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Flip or Rent: How to Evaluate the Potential of an Investment Property

Posted by Carrington Real Estate Services on December 27, 2015 at 2:16 PM

Flip_vs_Rent_Home.jpgReal estate investing offers a wide range of possibilities that suit all types of styles and personalities. Over time, many investors discover that they gravitate towards one particular style of investing, but if you are just starting out these options can be quite overwhelming.

One of the biggest questions from many beginning real estate investors is whether they are better off to focus on flipping a particular house or holding it as a long-term rental.

As with any interesting topic in life, the answer is that it really depends on what goals that investor has and what they want to put into the process.

Let’s take a look at both sides of the discussion and see how each could benefit a new investor.

Building Capital Quickly by Flipping Houses

The big attraction to flipping comes from the idea that you can work on improving a house for a few months and walk away with an enormous profit. Of course, that is oversimplifying things a bit.

The best flippers generally target a return of 25-30% on the amount they invest to improve a house, and they average a turnaround time of about three months. This works out to an annualized return of over 100%, which would be a no brainer for anyone if it were really that simple.

The problem with flipping is that there is an unlimited amount of things that can go wrong. And if you are not experienced, those things could find you in bunches and ruin your profitability.

Building Long-Term Income From Rental Properties

The other side of real estate investing sacrifices those quick profits on flipping houses in favor of long-term wealth building. These investors are not going to create the windfall profits that flippers experience, but over time they can create passive income from their portfolio of properties.

In order to assess the value of a rental property, you need to calculate the amount of annual income you will make after all expenses. It is common to assume about a 10% vacancy rate and month repairs of anywhere from 5% to 25% of the monthly rent.

Once you have figured out your estimated net annual income, you can divide that number by the purchase price to determine your cap rate. In most areas, 6-8% is a solid cap rate and anything higher is a no brainer.

If you are financing the rental property, you can divide the estimated net annual income by the amount of cash you are investing to calculate your cash-on-cash return. Compare this number to what your bank CDs and investment advisors are offering and you can make your own decisions regarding the best place to put your money to work.

Flipping vs. Renting

The bottom line is that you can make plenty of money either flipping or renting if you know what you are doing. You can even do both if you are so inclined. It all comes down to personal preference.

When it comes to evaluating the best approach to take on any one particular property, you should run all the numbers both ways. How much could you stand to make flipping the property? What is the cap rate and cash-on-cash return if you keep it as a rental?

With those numbers in front of you, you will be much more qualified to tackle the decision.

It can also help to evaluate the type of financing you will be able to get for the property. With long-term commercial interest rates as low as 5% right now, you might find that financing a property into a 30-year mortgage is too cheap to pass up. But do you really want to tie up your profit for that long?

You should also consider what you want out of an investment. Are you interested in being a landlord? Do you want to deal with contractors and unexpected construction delays?

The answers to these types of questions are going to be different for every investor. Follow your gut, estimate conservatively, and plan for the worst and you will do just fine no matter what approach you choose.

Your local Carrington Real Estate Services agent can help you decide which path is best for your current situation and risk tolerance. Contact an agent today.

Topics: Buyer Resources, Agent Resources


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