Flip or Rent – choosing a strategy
Most investors think the Flip or Rent question simply comes down to “do I want my profits fast or slow and steady.” Both flipping and renting investment properties are great ways to grow personal wealth through real estate, as a source of additional income or as a full time business.
There are plenty of other factors to consider. Sometimes current market conditions make this decision easy. For instance, if you are investing in a high value market where rents have not kept up with property values then it is going to be harder to find rentals that cash flow. In this post we’ll explore how and when to best deploy these exit strategies.
1) Choose the right property for the strategy you select
Choosing the right property is a crucial first step towards having a successful flip or rental, you should look for properties that fit your comfort and experience level as well as your budget.
If a property needs an extensive rehab and you do not have experience working with contractors , then it might be better to wait for the right property that needs a light cosmetic update to appeal to renters in the community.
When implementing a buy-to-rent (B2R) investment approach, you may be able to take advantage of special hybrid financing programs of mortgages that finance the property acquisition and rehab and then converts to a long-term loan based on the new market value once the property is rehabbed and stabilized.
Another key factor when choosing a fix-and-flip property is location. A property in the right location will have a higher value when upgraded to the fit and finish of other properties in the area and will be an appealing home for buyers, selling quickly once it’s on the market.
A few things to look for in terms of a location are areas that are up and coming (i.e. properties in the area continue to appreciate at a high rate), have great schools, and have low crime rates. This is important for both flips and rentals.
You will have a big advantage if you are investing in the geographic market you live in. You will know what neighborhoods have the culture and amenities that will attract your prospective buyer or renter.
2) “Fix” for After-Repair-Value or Upkeep to Rent
After location in importance for a flip is to correctly estimate the rehab budget and the after-repair-value (ARV). A good rule of thumb is to over-budget on the rehab to cover any fixes that may arise throughout he project that are not initially a part of the list of repairs and upgrades. These can include new electrical wiring or replacing plumbing fixtures on the home.
The after-repair-value is what the home will be worth once the rehab is completed and is ready to be sold. An accurate way to estimate the ARV is to find sales comparisons for homes in the neighborhood and what they were sold for in the past.
To rent, the level of fit and finish and how it compares to similar rental properties in the area will determine how much rent you can ask for. You will also want to focus more on the durability and functionality of any upgrades to factor for the wear and tear on the rental.
You can see from the different approaches to upgrading and rehabbing a property that it is necessary to formulate your exit strategy going in to real estate investment project. It is always nice to keep your options open but when it comes to the decision to flip or rent you need to plan upfront.
3) Whether you Flip or Rent – build a reliable team
An issue that arises and eats into investor profits, whether you plan to flip or rent a property, is having an unreliable team. For the fix component, nothing slows down a project more than having to fire multiple contractors who are either unresponsive or doing sub par work. To avoid this costly and time-consuming headache, vet multiple contractors before hiring one to work on the project.
To find the right contractor, take multiple bids from contractors for the rehab needed on the property and look for the right balance between price and quality of work. One contractor may do great work but at a higher price than the budget allows and another may bid a cheaper scope of work but the quality of the work may not be up to your standard.
Once you have narrowed your list to the final two or three candidates, request references from previous clients who can attest to the quality of the work as well as their experience working with the contractor. After receiving the references, you’ll be able to choose the contractor that will complete the rehab in an efficient and quality manner.