Real estate can be a great way to pad your investment portfolio. Investing just in the stock market is risky as it can be changeable, and almost all property is guaranteed to appreciate, as long as it is taken care of. But investing for buy and hold or for flipping purposes in the real estate market involves many considerations. If you are a first-timer, you may run into certain aspects of the investment property game you hadn’t previously thought of.
Hold or Flip?
There are pros and cons to both. Generally, you’re going to have an idea of what you want to do going into this, but just for the sake of argument, here are the pros and cons of both investment strategies.
Buy and Hold Investing
Finding the Right Investment Property
Buy and hold and flipping are two very different investment strategies but finding an investment property for either entails pretty much the same things. Both renters and buyers are looking for the same types of traits in their neighborhoods, but just looking for a desirable or up-and-coming neighborhood isn’t good enough. To find an ideal investment property, there are a few things you should be looking at:
You’re going to have to do the leg work. Look around at possible investment neighborhoods. See what they have to offer to potential buyers or renters. Are there parks, restaurants, shops, gyms? Find out if public transportation is easily accessible.
If there isn’t a full list of amenities available at the moment, you may want to take a look at whether or not there are any plans in place for the development of amenities in the future, as that could mean a higher return on your investment as the neighborhood develops.
You’ll want to talk to the people who live in the neighborhood you’re considering, too. Don’t just talk to real estate agents and rely on municipal records to find out what’s going on; really do your research and find out what the people who live there think.
It’s wise to talk to renters as well as homeowners, as renters do not have the investment in the neighborhood that homeowners do and are likely to be more honest and open about their feelings and observations. Drive or walk around at different times of the day and night to really get a feel for what is happening.
Schools and crime rates are hugely important. Both renters and homeowners will generally want good schools in their area and low crime rates. City hall, libraries, and local police departments will be able to help you with this.
Take a look at whether crime is on the rise or if crime rates are falling. Vandalism, types of crimes (serious or petty offenses), and police presence in the neighborhood should all come into play when looking at this aspect of a potential investment property.
If there are plans for new industry to come to the area you are looking at, workers will flock there, and housing prices will go up. But it’s always a good idea to look at what kind of industry is being developed.
Is it something you would want to live next to? If not, perhaps pass on the property. You can always check with the U.S. Bureau of Labor Statistics (BLS) or a local library to see how certain areas rate for job availability.
Also, you don’t want an area that is becoming overdeveloped, so you have to compete with others to attract tenants. Vacancy costs are a huge issue for buy and hold investors. Make sure you check with the municipal planning department to see what developments are in the beginning stages.
For investors looking to flip, try to look for an area that doesn’t have many newly renovated properties, but keep in mind the average sale price of houses in the area. Don’t buy a house, pour money into it, and expect to sell it way over the highest-selling house price on that street.
For the initial stages of researching what property to invest in, you may want to search without a real estate agent. This is because realtors may pressure you to buy a property that doesn’t entirely suit your needs.
Looking for an investment property takes time and can sometimes boil down to being in the right place at the right time. Often, you will have to wait to find the property that is right for you.
Differences in Flipping and Holding - The Finances
Amenities, safety, and the right amount of development in a neighborhood determine its desirability for an investment property, whether you plan on flipping or rehabbing it for rental property units. There are some major differences between renovating to flip and renovating to rent, however.
It’s An Investment
First and foremost, don’t get emotionally attached to your investment property. Look at it in terms of being an investor, not an end-user. This is equally important if you are going to be flipping or if you’re planning on renting. Either way, you need to calculate how much you can afford to put into the property, how much you’re going to spend rehabbing it, and how much it will cost during the reno time.
Before you buy your investment property, take a look at an investment property calculator like FlipScout, which can be used for either buying and holding or flipping. This will help you take all of the monetary variables into consideration. You have to look at the initial offer.
When investment properties are bought with the intention of flipping, a lot of emphasis is put on making an offer to maximize the bottom line. Do the same if you plan on rehabbing your property to rent. Whether flipping or renting, your monthly cash flow will depend on housing expenses, which are directly related to the cost of the property itself.
Next, take a look at the cost of renovations. Do you know a good contractor that you can trust? This is integral to the rehabbing game. Delays and shoddy workmanship can cause headaches and gouges to your wallet, so make sure you know who you are dealing with.
The most important aspects of the rehab are going to be the bathroom and the kitchen, as well as the floors, no matter what type of property you have invested in. If you’re going to buy and hold for rental purposes, try to take a look at the layout as a tenant would.
If you’re flipping, look at things like electrical and furnaces, as well as updating the kitchen, bathroom, and flooring. You may also need to install new windows. Buyers don’t want to have to think about the hidden but necessary parts of their new home.
When you’re looking at buying and holding, you have to take a good look at the property taxes. Is the area in financial distress? If so, the town may end up raising property taxes higher than you can compensate for with rental property prices. Make sure you take a good look at what rental prices are in the areas you are considering, as well as what property taxes are.
If you’re flipping, you need to take into consideration the fact that your profit may be taxed as income rather than capital gain. If you’re a realtor, real estate investor, or you flip often, it is almost a certainty that this will happen.
For buy and hold, of course, you will want to get tenants into your property as soon as possible. You have to think about the quality of the workmanship as well because, down the line, it will affect your monthly positive cash flow if you’re constantly shelling out money from your cash reserves for small repairs and maintenance. Make sure you or your contractor takes the time to do the job right the first time, even if it takes a little longer or costs a little more. It will pay off down the road, and your property will have a better reputation and attract better tenants who can pay more to offset the initial cost of the renovation.
If you’re planning on flipping, six months is the general timeline set out for most flipped properties. If you’re a first-timer, expect it to take longer, as there are always incidentals that crop up for those who are not as experienced.
Location, Location, Location
In the end, this holds true. But all of the above factors have to be accounted for as well. It’s always good to do your research and learn the right way how to find investment property. There are wonderful resources available for those looking for their first or their next investment property.
We love FlipScout for this, as it takes a lot of the uncertainty out of calculating which real estate property is the right one for you. It’s free, it’s handy, and it’s accurate.