Flipping vs. Rental Properties. Which is right for you?
Flipping? Or multifamily? ….. Instant lump sum of cash? Or passive income?
Decisions…decisions. While you take the time to think about how you want your profit, the better questions to ask yourself are “what’s my personality?” and “what’s my ultimate goal?” This will give you a better idea of where to start. Are you normally a patient person or are you constantly looking for action and get bored rather quickly? Looking to collect passive “mailbox money”? Or are you looking to repeatedly cash out and find another use for your profits?
I’ll go through some advantages and disadvantages of the two strategies so you can get a feel for which investment strategy might fit your persona. The best part is, you can do both eventually!
The main advantage flipping properties has is being able to profit in a lump sum after the home has been sold. Depending on your market conditions, you can expect and average profit from 40k a flip to even as high as 150k! Imagine doing this multiple times a year? Another advantage flipping has as an investment strategy is obviously time. Your capital will not remain hostage for several years before cashing your return, not to mention the headaches with tenants along the way.
From start to finish, the average time for a rehab project is about 3-6 months. You can take your profit and prepare for the next flip or go on vacation. Either way, your work is done. Cha Ching!
But in the famous words of Rocky, “The world ain’t all sunshine and rainbows…”
Flipping houses is an extremely operational game placing you in the new position as the project coordinator which is the first disadvantage. Missed deadlines and delayed renovation efforts could immediately kill profit potential. I’ll tell you first hand being in the business, your renovation team of contractors will be the make or break of your business. I can’t stress that enough. That leads to the second disadvantage which is the risk that is involved with this type of investment strategy. Don’t be surprised of the ‘losing 20,30,40k” horror stories. Without proper planning and exit strategy, yes this can happen. If you know what you’re doing, this will rarely happen – it’s just an understanding of the risks that are involved.
Think flipping is perfect for you? Or is your stomach upside down? What about the alternate investment strategy. Owning rental property.
By buying and holding single family or multifamily homes you’ve taken the passive income route which means less physical work and more steady monthly income which will be ongoing as long as you keep the property rented. Assuming no tenant issues or major repairs, you can literally sit there and collect checks – a clear advantage. Obviously if you are living in one of the units, you could live for free or with a significantly reduced monthly payment; another advantage.
If you can afford this strategy, you will find that all real estate properties slowly appreciate over time. Imagine having monthly cashflow for years until you decide to then sell for a profit? That’s a jab, jab, jab, RIGHT HOOK!
As a single family or multifamily unit owner you are entitled to important tax reductions as most property expenses can be offset by rental income. You can write-off interest on your mortgage or on any credit cards that you might have to use to make purchases for that property.
As much as you need tenants to become successful, they can also be your complete downfall. As much as they can put thousands of dollars in your pocket, they can cause damage to your property which can cost YOU thousands of dollars. You can only get paid when tenants are occupying your rental unit and if you find yourself with a property and no tenants – no income.
Not to mention if you actually do have a tenant……. that you need to evict. The eviction process can be extremely draining and cost hundreds of dollars for court and/or legal fees. The money coming in from rental income can literally be wiped away at a moment’s notice from the expenses that can be incurred. It’s unfortunate, but it happens sometimes which is why choosing your tenants wisely is a necessary skill you must inherit.
So there you have it, the pros and cons of both investment strategies. Think about your own goals and aspirations and decide which vehicle will best take you there. You may find out that both may work in your favor – all good!