Investment Property: Fix & Flip or Hold & Rent?

Are you leaning towards purchasing a house that’s a fixer-upper in order to put it back on the market after?

12:42 05 August 2020

If you’re in the process of buying real estate property and unsure of what path to take in terms of fixing it up to flip or hanging onto it for rentals, there are many considerations. There are pros and cons to each of these actions. It’s in your best interest to do a great deal of research before you make your final decision.

 

This is an attractive option for many individuals. If you’re ambitious, adventurous, and can make good use of your resources this just might be the right idea for you. Let’s take a look at the benefits and drawbacks of doing so.

 

Costs of Flipping a House

 

First, there’s the purchase price of the house. This is the cost of the house itself and the property it sits on. Since you’d already be doing a lot of work, you might consider buying property that has a bit more land than a small yard so you can put in a big shed, pool, or other add-on that will be attractive.

 

As a beginner, it’s ideal to find a property that mainly or only needs cosmetic repairs rather than some major rehabilitation. This way, you can make it work with a tighter budget and on a shorter time frame than you would otherwise. Also, you’ll be able to take notes and use what you’ve learned for future projects. Look at comparable properties as to their value and rehab costs before you make that leap. Remember that you’ll also be paying closing costs, which will typically be 2-5% of the purchase price. Research what materials, labor, and any other extras that you anticipate needing, will cost.

 

Live on the Property

 

If you do happen to take on a serious project that will require up to thousands of hours of work, and yet is mainly habitable, you can choose to live there and then reap the rewards later on. You can use this property to build up your investment portfolio. Typically for a house you live in you can avoid capital gains tax, but be sure to understand this aspect well.

 

An added plus to living in the house is that you won’t have two mortgages and if you find a good enough bargain, may be able to pay it all at once and not have to deal with a mortgage at all.

 

Going the Landlord Route

 

As a landlord, you’ll have some added responsibilities compared to if you’re fixing up a property and then letting it go. You’ll have continued communication and potential work to do on the building and premises. Another matter you’ll have to deal with is figuring out who will rent your house or apartments. It can be tricky to know if a person or family will be the right fit for sure, especially with all of the factors that are involved.

 

You should treat owning and renting out a property as a real business, like any other. You may want to decide in advance if you should form a suitable business entity, such as a corporation or LLC, in order to hold or manage the property - it may be a good idea to consult your attorney or accountant on this.

 

Prepare the House/Apartment

 

Though you may want to do more, at the minimum the space should have good flooring and paint. Make sure that there isn’t serious damage to fixtures, walls, floors, stairs, etc. that could affect quality of living. It’s also a good idea to prepare the exterior such as the lawn and stain the deck.

 

Screen Your Tenants

 

Prior to having people sign a lease, you’ll want to talk to numerous prospective tenants. Become a strong believer in tenant screening to vet prospective tenants. The costs are nominal, and become miniscule when compared with the potential costs of having bad tenants. At the very least get a background check and credit check. Be aware of federal and state laws that you cannot break when choosing your tenant. This can be a delicate area, and easily mishandled.

 

Property Management

 

If you’re completely new to this it may be worthwhile to go with a property management company to handle some of the work. For instance, a manager will organize maintenance, respond to a tenant’s complaints, collect rent, and even deal with an eviction process. This takes some of the stress off your shoulders and allows you to learn without making costly mistakes, some of which could become a legal headache.

 

Keeping Good Tenants

 

When you have a good tenant, you definitely want to keep them renting your property as this makes more financial sense than to have to find new tenants every year or two. If they’re respectful to you it’s crucial that you’re respectful and go above and beyond to make renting enjoyable for them.

 

One of the major things you should do is take quick action in responding to a maintenance issue. Go yourself or send someone to assess the situation as soon as possible. Then make a plan of action right away - and do this transparently.

 

Keep or Sell?

 

Fixer-uppers and house rentals both have their appeal. Ultimately, you’ll have to weigh your options to determine which makes more financial sense and provides you with the greatest overall benefits. Seek advice from professionals such as real estate brokers and financial advisors to give you more peace of mind with your decision.