REAL ESTATE INVESTING

Buy & Rehab

The rehabbing definition is when an investor renovates a property to improve it. Rehabbing can be approached several ways but is most often purchased at a discounted price and renovated intending to resell. What is the difference between a fixer upper and a rehab? Perhaps the best way to understand it is this: if you can live in the home safely and comfortably while you're doing work, chances are it's a little fixer job, not a full scale rehab also know as a gut job. 

Buy & Rent

To buy and rent a property can be a temporary or long term investment. The idea is to rent the property for an amount that will cover the bills and provide income. While you hold onto the property it will go up in value building equity you can later use with a HELOC, refinance or selling the property.

There are two schools of thought when it comes to rental properties. Some landlords want to do the minimum to get the property rent ready. This typically involves making repairs and cosmetic work like paint and carpet.

Other landlords will do a more extensive rehab. This may involve replacing the mechanicals like the HVAC unit, water heater, updating plumbing and electric, and replacing the roof. There is no right way to do this. 

Rental: Pros

Rental properties offer the benefits of steady long-term income. While that income may not be substantial, it adds up over time. With rentals, it's not the monthly income that's attractive - it's the ability to hold onto a piece of property for the long-term without having to pay for it in the meantime. 

Tenants are paying off your mortgage, property taxes and insurance for you. Meanwhile, your property is gaining value. Once the mortgage is paid off, you can keep most of the rental income for yourself - minus the cost of property tax, maintenance, and insurance.  Eventually, you can sell the property to earn a nice profit on top of the income you've earned from renting. 

It's also considerably easier to hold multiple rental properties and passively earn income. You can hire property managers to oversee the maintenance of your properties and collect rent checks on your behalf. 

Rental: Cons

The only real drawback to rental properties is that the return isn't quite as substantial as it would be with flipping. You realize gains slowly and over a long time. If you have a 30-year mortgage on the property, you'll be waiting three decades to collect most of the profits on your monthly rental checks.  

There are exceptions to this rule, of course. If the property is located in an area where you can charge substantially more than your monthly upkeep and mortgage costs, there's the potential to see a higher return more quickly. But these properties are rare and usually snatched up quickly. If you've invested in a community rental property, like an apartment building, it's also possible to earn a higher monthly return. 

Before anything else, you'll need to decide how much you can spend on your flip which includes the price of the property. 

• Repairs and upgrades. How much do you have to spend on fixes? What can you do yourself, and what will you need to hire a professional for? 
• Carrying costs. Consider what recurring costs you'll have to absorb while you own the home. That can include a mortgage, homeowners insurance, property taxes, homeowners association fees and utilities,
• Closing costs. Even if you're paying cash or buying at auction, there will be fees. 
• Your team. This includes tradespeople, a real estate attorney and a Realtor.

You can't just buy cheap property, upgrade all of the usual suspects (kitchen, flooring, and bathrooms), and expect to reap huge profits. You need to study the market, find out what types of homes people are looking for, and find a property that you can turn into that "ideal" home. If you're using sweat equity and doing the work yourself, you may want to consider the value of your time. How many nights and weekends are you willing to give up for your flip.

1. Find A Flipping Market - When you're trying to make a profit buying and selling real estate, location could make the difference between a tidy sum and a big regret. A real estate agent who has experience working with investors can be helpful and may come in handy as a listing agent when it's time to sell. They'll know what's considered standard in a neighborhood, have the latest info on comparable sales. 
2. Build Your Team -You don't necessarily need to start hiring; just be sure you've got the number of a trustworthy electrician, plumber, HVAC technician and so on that you can call if needed. To maximize the profits on a house flip, you need to own the property for as short a time as possible. The sooner renovations can start, the closer you are to selling that home. If you need a general contractor schedule an appointment right away since they book jobs weeks, if not months, out. 
3. Secure Financing - Paying cash for a home flip can save on closing costs and interest. In early 2021, nearly 60% of flippers used cash, though it’s not always an option for first-timers. If you have home equity, a cash-out refinance or home equity loan could fund the purchase, though both carry risks. Alternatively, an investment property mortgage is an option but comes with stricter requirements and higher rates. Comparing rates from multiple lenders can help you secure the best terms. 
4. Purchase Property - Many house flippers use the 70% rule to determine the maximum they'll pay for a property. The idea is that you should pay no more than 70% of the value of the home after repairs, minus the cost of the work. 
5. Renovate Property - Sweat equity can help you get more cash out of the project, it's important to stay within the scope of your expertise. Shoddy repairs may get flagged in a home inspection or, worse, could trigger a lawsuit from your eventual buyers. As the home owner you can save quite a bit by getting the permit yourself instead of through your contractor. 
6. Market & List Home For Sale - Some house flippers choose for sale by owner, forgoing a listing agent (and their commission) in order to maximize profits. As with renovations, whether to go FSBO or work with a listing agent comes down to your priorities while selling without an agent will save you that 2.5%, it can also be time-consuming and you can miss out of buyers willing to pay more. It's better to have more options. 

Fix & Flip: Pros

The most obvious benefit of flipping houses is instant gratification. Rather than having to wait years to pay off the property and reap all the profits from your monthly rent check, you can enjoy immediate gains when flipping a house. And unlike the stock market which can change in the blink of an eye, real estate markets are predictable. Overall, flipping is considered a lower risk investment strategy.

Fix & Flip: Cons

But there are considerable costs that come with flipping a home. Distressed properties, the types of properties that are ideal for flipping, may come at a lower upfront cost than, say, a brand new home. But repairs may require a significant investment, depending on the state of the home. Transaction costs can be high on both the buying and selling end, which is something all investors need to consider. Another important thing to consider: the market itself.