In my very first post, I told you our financial goal is to build a stream of passive income that we can retire off of. We want a stream of income that we don’t have to put in hours to collect. This seems to us to be the safest way to hedge against future uncertainty. If we are living off passive income, we don’t have to worry about losing our job, not being healthy enough to work, and other catastrophic situations.
So if passive income is our goal, why are we spending our time and cash flipping houses? Flipping houses is not passive. It takes time and effort to make these projects happen. If we aren’t working on our flip or working on finding a flip, it won’t happen. In contrast, our duplex pays us every month regardless of how much time we spend on it.
The IRS doesn’t even treat flipping houses as passive income. Income from flipping houses is taxed as self-employment income.
Lately, we have been pretty stressed about our current flip. We have been driving to the project almost every day to check up on contractors.
Also, we have to deal with contractors. Contractors are notoriously hard to work with. You can find good ones, but they charge a lot of money, because they know they can. Unfortunately for this project, we are having to babysit our contractors every step of the way.
This is the state of our 3rd flip. Excuse the toddler in the background. There used to be a pantry where the electrical wires are hanging down. Hello, new open floor plan!
I thought it would be interesting to flesh out why we are still doing this, since it is stressful and not directly contribution to our financial goal.
We need cash to buy more rentals
The short and sweet answer is that we need more cash. As I say in my “About” page, our yearly salary only covers our living expenses. This is not sustainable. We have to find a way to make more cash, so we can put it towards more rentals.
There are many ways to make cash on the side. Side hustles are a huge phenomenon right now. Particularly with young people, many of whom are struggling to make ends meet.
This post, from Young Adult Money has a great list of ways to make money on the side and why you should consider a side hustle. Some of these ideas require talents or time that not everyone has.
Luke has driven for UBER before, but we found that the per hour income wasn’t as good as we would like. Neither of us have any graphic design experience or any other talents that would lend itself to freelancing. With 2 young kids, we don’t really want to commit to spending our limited free time on a part-time job.
I’m not saying that these are bad ideas. I’m saying that these are great ideas, but everyone’s situation is different. We don’t have any skills to freelance and we don’t really have a lot of time to devote to a labor intensive side gig.
This means, we need to find a side hustle with a high ROI, with the investment being time.
The ROI of flipping houses
To really answer the question of why we are flipping houses, we need to look at the actual ROI of our house flips.
In our first flip, we invested about $46,000 of our own cash. We made just shy of 22,000. Our return was 47%, meaning we got our original investment back plus an additional 47%.
Our second flip was more profitable. We invested $29,000 of our own cash and made $33,000. Our return on this project was 114%, which is much better than our first flip.
We aren’t investing any of our own cash into our 3rd project, so our return will be infinite. Well, not technically infinite, if you count the value of our time.
I should keep better track of our time, but I think we each average about 4 hours a week on a flip. If we hold it for 5 months (as we are expecting to with the 3rd flip), our hourly rate is $206. I estimate we will make $33,000 in profit on this flip. If both Luke and I put in 4 hours a week for 5 months, that is 160 hours total time spent. 160 hours/33,000 = $206/hour
Flipping houses is a short-term solution to our capital shortage
At the end of the day, we flip houses because we have a capital shortage right now. We need to find a side hustle that pays us the most return for both our cash and time invested. Either way you look at the return on our current flip, the pay out is worth it. An infinite return on our cash investment or $206/hr, is something worth spending time on, in my book.
This is certainly not our forever plan. Flipping houses is a lot of work and there is risk involved. Our ultimate goal is to live off passive income, and nothing about flipping houses is passive.
However, it is indirectly getting us closer to our passive income goals. We need cash to buy rentals, and flipping houses is providing us with that cash.
Alternatively, it is reassuring to know that if we ever do need cash, we have a lucrative side hustle.
What do you think? Do you know the ROI of your side hustle?
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