Wednesday, December 6, 2023 / by Bell Home Team
Are you intrigued by the prospects of making money in real estate? Investing in real estate can be a robust addition to your portfolio, offering avenues for substantial returns and enhanced cash flow. In this guide, we explore two primary investment strategies—fix and flip and buy and rent—providing insights into their benefits, drawbacks, and money-making potential.
Exploring Fix and Flip: Real Estate on Fast Forward
Flipping houses has not only become a popular TV trend but a lucrative investment strategy when executed correctly. According to a recent ATTOM data report, homes flipped in Q3 2022 yielded an average gross profit of $62,000, with a 25% return on investment. However, profit margins vary across markets, and the fix-and-flip approach comes with its unique set of advantages and pitfalls.
Advantages of Flipping:
Cost-effectiveness: Fix and flippers often target distressed properties, allowing for a smaller upfront investment and reduced mortgage loan financing.
Quick returns: The turnaround time for a fix-and-flip property is relatively short, providing a swift injection of cash without the challenges of long-term property management. On average, it takes approximately 6 months to fully rehab and sell a property, according to ATTOM, giving fix and flippers that quick liquid cash out that makes this option so attractive.
Considerations for Fix and Flip:
Transactional costs: Home repairs, the initial "fix" in flipping, can be expensive, impacting the overall profitability. Being able to do some or a lot of the work yourself helps cut costs, but generally, reliable, honest contractors are needed for a chunk of the work. Finding a contractor to give you a realistic estimate of the budget you’ll need is essential. This way, you can be certain that the budget reflects how much you can expect to spend in order to get the property in sell-worthy shape, and you have an accurate timeline for the work.
Unforeseen complications: Zoning issues, permit problems, and unexpected repairs can pose challenges, emphasizing the importance of due diligence. It is a crucial part of the fix n flip process to ensure your renovations are done with the proper permits and paperwork. Without these, you could run into serious issues selling the property once you’re ready to list and/or have a potential buyer.
Diving into Buy and Rent: The Steady Income Stream
For those seeking continuous income, buying and renting out property can be an attractive option. Recent Realtor.com data indicates rising rent prices, offering a potential source of profit for investors who opt for a long-term investment strategy.
Advantages of Renting:
Steady income stream: Rental payments can cover various costs, including mortgage, property taxes, insurance, and a little something left over for you after operating costs are covered. This is what offers a reliable income source if you calculate your monthly rent right.
Long-term wealth potential: Real estate appreciation over time can contribute to increased profits, outlasting market fluctuations. Sitting out market downturns give you time to chip away at your mortgage (if you have one) and continue to capitalize on the monthly cash flow.
Considerations for Renting:
Maintenance hassles: Property owners may face ongoing maintenance responsibilities and tenant-related challenges, from repairs to rent collection. Without a solid hold on your rental income numbers, cash flow, and future planning for repairs, unexpected maintenance issues can create a serious hurtle for landlords. Not to mention, finding good tenants who pay on time, take care of your property, and don’t cause more damage and repairs can be tough. If you’re not looking to take on that responsibility, you can hire a property manager, however, it comes at a hefty cost, of a anywhere from 6% to 12% of the monthly rent payment.
Tied-up capital: Unlike flipping, the payoff in renting is a long-term endeavor, potentially limiting access to capital for other investment opportunities.
A Cautionary Note: Is Real Estate Investing for You?
While real estate investment holds the promise of significant returns, it's not without its challenges. Ed Laine, a partner/broker at Miller Laine Properties, warns that enthusiasm without experience can lead to costly mistakes. Seeking guidance from a knowledgeable real estate agent is crucial to navigating potential pitfalls and ensuring a successful investment journey.