Every home purchase is an investment. This holds true if you plan to live on the property or find a way to create a revenue stream from it. With the real estate market making a comeback, investors are stepping back in to find ways to put their money to work through acquiring property. The two options are renting it out or flipping it. Both have advantages and drawbacks. Which is the smart choice for you? Here are a few important considerations.
The Flipping Discount
Most properties that are targeted for flipping are offered at a discounted price because they’re considered distressed properties. On paper, that looks like a good deal. Then the home inspection report comes in and you discover you've got a lot of work to do to get it back on the market. The realty TV flippers make it look easy. Depending on the circumstances, it could be an easy process if you understand what you're getting into. With the right contractor and a good location, flipping a property could be end up putting a decent size profit into your bank account.
Renting for Equity
Buying a property to rent might not mean you'll score a discount deal as with a distressed property. However, the monthly rental fees you charge should cover your mortgage payments on the property. As that mortgage is paid off, you'll be gaining equity in the property. When a sizeable amount of that loan is reduced and market forces prevail, the property can be sold for a nice profit.
Landlord vs. Construction
If you want to make a career out of flipping properties, you should be constantly be on the hunt. This means looking for new homes, setting up cash deals and keeping the construction crews working. Once a property is secured, there’s a lot of waiting and spending. You have to be comfortable with your money being tied up in the project while waiting for the sale.
With a rental property, you'll be entering into a longtime relationship with your tenants as their landlord. There are property management companies who can handle many of the landlord responsibilities, but they will charge fees, which could cut into your profitability. Think about what it takes to keep your own household up and running. Now multiply that by one or two other properties. That is what’s in store for you.
The Revenue Stream
A rental property can provide a steady revenue stream. Suppose your mortgage is $1,500 per month and you can rent the property for $2,000. That will put an extra $500 in your pocket — a decent but slow revenue stream.
With the right flip, you could have several thousand dollars coming your way above what you invested in the property. The question becomes this: Do you want a steady stream or the big bonus? Of course, in either scenario, there are no guarantees. Both the rental property and the renovated house could sit empty for quite some time, which means you'll be picking up the expenses. Are you prepared for that kind of financial burden?
In either scenario, you'll have to take a proactive role with your investment. Clearly, there are other potential investments such as oil and gas production that let you be a passive investor. You put money in and wait for the returns, but you won't be working on an oil rig. No matter which investment path you pursue, make sure you consider all of your options.
