Rent or Flip? Important Considerations Pt. II
In our earlier segment of this series, we examined one of the ways in which direct ownership of real estate can be turned into a cash-positive investment. As we discussed, renting is often time-consuming and comes with its own set of potential liabilities and risk as well as being a 24/7 fulltime job for you as a landlord. On the other hand, renting is generally safer in the long run than purchasing undervalued properties with the intent of selling them quickly for a profit, otherwise known as fix-and-flip.
In the real estate investment word, the fix-and-flip is undoubtedly the most glamorous transaction for an investor. Keenly aware of the intricacies of the real estate market with an eye for bargains, the fix-and-flip investors are the mavericks of real estate, parlaying their experience, knowledge, and organizational skills into turning a profit. Buying a fixer-upper property and selling it for a huge profit seems like a flashy and appealing endeavor, but as with most things in life, there’s far more to it below the surface. Just like an iceberg, what you don’t see or plan for can sink your ship in a big hurry, so before jumping in, there are a few things you as an investor need to consider:
Do I have a working knowledge of the real estate market?
This is probably the most important aspect of flipping. Do you truly have a practical understanding of the real estate market, or do you just “think” you do? Sometimes investors overestimate their skills or underestimate the importance of experience needed to turn a profit on a fix-and-flip, and failure to prepare oneself in this particular case can have disastrous consequences. Make no mistake, real estate investment isn’t the sort of thing people decide to do on a lark, and that’s doubly true of investors who flip properties; most of us are real estate agents with years of experience. If possible, work with someone prior to flipping properties yourself as a mentor, or at a bare minimum get your real estate license. Experience is the key here, and it informs the decisions you make that will lead to either profit or loss.
Speaking of markets, how does it look in this location?
Before you even consider and settle on a given property, knowing the ins and outs of the local market is absolutely crucial. If you have the experience to accurately read the market, now is the time to do your research and begin formulating decisions based on the unique nature of the local real estate market. For example, let’s say you have the opportunity to purchase an undervalued property; what makes you think anyone else is going to want to pay more for that same property when you resell it? Is there something about the property that drove the initial price down, or is it due to the area itself and its real estate market? What are the property tax rates? Is the area undergoing growth with new development in the works? Finally, what are the demographics, average incomes, and economic needs and characteristics of the area and thus potential homebuyers? As an example, most homebuyers are likely to be families, who will want to be close to shopping centers and recreational facilities as well as have access to child care or public schools. All of these things need to inform your decision to buy, because you have to buy with the intent to sell, and therefore need to have an idea of to whom you’re likely to sell, which brings us to our next point:
Preparation, planning, and goals.
It’s impossible to overstate the importance of this, so we’ll say it again: real estate investment requires a goal, which requires careful planning as to how you’re going to meet that goal, which in turn requires preparation to put that plan into action. When we stated earlier that real estate investment is not something that people do on a lark, the implied second half of that statement, which should honestly go without saying, is that it’s never advisable to barge into a deal or sale half-cocked. You need a game plan and a defined goal. Most investors set a profit minimum that they try to meet, provided market conditions are favorable, and work from the property’s initial price to factor in maintenance costs, property tax, market fluctuations, value appreciation, and finally the sale price, meaning:
It’s all about the math.
This is probably the single most crucial aspect of the fix-and-flip process. Rather than getting lucky or finding a super deal, flipping is a disciplined endeavor fueled by a strict adherence to the numbers. When you set your profit goal, everything must be factored in accordingly. As we said earlier, the initial price of the property, market fluctuations, value appreciation, contractor and maintenance costs, property taxes, security, and even the distance you have to travel to oversee repairs. As the owner, your presence will be necessary for most of the operations because you, as an investor, need to protect your investment. We’ve even seen some investors design software programs specifically for the purpose of calculating the costs associated with fix-and-flip properties while also controlling for variables in the market, which should underscore the importance of playing it by the numbers.
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– Get It Right Solutions LLC