If you are interested in investing in real estate, there are some different approaches that you can take. The two most common options are “flipping” or “leasing”. Flipping is buying homes, investing extra money to increase the value with renovations, and selling them for a profit. Leasing is purchasing a home and providing the property as a home for renters. Profit is earned through rent and increased value of the home over time. What are the financial differences between these two approaches?
Buying a home to flip and sell for profit has its pros and cons. A pro to this approach is the return on your investment can be earned sooner. The timeline for purchasing the property, completing upgrades, and selling the property can occur relatively quickly. Plus, once the property has been “flipped” and sold the investment project is complete. Profit from a flip will vary depending on the initial cost of the home, the cost of renovations, and the sales market. The average net profit for a house flip is $30,000 according to this article from New Silver. Cons of this approach are the need for funds upfront to make the initial investments as well as a higher risk of loss. If you purchase the home at a high cost, spend a lot on renovations, or are unable to sell the home for the right price, you may take a loss on your investment. You also need to be aware of the potential for unforeseen damages in the home that could be costly to repair. It is good to estimate the cost of all renovations and repairs and add this to the cost of the home. See this detailed guide on how to estimate your repair costs. This approach also relies on the strength of the sales market since ideally, the turnaround should be as fast as possible. As with all investments, there is risk involved.
There are also pros and cons to purchasing a home to lease. After you have purchased the home, you can list the property for rent and start earning income. Some benefits are a steady income and an increase in the value of the home over time. Some cons are regular expenses and the time involved to manage tenants. Expenses to consider are HOA dues, mortgage, taxes, insurance, and management fees. There will be some upfront costs for initial cleaning, changing locks, and basic maintenance. Routine maintenance to the home such as furnace maintenance, chimney cleaning, and basic repairs will be necessary to keep the home from falling into disrepair. At some point, you may also need to replace the carpet and paint. This is important to note since this type of maintenance helps retain the value and prevents damage done due to neglect. Over time, other expenses may arise such as the need for new exterior paint, a new furnace or water heater, or new appliances. Tenant placement and management can be time-consuming and difficult at times. One con in leasing a property is the liability, every City and State has different laws that must be followed when providing a home for others. Rental properties make an average return of 7-8% annually (see this site for more details on how to calculate your profit, cash flow, and for more statistics). This approach is reliant on consistently having tenants and is a longer-term investment than a house flip, more comparable to a marathon than a sprint. This allows you to keep your investment when the market dips, and wait to sell when the market is at a high point. This method of investment can yield more profit than flipping a home, but ultimately takes more time, patience, and knowledge of the rental market.
A professional property management company can take the workload associated with leasing a property off of you. All Season, LLC CRMC consistently maintains a less than 1% vacancy rate, keeping our clients' homes rented and earning income. We ensure that basic upkeep is taking place, with a focus on preventative maintenance. Whether this is the interior of the home, the exterior, or the yard. All Seasons LLC takes great care to protect your rental property and keep happy tenants that are caring for your home. You can read more about All Seasons, LLC CRMC here.
We hope this guide helps you decide on what type of real estate investment is best for you. If you would like to discuss how All Seasons, LLC CRMC can help you with your investment, whether that be buying a home or renting out your property, give our offices a call today at 719.632.3368.
