What will you do with your Investment Property?

 

Today’s article comes from Daniela Andreevska, a Content Marketing Director at Mashvisor.

Flip or Rent Investment PropertyOne of the beauties of real estate investing is the numerous options to make money which the industry gives you. Whether you are looking for quick cash or for long-term income, whether you are after passive income or don’t mind rolling up your sleeves, real estate has the right answer for you.

 

 

To help aspiring young investors find their niche in the market, we will look at the pros and cons of flipping and renting out the investment property they are about to buy.

Buying an investment property is not the end of the process of becoming a real estate investor. It is just the beginning of this exciting journey to financial independence. Thus, before you take on the endeavor, you should have a very clear strategy of what you plan to do with your house. You have two basic options: to fix and flip the property or to start renting it out to tenants, whether you go for a short-term rental (also called a vacation home) or a long-term rental (i.e., a traditional rental).

The Advantages of Fix and Flip

• Quick Money

The number one pro of the fix and flip strategy is that you make fast money. You can conclude your whole endeavor in a few months and walk out of it several thousand dollars richer. As far as real estate goes, this is the fastest way to make money. And depending on how good you are at buying low and selling high and how much efforts you put into renovating the house, you can make a lot of money with this strategy.

 

• No Long-Term Commitment

Some people were just not born for long-term business projects. They have no patience, they start losing sight of things, they get distracted with other endeavors… Flipping is the right approach for these people. Because of the short timeframe of fix and flips, investors do not have to commit to any particular property or even to the real estate business altogether.

 

• No Need to Deal with Tenants

Some people are not people people and would make terrible landlords. Fix and flip eliminates the need to engage in long-term relations with tenants, property managers, etc. You still need to work with property sellers and buyers, agents, and contractors, but these relations are strictly business. With property flipping, you don’t have to worry about getting a bad tenant who will destroy your rental or someone who will be late with the rent each and every month.

 

• Moving on to the Next Project

Because fix and flips generally take just a few months to complete, you can soon be on the next project you have in mind. Actually, as you gain experience, you can start going through a few projects each year. The money you make from one will be used to finance the next, bringing you even more cash in. So, there is an important potential to grow your business.

 

• Forced Appreciation

Appreciation is one of the ways to make money in real estate. With fix and flip, you can make good use of forced appreciation by implementing improvements on the property to increase its value before you sell it.

 

The Disadvantages of Fix and Flip

 

• Very Demanding

Although flipping houses requires only short-term commitment, it is a very demanding endeavor. For a few months you will have to work closely and intensely with property sellers, brokers, contractors, buyers… While you can make a lot of money, it will be money earned with hard work. Fix and flips require an energetic person and preferably someone who is devoted to this on a full-time basis.

 

• No Long-Term Income

While you make money fast, once you are done with selling the property, you will not gain anything more from it. Unlike rental properties, fix and flips do not generate long-term income. You have to get onto the next project in order to make more money.

 

• No Natural Appreciation

Because you only hold the property for a very short time period, you don’t get to experience natural appreciation. The property will appreciate in value only as much as you do work on it.

Instead of selling the property as soon as you buy and fix it, you might decide to go for holding on to the house and renting it out. This real estate investment strategy has its perks and downsides as well.

 

The Advantages of Renting Out

 

• Long-Term Rental Income

The most important benefit of renting out your investment property rather than flipping it is the monthly rental income that you will gain from it. You can start making money from your rental property as soon as you get it in a rentable state and put it out on the market. As long as you are able to attract and retain tenants, you will be getting cash every month. Thus, investing in rental properties is an excellent way to secure your financial stability.

 

• Paying for Your Mortgage

If you decide to buy a rental property through a mortgage, you don’t have to worry about the monthly payments as in a sense your tenants will be covering your monthly dues to the bank. A successful real estate investor has to make sure that the rent he/she is able to charge for his/her house exceeds the expenses associated with buying, running, and maintaining the property. A positive cash flow is a must with rental properties.

 

• Easier to Finance

Speaking of mortgages, financing rental properties is much easier than financing fix and flips. Banks and other lenders like the fact that you will make money from your property so they are more inclined to give you a loan at a reasonable interest rate.

• Natural Appreciation

Natural real estate appreciation will help you make even more money from your rental property when you finally decide to sell it. In this way, you get richer not only in the short term through rental income but also in the long term through appreciation. And you don’t have to do anything to benefit from this type of appreciation. It just happens – in nearly any real estate market – while you hold on to your property and rent it out.

 

 

• Growing Your Investment Portfolio

As long as you have a positive cash flow property, you can use the extra cash to save up for a down payment on a second rental property. The more properties you hold as a real estate investor, the faster you will be able to save the money for new properties. That’s how rental properties offer you a way to expand your real estate investment portfolio without having to spend money from your pocket. Before you know it, you can be the proud owner of a bunch of rental properties and even be able to quit your 9-to-5 job.

 

The Disadvantages of Renting Out

 

• Long-Term Commitment

In order to make money from rental properties, you have to remain committed to your business in the long run. You have to make sure that your property is in a good state, that your property is not vacant, that your tenants are happy and paying the rent on time, that your property and income tax as well as insurance are taken care of, and the list goes on. Being a landlord is not only an investment but also a job. It is true that you can hire a professional property management company to do most of these tasks for you, but you will have to split your profits with them. Nevertheless, it might be worth if you don’t have the time and/or energy to deal with all the responsibilities of a landlord.

 

• Mortgage Payments

Unless you are already rich, chances are that you will have to take out a loan to buy your investment property, and you will have to pay back for this mortgage no matter what. Maybe rental rates might go down in your location. Maybe you land on bad tenants who refuse to pay the rent. No matter what happens to you as a landlord, you will have to find the cash to make your monthly mortgage payments. Otherwise, you run the risk of losing your property to the bank.

 

• Dealing with Tenants

Regardless of whether you opt for professional property management or not, you will still be very much dependent on your tenants. They might destroy your property beyond reason. They might stop paying the rent on time or at all. They might break laws within your property… So, you have to be able to deal with a wide range of potential issues before deciding to rent out your investment property and become a landlord.

 

• Fluctuations in Rental Rates

Both property prices and rental rates tend to go continuously up over time. However, this doesn’t mean that temporary dips are not possible. The rents in your area might easily drop down for a year or two and leave you with less money to make your mortgage payments and cover your rental expenses. Thus, it is always recommended to have some cash set aside for when you might need it as a landlord.

 

As you see, both flipping and renting out your investment property have their pros and cons, and it is not possible to say which one is the better real estate investment strategy. It depends on your personal preferences, your financial situation, and your market among other factors. Below we give you a few matters to consider when making this decision:

Flipping vs. Renting Out: Factors to Consider

Rental Demand: Are people looking for houses to rent in your market?
Rental Rates: Is the average rent for the type of property you plan to buy high enough to cover your mortgage and other expenses and leave you with positive cash flow?
• Return on Investment: What cap rate and cash on cash return can you expect from your rental property? Conduct careful real estate market analysis as well as investment property analysis with an investment property calculator like Mashvisor’s to make sure your investment will be a profitable one.
• Financing: What are your options for financing the purchase of an investment property?
• Employment: Do you have a full-time job? Do you have another source of income?
• Networking: How good is your real estate investment network? Do you know a lot of property sellers and buyers, real estate agents, contractors, property managers, etc.? Are you good at maintaining relations with them?
• Knowledge: How familiar are you with the real estate market? The rental one? Do you know how to valuate a property?

 

More good Real Estate Reads:

Real Estate and your senses by Lynn Pineda

 

About the Author: Daniela Andreevska is Content Marketing Director at Mashvisor, a real estate analytics tool which helps real estate investors quickly find traditional and Airbnb investment properties. A research process that usually takes 3 months can now take 15 minutes. We provide all the real estate information in easy to understand visualizations.

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