Rent or Flip? Important Considerations Pt. I
Last week, we covered the two different methods of investing in real estate: direct ownership vs. real estate investment trust. This week, we’re going to go into a bit more detail, particularly regarding direct ownership. As we discussed, direct ownership is anything but a passive investment, but there are different ways to go about it and each has its own set of implications as far as what may be required of you as a property owner in order to realize the best outcome of your initial investment as well as risk and potential liabilities.
In the real estate investment world, the choice between whether to rent a property as a long-term investment and sell as the property value increases along with the market or buy an undervalued property and quickly sell it (otherwise known as “flipping”) is the subject of much discussion and, frequently, a question that leads to terrible advice. While both usually (and should) involve purchasing property at a low price, the benefits inherent to each are slightly different but nonetheless predicated on the initial cost and how it relates to the property’s overall value. For example, you might purchase a property at a low price and be able to take advantage of a low mortgage rate while the value of the property and that of surrounding properties climbs, to turn it into a long-term cash positive investment with a high yield a few years down the line. Conversely, you might find an incredibly undervalued property in a fairly hot market and be able to take advantage of a quick turnaround in order to fund more purchases in the same market as property values climb. Indeed, the considerations are more than just “different strokes for different folks,” as the saying goes; also factored in must be the area, surrounding property values, recent and projected market trends, and of course, how much time you can devote to your investment.
Remember, getting a good deal on the property is just the first step. Ideally, every property bought by a smart investor should be below market value, and that alone is not enough to guarantee a profit either way. Whichever you choose, keep in mind that one isn’t necessarily better than the other – the decision should be one based on careful calculation of the cost of the down payment and maintenance, as well as the potential risks and liabilities.
This week, we’re going to explore the possibilities and important considerations inherent to renting, or buying and holding property as opposed to flipping it in a quick sale. While it’s a bit less flashy than the prospect of buying an undervalued property and turning a profit in a quick sale, it’s also notably less risky in the long run. Before deciding to rent, however, there are a few important questions you need to ask yourself, not the least of which is:
Do I have the time, patience, and work ethic to be a landlord?
This is not a task that should be undertaken lightly. Being a landlord is a 24/7 job, and how well your investment performs is going to depend on how diligently you cultivate it. Apart from the concerns of how well your tenants treat the property, it’s nonetheless your responsibility to maintain it so that prospective tenants will want to rent it and to ensure that the property’s value stays intact and climbs along with the market. When the plumbing clogs at 2 a.m., you’re the one who’s going to address the problem. Electricity issues, pest control, central heating and A/C problems, landscaping, you name it: all of those things are a part of a landlord’s daily list of concerns. Landlords need a strong do-it-yourself work ethic and a high degree of organization – and the word “vacation” isn’t in their vocabulary – so make sure this is something you’re willing to take on before jumping in.
What’s the rental market like?
Before you buy a property with the intent of renting it, you’ll want to understand average rents in the area because the price at which you rent your property will determine how well your initial investment begins to appreciate. That, and you’ll want to have a working knowledge of the overall climate of the housing market in which your property is located, which leads us to our next consideration:
Location, location, location!
In some ways, this is the most important aspect to consider for a few reasons. First, most landlords don’t have the time to manage multiple properties that are spread out over forty or fifty miles away from each other or the landlord’s own home. This is crucial if you intend to own multiple properties. If you need to visit each site a few times each month, the farther you have to travel to each, the more your investments’ value may decrease. Second, for most investors, the idea is to sell the property at some point and as a “buy-and-hold” investor this probably means, for you, later rather than sooner. Therefore, it’s imperative that you know the particulars of that area’s housing market, such as future building developments, crime rates, property taxes, schools, and the usual questions prospective buyers will ask. Further, it’s important to know the laws of that area, which brings us to our last consideration:
What are the landlord/tenant laws in the area?
Of the subjects we’ve covered, this is probably the trickiest of the bunch. It should go without saying that you should always consult an attorney on the local jurisdiction’s laws before purchasing a property you intend to buy and rent. Everything from access restrictions to security deposit restrictions to eviction procedures can vary from county to county, and sometimes can change just within a particular municipality. Security deposit restrictions and eviction laws are probably the most important, since both have a direct effect on the risk that you as a property owner are exposed to. If it takes several months to evict a non-paying tenant, that’s time in which you’re not making an income while still being responsible for your own mortgage. If there are security deposit restrictions, any damage caused to the property while under lease may be barely covered by the deposit, leaving you on the hook for the rest. Again (and we can’t stress this enough), always consult an attorney and read up on the local ordinances before purchasing property with the intention of renting it.
In our next piece, we’ll discuss the opposite side of this particular coin, covering fix-and-flip methods and considerations. Be sure to follow us on Facebook and regularly check our blog for great tips and advice on investing in real estate!
– Get It Right Solutions