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You have probably read and heard a lot about the importance of wealth building. And, in the light of the financial upheaval caused by the COVID-19 situation lots of people are realising that it’s more important than ever to have revenue streams that are not tied solely to the salary you are paid from your job.
One of the more satisfying and rewarding means to wealth building lies in residential real estate investment. Two of the proven, and most popular methods of doing so are property flipping and rental ownership.
Flipping is a short-term, labour-intensive investment, while rental properties require a long-term commitment and varying degrees of reinvestment. Both involve property acquisition to net a profit, but that’s where the similarities end. Which is right for you, if you are considering making a move into real estate investment? Let’s take a look.
Factors to Consider: Flip or Rent Property
Which to choose depends on a number of factors, and immediately among those is your current cash flow. The rule of thumb used by real estate investors is that flipped properties generate a greater and faster profit than rental units.
Others prefer the slower and steadier income stream from rental units to help them achieve their financial goals in increments rather than windfalls.
Bringing properties up to their market potential and selling them at a profit quickly is the basis of property flipping.
- This is a good strategy in mixed market conditions or if you have – or have access to – stellar construction and design skills that will elevate the property to a standard that makes it worth considerably more than you paid for it.
- Flipping in ‘hot’ market can be hard. Finding a significantly improvable property can be a challenge, but it does present the upside that the actual flip – resale – should be quick.
- Short hold periods. The primary advantage of flipping property rests in the short time it takes to acquire and improve it, and sell it for a profit.
- The cost of selling. Unless you handle the sale yourself, it will cost you in fees and commissions, which cuts into profitability. Handling the sale yourself however, is a complicated minefield that most people wisely avoid, as the selling success rate of FSBO properties is very low, and most people who try it end up turning to a real estate agent anyway, after having wasted both time and money trying to sell their property alone.
- Repairs and upgrades can be costly. Unless you have a good understanding of home construction and renovation, it’s going to be challenging to manage the improvement process, especially when sorting through contractor estimates.
Rental Property Ownership
Although some people find flipping properties is a good stepping stone to building their portfolios, others choose to buy and hold rental property as a starting point.
- Positive cash flow. Rental properties offer a dependable income stream as long as their rented. In many communities, monthly rents are high enough to cover the PITI (principal, interest, taxes and insurance) payments, along with maintenance items. That’s ceratinly usually true in the Waterloo Region right now.
- Longer-term wealth building. Historically, homes appreciate, except in very unusual circumstances. The longer they’re held, the greater the returns.
- Local expertise. Rental properties require more local market insight. You’ll have to evaluate the desirability of the property from the viewpoint of both a renter and a buyer. However, work with the right local real estate agent and that is a problem that vanishes as they can offer the all important insight you need.
- Lack of income stream when property is vacant. You’ll have to absorb the monthly PITI, any homeowner association fees and utilities.
- Ongoing repair and maintenance expenses.
- Rental property isn’t a liquid asset if you need to divest quickly.
Whether you choose to flip properties or invest for the long term, residential real estate represents a tangible and proven path to wealth building. Which works best depends on your access to capital, time, interests, and preferences.
In either case however, having a local real estate expert on your side will make a huge positive difference, and not just in selecting the properties you buy.
A local real estate agent can help you obtain the best financing rates, close faster, find a property management company if you don’t want to play landlord yourself and much more.