In our previous real estate investment blogs on flipping homes vs. buy-and-hold we talked about why different types of investors are better suited for each strategy. Choosing whether to flip or hold may depend on your financial situation, your goals, and the time you have.
On one side of the spectrum might be a young real estate agent who chooses to supplement her income by flipping several properties a year. She is well-positioned to find a good property by the nature of her business. Her current work doesn’t require her to be in the office from nine to five. In fact, it offers her ample opportunities to efficiently manage her rehab project. Her goal is to boost her income to enjoy a better lifestyle. She also wants to accumulate capital to expand her rehabbing business.
On the other side of the spectrum is a busy professional with a lucrative but demanding career outside of real estate. He might already have significant retirement savings through his IRA or 401K. He is looking for more entrepreneurial ways to accelerate his wealth building. For him, investing in rental properties offers a way to diversify his assets and protect himself from stock market fluctuations.
Of course, life is more complex than these two scenarios. A true entrepreneurial spirit requires nimble thinking. Few opportunities come in exact forms and shapes we expect them. Our young agent might find a perfect home to rent out. Our seasoned professional might encounter a flip opportunity he cannot afford to miss. Here are some practical questions that you need to ask when evaluating a real estate investment opportunity.
How much profit will I make by flipping this home?
My personal recommendation is to start with evaluating how profitable your property will be as a flip. The return on the investment you need to aim for should be at least 15%. In addition to this, any flip expected to generate less than $20,000 in profit is probably not worth your time. This is because you could encounter unexpected expenses that might lower your profits further. However, if you can book immediate profits of $30,000 or more, it’s better to go ahead and flip the property.
As a local hard money lender, I can attest that the properties that generate large profits have become more difficult to find. But they are out there! Our borrowers consistently make money by fixing and flipping in DC! Still, experienced flippers need to have the financial discipline to keep rejecting properties until they find a good deal.
Am I building “instant equity” to justify turning this real estate investment opportunity into a rental?
A small portion of those “rejects” should be evaluated further for their potential as a buy-and-hold. The fact of the matter is that a $20,000 profit might not sound impressive to a real estate flipper, but a landlord can afford to operate differently. Remember, this is a long-term real estate investment that might span ten years or more. Getting a rental property at a $20,000 discount means that you’ve built some equity in it right from the start!
However, this is not the only factor you need to consider when deciding whether to retain property as a rental. Don’t take me wrong – it’s always great to buy below market. However, when you hold a property for a long-term there are other considerations. For the last 3 questions question to ask yourself when deciding on a real estate investment strategy for a particular property, read our next article.