Why I DON'T flip houses (revealing my favorite real estate investing approach)

What's up you guys, it's Graham here. So one of the questions I get asked a lot is, am I going to be flipping this place or am I going to be selling it in the short term? The answer is no. In fact, of all five places I bought, I've never once wanted to sell or flip anything. This is my reasoning behind it.

Even though I've helped my own clients flip properties and make a lot of money, and I'm talking about in the hundreds of thousands or millions of dollars in profit, I have never once flipped a property myself, just by choice. I've just never been interested in it. From everything I bought, I just end up keeping it instead. That isn't to say that flipping properties is bad or anything like that, because I've come very close to selling a few of the properties that I just ended up buying, but I've resisted.

Here's why: to me, my focus has always just been building up my passive income. In the last six years of buying and investing in places, I pretty much got my rental income to cover almost all of my day-to-day expenses, allowing me to save 100% of what I make as a realtor. Then all that money I just reinvest back into more rental properties, and that just ups the passive income I make every month.

This is the type of investing I prefer the most, and it's partly due to laziness, because I know if I just focus on my passive income year after year and I work on increasing that, I can pretty much just retire whenever I want. That allows me to really focus on the things that bring me the most enjoyment, and it's also way less time-intensive than flipping properties. I take a very easy and lazy approach when it comes to real estate investing, and that slow and steady wins the race.

Once you set up a rental property with the right tenants, it could pretty much just run on its own without you getting involved and make you money even while you sleep. Now, here's just a quick disclaimer before I get into it, but people could make a lot of money flipping, so don't get the wrong idea that like I'm not for flipping or that I disagree with it. Because some people can be very, very, very successful and make a ton of money by flipping properties. So it's a great business to be in, and there's absolutely nothing wrong with it.

Everyone's goals are different, and some people just prefer the immediate profit of a flip. But here are my own personal reasons with why I decide to keep them as rentals instead. The first is that it's a lot of work to flip properties, especially in a really competitive market. When you're trying to buy a property at a good value to be able to sell it for a large profit, especially when inventory is really low like in this market, finding a good deal could take months.

While it could generate a very large profit immediately, it takes a lot of work and skill involved to find those deals, get them up, and sell them in time. The second issue that I see is that when you go and sell it, it's taxed as ordinary income. This is a lot different than if you hold it for a year or two, and you sell it; then it's long-term capital gains, which is taxed at generally a lot less than what your ordinary income would be.

For instance, for me, if I flip the property, thanks to California, chances are I would be taxed at almost 50% of my profit, which is just ridiculous. Now, that's up the third issue I have is market timing. Especially in a really competitive market like Los Angeles, finding a good deal could take a long time. For me to find this place, it took me six months of looking every single day for a good deal, losing out on some multiple offers that just went way above what I thought the place was worth and eventually finding this.

So all in all, it could take you a few months to find a good deal, then another few months to fix it up, and another few months to go and sell it for the profit. Sometimes, you're looking between four and nine months from beginning to end to flip a property. Now, in the bigger picture, a lot could happen in that time frame. Interest rates could go up, something could happen in your local market, something could happen to the stock market or the economy. Something could affect the value of a property nine months down the line, and unfortunately, we can't see what's going to be happening nine months from now.

The market could very well just continue to appreciate, and you make even more money than what you expected, or something can happen, and you potentially risk some of your profit. It's just a lot of unforeseen things that could happen nine months from now. A flip should ideally take between two and five months, and to get it done that quickly, it's really just a numbers game. You have to have more properties in the pipeline to continue to get renovate and sell really quickly.

This really helps mitigate your risk when you have multiple things going at the same time. So the fourth issue I have is profit. Now, let's take this place as an example. I'm going to be in this place about $700,000, and by that time, it's going to be worth somewhere around $850,000. So on the big picture of things, it looks like I've just made $150,000 in equity, but it's not that simple.

If I go ahead and list this place for sale, I'm going to have to pay 2.5% to whatever agent brings a buyer to this place. That's $21,000 of my profit gone. I'm also going to have to pay about 1% in closing cost, so that's going to be another $8,500. We're also going to have to subtract about $5,000 from my carrying cost, and that includes expenses like holding my mortgage, paying interest, property taxes, insurance, and everything else that goes along with that.

So all of that added up adds up to about $35,000 that's reduced from the $150,000 profit, so that leaves me with about $115,000 left over. So wait, so I've just made $115,000? Well, not quite. Thanks to the state of California, almost half of that is going to go to taxes, leaving me with about $57,500 of profit. Now that could be seen as a lot of money, but get this: it took me six months to find this deal. That's six months of me looking every single day to find a property.

Then once I buy it, it's going to take me another month, maybe two months, to fix it up and get it ready. Then after that, I can probably get this closed and sold within 60 days, meaning my time from start to finish could be as long as 10 months. That's a $5,750 profit per month. If I flip this place, like I said, in order for that to make sense, I need to have another place lined up for me to move on to when this is done so I can start on another project or have that going concurrently with this at the same time.

$5,750 per month to me is really not enough to go through the motions of buying a place and all the stress involved in fixing it up, and that really takes the time away from working as a realtor, which is really where I earn the bulk of my money. Now, my fifth thought is that if you have that much equity in a place to flip it for a profit, chances are you can ask higher rents, which would just increase your cash flow.

So to go back to my flipping example, if I were to rent this place out at full market value, it would pay for itself and give me an additional $1,300 per month after all of my expenses. That also doesn't include paying down the mortgage, which would add an additional $700 per month in equity. So that's a total return of about $2,000 per month in passive income.

Now, of course, that's a $3,850 per month difference between renting it out long-term and selling it for a profit. But the major component here is that the $3,850 per month that I would gain in selling this place takes a lot of my time away from my main focus, which is working as a realtor. It also requires constant hustling to keep that momentum and to keep that income flowing.

That $3,850, by the way, is not consistent. Some months it could be a lot higher depending on the property you're flipping, or some months it could work out to be a lot less if you end up earning less profit than what you originally had anticipated. So it really just entirely depends on the deal you have and the type of market it is, and the area, and the price range. Your profit could vary wildly, and it's very inconsistent depending on the deal.

So what I'm essentially doing is just buying myself another job. Flipping properties tends to be another job that definitely could be very lucrative, but it's exactly that: it's a job. Versus buying a place and renting it out, that's really not so much as a job; it's a lot more passive and a lot more long-term than buying something to flip.

Flipping properties is really like a job, and what I'm looking for instead is passive income, which to me means total freedom. For me, I'll take the $2,000 per month without doing much. It just requires some upfront work and an initial investment to get started, but once you get it going, it could run for a very long time without you really getting involved.

Now, this is not to say that flipping a property isn't lucrative, because it is, and people make a lot of money flipping properties, and it's a really great business to be in. But it's not a business for me personally that I really want to be in right now because my focus is just increasing passive income, and this is the type of investment that I prefer the most, because it doesn't require a lot of your work after the initial upfront investment that you make.

To me, my priority has always been to find really great properties that need a lot of work in an area that's very up-and-coming, fix it up, and rent it out. That's just my personal preference, and that is why I'm not flipping this place.

So as always, you guys, thank you so much for watching. If you enjoyed this, make sure to click that subscribe button right now. Do it! Subscribe, okay? Also, feel free to add me on Instagram and Snapchat. I post pretty much daily, so if you want to be a part of it there, make sure to add me there too. Thank you again for watching, and until next time.