You want to invest in real estate but wonder which strategy works best. You could buy a fixer-upper, fix it and flip it, washing your hands of the property. Another option is to keep the property (fixer-upper or otherwise) and rent it.
Both may provide profits, so which strategy is best for you?
A Quick Overview Of Flipping
Flipping homes isn’t investing in them. You’re working for your money. Investing is more of a passive activity.
When you flip a home, you buy one that needs renovations and/or repairs. It may even be unlivable when you buy it. You fix it up, make it attractive for your target audience, and sell it.
You’re involved in the process from start to finish, somewhat actively, although you’ll likely hire contractors to do the physical labor and a real estate agent to sell it.
Once you sell the home, you pocket the profit and move on.
A Quick Overview Of Renting
Renting an investment property is a passive activity in terms of investing. You may or may not have to pay for renovations or repairs. Either way, you rent the home to tenants who live there full-time.
The tenants pay you rent which should cover all expenses for the home (mortgage, taxes, insurance, utilities, etc.) and leave you with a small profit. You actively manage the property (or hire a management company) and keep ownership of the property.
You earn equity in the home as the tenants pay your mortgage down, earning you a passive income.
Why Is Flipping Better?
There isn’t one answer that says ‘flipping is better’ or ‘renting is better.’ But, there are some reasons many people flip rather than rent including:
- Quicker access to your capital – When you flip homes, you invest money for a short period (usually 6 to 12 months).
- Less work – After you fix the home up, you don’t have the hassle of finding tenants and managing the property. You sell it and move on.
The Downsides Of Flipping
Flipping properties is great for many, but there are downsides to consider:
- Tie up your funds – Tying up your capital means an opportunity cost for other investments you could be using your money for, which could mean a loss for some.
- Extra fees and other expenses to calculate – Flipping homes incur closing costs when you buy and sell them, plus you have the added expense of capital gains taxes
Why Is Renting Better?
Renting appeals to some investors more for the following reasons:
- Regular cash flow – You don’t have to wait until the home sells (which can take months). You get instant access to monthly cash flow as soon as you sign a lease.
- Earn equity – When you buy and hold, you take advantage of the home’s appreciation. Couple that with the equity you earn with a paid down mortgage (rent should cover the mortgage) and you could have a nice return on your investment.
The Downsides Of Renting
Renting properties has its downsides too, especially with the amount of responsibility that comes with it.
- Actively manage – You’re responsible for almost everything with the house including 3 AM phone calls about burst pipes. You collect the rent, keep the house in livable condition, and make sure the tenants care for the home reasonably.
- Vacancy – A lease agreement is nice, but it’s not a guarantee that you’ll never have vacancies. If you do, you still have to pay the mortgage, insurance, and taxes.
What’s Right For You?
Think about what you want in the end. Is it a slow-growing investment that earns you monthly cash flow? Would you prefer to do some hard work upfront, but then sell your investment and make a lump sum profit?
Think about the work involved in both opportunities. Does one sound better than the other? Maybe one strategy fits your personality better than another. Of course, you should consider your finances too. Are you investing for the monthly cash flow or would you prefer a large capital gain that you can spend, save, or invest how you want?
There isn’t a one-size-fits-all answer. Every investor differs and each situation may be different too. Look at the big picture and decide where you want to start. You may find after you try one that you flip to the other and vice versa and there’s nothing wrong with that either. Find what lights you up and makes you the most profit in the end.