Renting vs. Flipping: Which Is Right For Your Next Investment? - 5 Arch Funding

Renting vs. Flipping: Which Is Right For Your Next Investment?

Posted by Michael Miller on July 15, 2017

 

Every time you acquire a residential property, you have a decision to make: Should you hold it for the rental income or flip it as soon as possible? There are pros and cons to both strategies but with a diverse property portfolio, you might actually find advantages to doing both strategies at once. Let’s take a look at some factors that might be have an impact on your investment decision.

Pros and Cons of Holding and Renting

Certainly one of the main reasons you got into the rental property business in the first place was to have a consistent monthly income. However, if you’re in the rental market for the long term, your expenses stay fairly steady—think fixed mortgage, predictable management fees—while your income has the potential to increase when you raise the rent or rent out additional units.

On the downside, there is the onerous task of managing the properties. You are now a landlord, meaning you may occasionally have to deal with tenants who are late with their rent or who don’t maintain the property to your expectations. If you use diligent screening procedures or hire a rental management firm, you could largely avoid that downside. However, you will have to assume the costs of ongoing maintenance of the property, which could be particularly burdensome and costly if your property is aging and needs repairs.

When you hold a property, it ties up your capital, which lessens your flexibility to move forward as other attractive deals present themselves. But when you build your rental income, you can alleviate that problem by accumulating cash for another potential down payment.

Pros and Cons of Flipping

Fix and flip investing can be a lucrative venture if the real estate market conditions support it. Older properties or those that have fallen into disrepair can be especially profitable, particularly if you’ve got rehab experience. When you buy bargain properties via a foreclosure or short sale, there is even more potential to heighten your profit.

If you flip the property, you will forgo any management or maintenance responsibilities. However, a big downside is that the short-term financing associated with flipping can be costly. Additionally, you’ll cut into your profit margin when you spend money to market the property and cover costs associated with the transfer of ownership. Time is your enemy here. You have to work fast, and any delay can be quite costly.

Determine Your Strategy

When determining your strategy, you need to look at current market conditions. Right now, interest rates are set to rise. You could flip a house in early 2017, given that potential homebuyers may want to act before interest rates put their homebuying dreams out of reach. By the end of the year, however, rental properties may be the more lucrative way to go as rising interest rates tamp down the housing market and make the rental market more robust.

It’s also important that you know your demographics. Is your locale more conducive to profitable rentals or flipping? In 2016, Realtytrac.com identified Baltimore, Maryland as the top market with the highest single-family rental returns. Two counties in Georgia—Clayton and Macon—also ranked high, while South Florida continues to be a profitable rental market. Conversely, the three most profitable markets for house flipping in 2016, according to WalletHub, were Sioux Falls, South Dakota; Fort Wayne, Indiana; and El Paso, Texas. Because market conditions change from year to year, it’s important to do extensive research immediately before making an investment decision.

Also, make sure to consider your strengths and your objectives. If you have strong property management skills and/or require monthly income, a rental property focus may be the best way to go. If you have good property rehab skills and can tolerate the ebb and flow of investment income, then flipping is probably best for you. If you invest in multiple properties, having a strategy with the advantages of a regular rental property income plus profits from your flips to finance additional properties can provide the best of both worlds.


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