There are two leading strategies for the average investor to actively create real estate income: buying rental properties or fixing up houses to sell. In today’s market, either strategy can be a good investment for property owners, though each one comes with different risks and benefits. The real question is not which is the better option in general, but which is the better investment for you. To answer this question, let’s take a closer look at fix-and-flip vs. renting.
Contents of This Article:
- Comparing Fix and Flip vs. Renting Out a Property
- Considerations for Fix and Flip Investors
- Which Real Estate Method is Right for You?
- Hire Property Management for Your Rental Investment
Comparing Fix and Flip vs. Renting Out a Property
Renting out a property is a valuable long-term investment. Property owners enjoy a consistent return on rentals over time, particularly with homes that have already been paid off.
When comparing the two real estate ventures, renting is similar to receiving dividends from stocks over time, whereas flipping is betting on the market. A flipper may get lucky, but the more dependable plan of action is to keep your money in an investment until it really pays off.
Rental property owners, like flippers, have to make sure that their investments are well-maintained, which requires additional capital. However, their consistent cash flow and tax breaks offset the cost of maintenance.
Many rental property owners use their investments as supplemental income to help save for retirement, college, or even just extra vacation money.
Since most rental property investors have other full-time jobs, many rely on a professional property management company to handle the day-to-day tasks associated with being a landlord. From routine maintenance tasks to rent collection and tenant screening, property management makes owning a rental property a breeze.
Flippers, on the other hand, may have to dedicate the majority of their time to balancing the cost-benefit ratio and ensuring that a home’s renovation will be worth the effort when they resell. Contractor hours are also a common concern, so these investors often spend a lot of time being hands-on with projects to ensure a timely completion.
Supply and Demand
Another reason renting can be so beneficial is that many people cannot qualify for home loans, given the higher standards these days. Property owners can take advantage of the situation by offering additional amenities and quality homes that are affordable yet don’t require down payments or any of the other costly fees associated with home ownership.
With the assistance of the right property management company, landlords can successfully benefit from multiple rental properties at once. Flippers, on the other hand, commonly invest in one house at a time, banking on a high return rate at the end to pay the bills.
Considerations for Fix and Flip Investors
Some people really enjoy the challenge of successfully flipping a house. It’s a game of risk and reward that requires careful planning and balance. That said, savvy flippers who work hard to complete their project and then market their finished products are primed to make the most profit. It’s not as sure a bet as renting, but the rewards are often more immediate.
With flipping profits averaging around 35%, flippers may have a hard time finding the “perfect project” they may see on television renovation shows, which often show homes exceeding a $100,000 profit or more. On the other hand, houses that see a $20,000-$40,000 profit off a single flip are more common.
To succeed, flippers must first budget for buying the property and then carefully estimate the cost of upgrades and repair work. They also have to work with private companies for financing and find quality, licensed contractors who will work within managed budgets. Another cost comes when the investor tries to sell the property.
A flipper will often use a brokerage company that will charge 6% of the total sale price. If flippers aren’t careful money managers, they may find themselves losing money with their flips.
Flipping homes for an income is a riskier type of venture for most individuals due to market swings and the need for a deep understanding of how to realistically renovate and market a property.
Those who love the challenge and have some contracting experience, however, can be successful while also being their own bosses and creating great homes out of neglected and unwanted spaces.
Which Real Estate Investment Method Is Right for You?
If you’re still not sure which investment is the better choice, ask yourself these questions:
- Do I have enough capital to flip? Flipping a home is an investment of time and money. You’ll need to be able to invest large sums upfront to make a venture work. If one private bank or company won’t lend you the money for flipping a home, chances are slim that another bank will. Home lenders are interested in helping individuals who are willing to invest over the long term.
- What happens if I encounter the worst-case scenario? For rental properties, the worst case may be that nobody wants to rent the home or that tenants destroy the property. In the latter situation, property owners can take legal action. In the former, an owner can sit on the property for a time or hire a professional property management company to help with marketing and tenant obligations. A flipper who encounters a worst-case scenario may face significant financial troubles after just one poor investment decision.
- Do I work well under stress, enjoy hard work, and manage my finances particularly well? If you answered yes to this question, maybe you have the perfect personality to make flipping or a rental property profitable.
Hire Property Management for Your Rental Investment
Every individual should carefully consider the pros and cons of fix and flip vs. renting for his or her market and personal situation. What works in one city may not work in another, let alone in other parts of the county.
Just remember that flipping homes is a huge gamble that can provide a great reward or be a costly learning experience. While on the other hand, rental properties require a lot of time and dedication toward finding tenants, maintenance, and general upkeep.
For more information about property management in Baltimore, Philadelphia, Northern Virginia, or Washington, DC, contact BMG today. We provide comprehensive rental management services, so you don’t have to worry about the day-to-day tasks of owning a rental property.