Real estate investing continues to be a popular strategy for entrepreneurs from all walks of life, as it provides more predictable, steady returns than stocks and bonds. Thanks to the equity created in a real estate investment, entrepreneurs can build a foundation from which to finance other lucrative investment opportunities.
While real estate investments of all types can offer great returns, two of today’s most popular real estate strategies include:
• Flipping a house to sell it for a profit
• Holding a rental property to make passive monthly income
Both are great options with numerous advantages, but it’s important to select based on your needs, abilities, and financial standing. To help you decide which real estate investment opportunity is best suited to you, let’s consider a couple of the pros and cons of each.
Fix and Flips
• Potential for immediate profits: Most people who choose to enter the fix and flip industry are looking to turn a quick profit—and the right flip can help you make money quickly. Returns can be achieved in a relatively short amount of time.
• Real estate markets are easier to predict: Unlike the stock market, which can fluctuate daily, the real estate market remains steadier, and can be easier to predict.
• Unrealistic expectations: While you can turn a relatively quick, significant profit while flipping homes, this isn’t a given. Your success depends on an array of factors, including the properties available for purchase in your area, the team you hire, the real estate market, and comparable homes in the area. Many flipping “newbies” tend to enter the industry with unrealistic expectations, which can be dashed if the first flip doesn’t go as planned.
• High investment costs: To purchase a fix and flip property, you’ll need to have the right amount of capital on-hand. In a slow real estate market, you may be able to afford the property you want with ease; in a hot, competitive market like Arizona, you may have to pursue alternative forms of funding like Peoria hard money lenders, as banks and traditional lenders are unlikely to fund a new fix and flip venture.
Running a Rental Property Business
• High returns in the long run: Buying and holding a rental property can help you amass wealth in the long run, as property values tend to increase over time. Short-term market fluctuations don’t significantly affect monthly rental income.
• Monthly income: If you’re looking for something to serve as a steady source of passive income, a rental property is the way to go. Typically, it’s much easier to find a renter than it is to find a buyer, and securing the right tenant means expecting a check each month.
• Continuing expenses: You’ll be responsible for maintenance expenses on your rental property, and be in charge of any repair necessary after tenant turnover.
• Monthly management responsibilities: With a buy and hold property, you’re signing up for quite a bit of responsibility, especially if you take over management duties and serve as the landlord for your property. While this can be circumvented by purchasing the services of a property management company, this in itself constitutes a new cost.
• Dealing with renters: It seems every landlord has a nightmare tenant story, and it can sometimes be difficult to avoid—even if you go through the screening process point by point.
How to Choose Between Flipping and Rental Properties
After assessing a few of the pros and cons of both options, hopefully you have a bit more insight into the investment strategy that’s best suited to your needs. Although your choice ultimately depends on your current financial situation and your investment goals for the future, there’s an easy way to discern between these two options.
Holding a rental property is typically more advisable for an entrepreneur that considers real estate the bulk of their investment portfolio. In contrast, fix and flip endeavors are better suited to entrepreneurs that want to supplement their already robust investment portfolio.