it. You can share it. I don't care.
But I guarantee if you pay full attention here to this training, you'll find what I'm about to show you pretty eye-opening and maybe start looking at real estate in a totally different light. I'm going to show you another one, but for big long-term profit centers, the most investors overlook in their deal analysis. And I'm also going to introduce you to what they called the rule of 10, which is a great rule of thumb to use when making decisions on whether you should flip something or keep it.
So, let's get started. And the one thing I will ask is please pay attention. We're going to go deep into the numbers in this training. This isn't some bullshit fluff video where I'm going to try to give you a bunch of motivational memes and send you on your way or sell you something or whatever, right? This is meant to go deep into the numbers and truly give you a better understanding of how real estate analysis works and how you can use real estate analysis to help you build wealth. Okay?
So, let's say that there is a house and for the purpose of this training, we're going to use a new construction example because that's mostly what I do in my businesses; new construction are flips as well as new construction development for my rental portfolio, but you can apply these principles to rehabs as well. But again, just for the sake of this training, we'll use a new construction example. Let's say there is a house that you can build. You're going to buy the land for $30,000. It's going to cost you about $140,000 to build a house. It's a little three bedroom, two bath house, and your closing, holding and financing costs, we're going to keep it simple; we're going to say it's $5,000. We're really just going to ignore financing for the purpose of this example. Just to keep things very simple, right?
So, you've got two options. You can go and flip this house for $250,000 to a retail buyer or you can rent it out for $1,800 a month. Now, assumptions for this training that we're going to use; you can get your initial capital out in both scenarios, right? Just to keep things even between flip and hold, we'll assume that you can get your initial capital out in both scenarios, so if you're flipping, you can get paid back when you sell and if you rent, you can refinance and pull your cash out. You can use the BRRRR method, which I've been teaching for the last 10 years. I was probably one of the first, if not the first person out there starting in 2009 to be teaching our clients and subscribers this method where you buy, rehab, rent, re-fi, and then repeat. Or if you're doing new construction, it's build, rent, re-fi, repeat. If you go to rehabvaluator.com/developers, you're going to find detailed training on both of those methods. Okay?
So, let's dive into the numbers. Okay, so we are inside Rehab Valuator and again, everything I'm going to show you, even with the free version of the software you can do. So, this is the analysis screen. I can go in here and I can switch from rehab to construction, since that's what we're doing. I've entered my purchase price of land, which is $30,000, and then I've entered my closing costs and I can go in here and I can click detailed input and itemize them, but we'll just enter $3,000 closing costs and then $2,000 in holding.
And then I can go in here and then through my construction budgets. So, in the free version of the software, I can just enter a lump sum budget, which I have here. Now, with the premium version, obviously you have the full project management suite. So I can go in here, create a detailed budget, I can actually load in a ready to go budget. That's already done for me with all of my costs populated here. But again, we'll go and we'll keep it simple and we'll just enter $140,000 and. And by the way, quick detour back to project management again. This is something that we've been spending a lot of money building out. You have the full project management capability here where you can enter bids. You can store bids with all of your bid documents, manage all your files in one place. You can keep track of all your transactions for your project, and then compare actual budget and create reporting for it. This is really, really dynamic, but not to get distracted here.
So, we'll go back to quick lump sum and enter $140,000 for our budget. Click update. And then again, for the purpose of this analysis we'll ignore financing. All right? Just to keep it simple. We'll ignore short term financing, construction financing. And so here, you've got two exit strategies; flip and hold. For flip, we're going to say ARV is 250 and we're going to sell it for 250 with a 7% cost to sell. And I usually model in 7% because that's 6% commission and then another 1% for concessions I may give to the buyer for attorney fees on my end, et cetera, et cetera. So I'll enter 7% cost to sell, and here's my projected profit; 57 and a half thousand dollars. Nice chunk of change. And on an annual basis, I'm earning over 49% on my money. That's pretty good. That's very good.
Now, I can click here and click on hold. Again, we're going to say this is worth 250. I will go in here and enter my rents and I could do this for an apartment building with a thousand units if I want, but in this case it's one unit. The house is 1,500 square feet and I can rent it out for $1,800, and I'll leave the vacancy at zero just to, again, keep things simple. And quite frankly, in my portfolio, I don't really have vacancy on my single family houses. They're all rented 100% of the time. It's a very strong rental market and it's always been. And then I'm going to put this button and enter projected operating expenses for when the house is built and leased out. I've got my management fee in here, insurance, and I can enter my costs in a monthly, annual, or dollar per unit per year basis. 50 bucks a month in repairs and maintenance because it's a brand new construction house. I really shouldn't hear from these tenants for three, four years. And then property taxes. In my single family houses, my tenants pay all the utilities, they're responsible for their landscaping, so all of those, I'm going to leave blank and I'm going to hit update.
This tells me, you know, if I build this with cash and there is no permanent long-term financing in this, this is my cash flow; 1,391 a month. That's my cash flow and I'm making nine and a half percent return on my money, but I don't want to leave $175,000 tied up in this house. So what I'm going to do is I'm going to go in here and I'm going to select yes to refinancing, and this allows me to refinance into permanent long-term financing. Now, I'm going to say re-fi at 70% of the after repair value of 250 and the 5% rate with 20 year amortization.
Now, 20 year amortization is nice because it pays off my note pretty fast as I'm going to show you in a second. And we're going to enter one point here. This is my new loan amount, 175, and I'm leaving ... I know I said we wouldn't leave any money tied up, but I'm basically ... this point, what I'm paying in refinancing costs, that's what I'm leaving in the deal, right? If I zero out, let's zero out and say no closing costs, I'm leaving no money tied up in this deal. And this is my monthly cash flow, 236. So, actually not too bad, right? I've left no money tied up in this deal. On paper, I have $75,000 in equity and I'm cash flowing in 236 bucks a month. And this is a good sanity check because this tells me that the debt coverage ratio of the new loan will be 1.2, which is pretty tight. That's probably the minimum that your banks will want to see.
So, you may look at it and you say, "236 bucks, that's not terrible, but it's really not much," right? "Do I really want to manage this property and go through the headaches to collect 236 bucks a month?" The answer might be no, but we need more data, right? We need to look at this on a deeper basis. And that's why I created this spreadsheet that you can download called ... Let's call it the flip or rent calculator. Let's go over here, let me show you the spreadsheet. What we're going to do is we're going to ... Let me walk you through this. We are going to take the numbers from Rehab Valuator and we're going to populate them here, right?
So, this is our assumptions. 30,000 to buy. 140,000 to build. Value is 250. Other costs are $5,000 and then cost to sell, 7% times 250. So here's our profit, right? This matches what we had in Rehab Valuator; $57,500 net profit on this deal. And then for our hold scenario, same thing; 30 to buy, 140 to build, value of 250, monthly income of 1,800, and then our monthly expenses were $409. And our permanent financing rate will be 5% and the new mortgage that we get, what did we say here? Our permanent mortgage. Exactly. $175,000.
Does this cash flow match what was in Rehab Valuator? 236? Yes. It matches 236 perfectly. So, then I've got my global assumptions here. Let me walk you through this. This is going to be really cool analysis that if you actually take the time to pay attention, I think it's going to be really eye-opening for you. Capital gains rate, I think right now it's 20%. It keeps changing, but 20% effective tax rate on rental income. Now, what this is, is I've entered a rate of 10% here because this assumes that I have a positively cash flowing asset, but my net effective tax rate is going to be less than the income tax rate because of depreciation. So, if I look at my portfolio, I end up paying taxes on my rental portfolio, but it's much lower than 20 or 30 or 40%. It's around 10%. So again, we're just making assumptions here, right?
And then we're going to leave this at zero for now. This is rate of appreciation, rent growth and expense growth. And then this is an important input right here, reinvestment rate of flip profits. At what rate can you take this flip profit and continuously nonstop reinvest it into deal after deal? What kind of return can you generate consistently? Now, I know here we said we generated almost a 50% annualized rate of return, but can you do this nonstop for the next 10 years? Can you redeploy this capital and generate consistently 50%? It's very hard to pull off. So here I've entered 15%. Let's bump this up to 20.
So, here's level one. We're going to go through three levels of analysis, and I hope you're still with me. How much money do you generate now? What I like to use in these scenarios is a rule of 10. Rule of 10 says that if my flip profit is more than 10 times my annual net cash flow, then I sell. If my flip profit is more than 10 times what I can generate in a year from cash flow. So, take my first year cash flow, which is here, 2,550. So in the first year, I would generate net cash flow of around $2,500. If I multiply that by 10, I get $25,000. If my flip profit after my capital gains taxes, right? Because look here, we immediately chopped 20% off. So my first year profit after taxes is $46,000. My first year cash flow is $2,500, and if I multiply that by 10, 10 years worth of this cash flow is $25,000. Well, this rule tells me that I should sell it.
This is a pretty safe rule to follow because, look, you may say, you know, "Maybe there won't be any rent growth and maybe I'm going to be stuck collecting 200 odd dollars a month every month for the next God knows how long. It's not really worth my time." And that's a perfectly reasonable stance. So this is going to say flip it right now. If I can rent this thing out for $2,400 even $2,100, look, see this number? It's under 10. $2,000. Still under 10. This says hold, right? The rule of 10 says hold because in 10 years, even if rents don't grow. I will generate in cash more than I'm going to generate off of flipping except for this is passive income, right? I can hand it off to my property manager and this will continue bringing me money. This, I have to keep working for. Are you following me?
So, if I could rent this out for two grand, the rule of 10 says hold it because over 10 years I will generate just in cash flow, even if rents stay the same, far more than I will generate off of flipping right now. Right? So, here. This is the number. I really hope you're pay attention because this is very powerful stuff, but you need to be paying attention to these numbers. So, we're comparing $46,000 versus $47,000, but I can only rent this out for $1,800, so this is going to say flip it. But now let's hit this little plus button and look at level two analysis. And by the way, I'm going to tell you right now. the level two analysis is wrong. It's always wrong. But I wanted to show you this analysis. Instead of looking at how much now, how much over 10 years?
If you take this $46,000 and reinvest it continuously at 20% at this rate, this is what that money is worth over 10 years. And we're not looking at present value of these cash flows. We're looking at just gross numbers. Versus my cash flow over 10 years will just be this much; $25,000, right? So clearly this says flip. Sell this, take the 57 grand, pay the capital gains and move on, because as long as I can reinvest this $46,000 at 20% over 10 years, it's going to be worth this much versus my cash flow every year for the next 10 years is only going to be worth this much. So this will say flip.
Almost no matter what I do here, I can increase the rent the $2,400 and this will still say flip. I can increase this to $3,000. This will still say flip, right? I mean, if you ... But obviously it's wrong, right? Because if I can collect a grand and the half in cash flow, I'm going to keep this. This is wrong because it ignores almost everything that you should be looking at. So, let's click this little plus button and look at level three analysis. Level three analysis is going to include all the other benefits of ownership; NOI growth, which is income growth, appreciation, depreciation, and amortization, right? These are all very powerful benefits of holding the property. So here's what we're going to look at.
This number here is going to equal my cash flow over 10 years, right? This is my cash flow, but now let's look at depreciation. We are assuming that this is a residential asset. Right here, this will calculate depreciation over 10 years, or ... Yeah, every for the next 10 years this will calculate depreciation. So what it does is, and I can show you the formulas, this takes your cost basis minus the value of the land and then divides it by 27 and a half years, right? So again, this is very simplistic view of depreciation because you can depreciate certain items faster, like appliances and heat pumps. But if we just take the entire thing and depreciate it over 27 and a half years, over 10 years, you will get 52, almost 53,000 in depreciation, which will offset your income and save you money on taxes, right? Depreciation is one of the most powerful aspects of owning real estate. Even if the market stays flat, even if there's no appreciation, even if there's no rent growth, you will reap the benefits of depreciation.
Next line item is appreciation and right now it's zero because we set here the appreciation will be zero. And then finally, amortization. What you have here is an additional amortization calculator that I gave you, and so this is going to read the loan amount from here. It's going to read the mortgage rate from here and you can vary amortization. In this case we said 20, but you can actually even input an interest only loan or an ARM here, but we'll leave it the 20 year amortization and no prepayment of principle, but you can play around with us and add principal prepayments. And so, what this says is that if go back here on the 20 year amortization, you will pay off over 10 years, $66,000 in principal on your note.
So, let's look at level three analysis. If I take my flip profit of $46,000 and consistently, continuously reinvest it at 20% over 10 years, it's going to be worth $284,000. But if we add up all of these things, annual cash flow, net of taxes, net of our 10%, depreciation, appreciation and amortization, we end up with $144,000. And again, we're not taking ... If you're a math geek like me, you're probably asking, "Well, we should be taking the net present value of these cash flows today, et cetera, et cetera." We're just looking at gross cash flows over the next 10 years. What's this worth?
Well, so this is still going to say flip, right? So our analysis is consistent across the spectrum. Rule of 10 looks to be correct, but now here's where it gets interesting. What if we grow our rent at 30% and grow our expenses at 3%, right? That's a perfectly normal assumption, that over the course of 10 years, we're going to see rent growth in line or a little bit higher than inflation. So let's grow our rent and our expenses at 3%. Well, this still says flip, but our number got a little bit better here. Okay, well, what if we model in just a 2% annual appreciation for the next 10 years? Okay, well, 2% gets us closer. Now, so let's see where we would have to be in order to beat this number. 3%? No. 4% appreciation. So, if we can get 4% annual appreciation, we would say hold here.
And again, keep in mind that the offsetting factor here is that even if this number is lower, it's largely passive, right? For me to achieve $284 here, $284,000, I have to do deal after deal after deal after deal after deal for 10 years, consistently generating a 20% return. Whereas this is I buy the deal, I refinance, and then I hold it for the next 10 years. I outsource management to a property manager. So to me, this number doesn't have to beat this number, but this is where I would have to be; 4%. So, rule of 10 seems to be fairly correct.
Let's bring this all back to zero. What kind of rent would I have to generate for the rule of 10 to tell me to hold this deal now? $2,000. So instead of $1,800, if I can rent this house for $2,000, rule of 10 says hold. And then if I add in a rent growth and a 2% appreciation, nope, 3% appreciation, almost 3.2% appreciation, then long-term, that says I should hold as well. So, you can download the spreadsheet and play around with these numbers, and you can see the benefits of long-term asset ownership, that they far outweigh.
Here's where this thing breaks, right? If you don't think you could consistently do deal after deal after deal from next 10 years and generate 20% returns, what if it's only 15%? Well, this number just got crushed, right? We just went from 284,000 to 186,000. So now I can rent this house for 1,800 bucks and grow my income. And here's the cool thing. I'm growing my rent to 3%, I'm growing my expenses to 3%. If my income grows faster than my expenses, I win. If I can grow my rent at 5% in expenses at 3%, boom, I win. If I grow them equally at 3% but I have 2% depreciation, I win, right?
This is what I make over the next 10 years; 52 and a half thousand dollars off of cash flow, 52 grand off of depreciation, almost 55,000 off of appreciation, and another $66,000 off of debt pay downs. Do you see how powerful this is? Even if my rule of 10 says flip, over the long-term, I'm much better off holding this deal. And you can mess around with these inputs. If you're in an area that it's going to see ... If you're in an opportunity zone or if you're near major development and you might see serious appreciation for next couple years, plug in like a 5% here. Look what this does. Look what happens here. Compare this number to this number. If you can grow rents at 3% while keeping expenses steady, it's not super realistic because your taxes will grow, your insurance will grow, but if you can grow rents faster than expenses, oh my god, you win big. Look, your rule of 10 says flip it, but long-term, look at this number versus this number.
So, play around with these inputs. Use this for your decision making, right? Rule of 10 is a good, quick rule of thumb when you're thinking short term. I'd rather take the 46 grand than manage this deal for 236 bucks a month, right? It's not worth the trouble. But long-term, oh my god, I should hold this. Long-term, look at how much wealth I'm going to build, right? Look at how much wealth. Instead of taking $46,000 now, over 10 years, I can make between just amortization and appreciation, 223 grand. After that, another 52 grand in depreciation and almost 80 grand cash flow. Instead of making $46,000 now, over the next 10 years, I can make $355,000 passively. Do you see how powerful this is? If you're not keeping deals right now, at least some, and building a rental portfolio, I think that is a mistake. Rental real estate is one of the most powerful, consistent wealth generators anywhere.
So, download the spreadsheet, play around with these inputs. Plug some of your existing deals. You can do this for new construction. You can do this for flips. You can do this for multi-family. I've left all the formulas open so you can modify them. If you're doing commercial deals, you can just adjust your depreciation. Instead of 27.5, say 39. I think that's commercial depreciation, over 39 years. All right?
So, let's quickly recap the takeaways. Quick flip profits are great, but I honestly think most of investors ignore the long-term benefits of holding; appreciation, depreciation, NOI growth, and amortization. And then of course all of the other tax benefits. So, here's what I want you to do next. Leave me your comments, questions, thoughts below. If you're watching this on YouTube leave me comments here. If you're watching this on our website, leave me any comments, questions in the comment section. Download the flip and rent spreadsheet. It's yours. There are no strings attached. Download it, use it, save it, modify it as you see fit.
If you don't have a Rehab Valuator account, create one at rehabvaluator.com. All the analysis that I showed you, you can do for free. That free account is yours for life if you want it. There's obviously many powerful features of the premium version, but you're under no obligation whatsoever. Get the free account, at least. Watch this video again and follow along in the spreadsheet once you download it, right? And then again, here's the link to the software if you don't have it yet.
And share this video on social media. There are probably buttons below this video that you can use to share this on Facebook, share this on Twitter, on LinkedIn. Our goal is really to empower as many investors as possible to make smarter decisions in their deal making. So, spread the word. All right? And that's it. Thanks, and we'll see you in the next training.
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