With a market value of over $485 billion, the US residential rental market has been providing its fruits to investors. The gross profit on a typical house flip was around $63,500 in the first quarter of 2021, providing an average of 37.8% return on investment. When investors are about to invest in real estate they often get confused in determining if a property will be better as a rental property or a fix and flip.
Both strategies have their pros and cons but, it depends on what the investor tends to achieve in terms of their financial goals. There are some key differences in a rental property and a fix and flip such as,
Duration of Investment
A fix and flip is a short-term investment project lasting until the rehab is done and the property is sold afterward. On average, it will take up to six months for an investor to close a fix and flip deal.
A rental property, on the other hand, is considered a long-term investment project. An investor will hold the property for several years and earn a monthly income through rent. The benefit here is that the rental property value will appreciate over time and is a great way for investors to earn passive income.
Property Management
When it comes to flipping a house the investor needs to actively participate in property management. It includes supervising the repairs, managing the manpower, approaching the potential buyers, etc. An investor needs to apply his managerial skills to invest in a fix and flip project.
On the contrary, a property bought with an intention to rent will have fewer repairs and can be effectively be managed by third-party real estate agents.
Source of Income
The income from house flipping is one-time and can be obtained only after selling the property at a profitable price. Investors can increase their income by flipping multiple properties at a time.
On the other hand, an investor can have a steady flow of cash through a rental property with an average increase rate of 10% per annum on the rent. They also have the option to invest in other rental properties through refinancing their existing loan. This also provides an opportunity for investors to increase their real estate portfolios.
Both rental and house flipping strategies have their pros and cons. Investors should use their experience and skills to better analyze a fix and flip or rental property. Let us have a look at what makes a property good as a rental or a fix and flip.
What makes a good rental property?
Several factors that make a property better to be invested as rental property are as follows,
1. Location
When investing in a rental property, investors should primarily take into account the location of the property. The location of a rental property defines the average rent it can achieve, the quality of tenants that will approach, and the appreciation value if a property is located in a growing real estate market.
2. Type of Property
There are several types of properties available for an investor to earn rental income from. The popular options include single-family homes, apartments, condominiums, or commercial properties. Single-family homes are the most preferred rental properties by investors. These types of rental properties are affordable, easily financeable, and appreciate faster as compared to others.
3. Condition of the Property
Investors should consider the repair and maintenance costs before investing in a rental property. Make sure to thoroughly inspect the property, a property with fewer repairs and a solid structure will qualify as a good rental property. While a fixer-upper will consume an investor’s time and money to make it rent-ready.
4. Offered Amenities
When acquiring a rental property, investors should look for the amenities that the property offers. Household amenities serve as a quality of life and uber-tenants love a comfortable lifestyle. So, investors should make sure that the property they wish to invest in has ample internal and external amenities such as,
- Plenty of outdoor space
- A balcony
- Good parking space
- Proper air conditioning
- Functional modern kitchen
- Separate dining room
- Minimum two bathrooms
- Ample storage spaces
5. The Property is Priced in the Median Range
A real estate investor should not consider investing in a rental property just for the sake of affordability; they must understand the real value of the property. Investors should perform rental comps to understand the true potential of a rental property. It is also important in terms of evaluating the property. A rental property priced according to the median range for the area qualifies as a better investment.
6. Provides Positive Cash-flow
The way to gain profit from a rental property is by having a positive cash flow. A positive cash flow is where an investor earns more income than the expenses and financing costs. Investors must ensure that the property always provides a positive cash flow in order to gain significant profit which can be used to increase your rental portfolio.
What qualifies as a good fix and flip property?
To determine if a property is a perfect candidate for fix and flip, investors must consider the following things.
1. Well-connected Location
Location is and always will be the primary factor defining the success of a fix and flip property. Investors should make sure that the property is located at a place from where every public facility like a school, hospital, grocery store, public transportation, or police station is easily accessible. Investors should review the neighborhood to make sure they get the best offers for the property they are about to invest in.
2. Reasonable Purchase Price
Investors should make sure that the property’s purchase price is reasonable and the after repair value (ARV) will provide them a significant profit margin. Find the best comparables (comps) to get an insight into what’s selling in the nearby area. Analyzing the right comparables will allow an investor to carry out necessary changes to the property in order to make it sellable.
3. A Solid Structure
Investors should consider the foundation of a property before investing in it. Make sure that the main foundations like the slab, basement, and crawl areas have been built using quality material and are strong enough to endure in every condition. A structurally sound property will allow an investor to avoid the excessive costs of renovation.
4. A Good Floor Plan
The property with a good floor plan will always qualify for a great fix and flip deal. A good floor plan will generally include appropriate room sizes, ample storage spaces, proper ventilation, etc. Investors should have a keen eye for the architectural aspects of a property. These types of properties are sure to attract potential buyers and can be easily flipped.
5. The Roof
The roof is one of the major factors that potential buyers will look for in a property. Investors should find a property or fix the roof enough to withstand every type of weather and provide better protection to the occupants.
6. Value-add Potential
Properties with a value-add potential have a great chance of receiving a better ROI. A seasoned investor will make structural and cosmetic changes that will add value to the property. Funding sources like hard money loans provide coverage on the renovation and repair costs, so investors don’t have to worry about the additional expenses.
The changes and renovations may differ by the type of property you wish to buy. Most investors prefer residential properties as a fix and flip project. Here are some of the major changes investors can make in a fix and flip the residential property to increase its overall value.
- Increase living space (adding another room)
- Upgrade the kitchen
- Upgrade wiring and plumbing
- Add wooden flooring
- Interior and exterior paintwork
- Updating main door and garage door
- Improve the landscape (garden overhaul)
- Improve the curb appeal
The Bottom Line
Rental or fix and flip properties are a great way to earn profits and increase your real estate investment portfolio. Investors should thoroughly inspect a property to understand if it’s better as a rental property or a fix and flip. Making necessary changes to the property will attract potential buyers or a better pool of tenants.
If you are looking to invest in rental or fix and flip properties, hard money loans are one of the best ways to fund your real estate investment projects. Seasoned hard money lenders like 14th Street Capital provide hassle-free hard money loans with flexible terms. Apply for a hard money loan now to quickly start investing in real estate.