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A Crucial Decision: Should You Rent or Flip the Property?

By Michele Lerner

To flip or not to flip? These are the questions that you have to answer. The most important choice every real estate investor needs to make when evaluating a property is whether it makes financial sense to flip the property or to hold onto it as a long-term investment that makes money through cash flow - renting the property out to tenants and then selling the property in the future, say five or ten years.

On the surface, to flip or hold on to the property long term, may seem like an easy decision, but there are several factors that investors should evaluate when figuring out whether to rent out a property or flip the property to make money right away.

1. First, every real estate investor, especially if you are new to the business, should weigh the consequences of becoming a landlord. Some investors simply prefer to buy a place, improve it and sell it as quickly as possible in order to avoid managing a rental property. Others are willing to take on the responsibility of maintaining and marketing one or more properties in order to reap the financial benefits of rental income.

2. In addition to considering your temperament and the time factor involved in functioning as a landlord, you need to clearly establish your financial goals for real estate investing and evaluate how you can best achieve those goals. If you intend to build a business as a real estate investor and want to create cash flow, you may want to purchase several properties and rent them to tenants. If you are hoping to make some fast cash, flipping will be a better choice. Some real estate investors choose to work with both scenarios.

3. Market conditions will play an important role in your decision. You will need to educate yourself or work with an experienced local Realtor who can guide you and let you know where the value lies in different properties. Realize that whether you intend to flip the property or rent it, your best chance of making a profit depends on the purchase price. In some real estate markets buyers are competing over inexpensive properties and driving up prices.

You will need to do a careful estimate of market rates to decide whether you are getting a good buy and to make an estimate of your future selling price. In markets with slow appreciation it may make more sense to hold onto your property for one year or longer, combining rental income with a hoped-for increase in value once you have made improvements.

4. Educate yourself about the rental market, too. If there is a glut of rental properties or a lack of demand in a particular area for rentals, then avoid purchasing property unless you intend to flip it. Remember that the rent you charge is based on market rates, not how much income you need to cover your mortgage. Check out local rents before you commit to a property so you will know if the rent can meet your cash flow needs.

Should you decide to become a landlord rather than flip the property, take the time to educate yourself by reading about the tax implications of becoming a landlord, how to find good tenants and how to maintain your property without overspending. Yes, there are a lot of costs associated with owning a property and renting it out. And as a landlord, if you don't take care of the property you won't keep tenants for very long.

Learn more: Can You Be a Successful House Flipper?


Michele Lerner, a real estate expert and freelance writer with 20 years of experience, is the author of “HOMEBUYING: Tough Times, First Time, Any Time”.

 



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