By Mike Baird
If you’re like me, you probably like to diversify your investment opportunities and give yourself different sources of cash flow throughout the year. That’s why, while I specialize in house flipping, I also pick a few rental properties here and there to keep consistent income coming in during those times when I won’t be selling any flips for a few weeks or months. To make this work, I’ve spent a lot of time figuring out a formula for choosing whether to fix and flip or fix and hold my properties.
Flip – You Have a High-Interest Loan to Pay Off
If you’re just getting started, you may not have friends like Greg who can help you get financing on your flips. As a result, you’re probably financing your fix-and-flip properties with hard money loans or loans from private lenders. These loans can come with some pretty steep interest rates, and you don’t want the interest on your loan cutting into your profits on the property. If you need to pay off that loan and avoid paying all that interest, you probably need to focus on flipping instead of holding.
Hold – You Found a Great Property in a Slow Market
Let’s say you’re looking through the MLS or you’re driving around the areas where you usually flip houses. You see a great property at a bargain price. You take a look at the house, and it doesn’t need a whole lot to make it an incredible property. The thing is, though, the market in the area has taken a hit or is very slowly coming back from decline. You know that it’s going to be a great market for a flip house in a year or two, but right now, you’re not sure if you can sell at a decent profit.
If the neighborhood is somewhat stagnant or is slowly coming back, people will want to move in to rent the property, but you may not be able to get the price you want if you sell it. This is a classic case where I’ll buy the property and hold it as a rental until the market improves. Then I’ll do a few more rehabs and sell it.
Flip – It’s an Older Property
The rehabs you do on a flip property are very different from those you’ll do on a rental. With a flip, you’re looking at impressing buyers and getting them to pay market value for the house. With a rental, you’re looking at sturdy and durable appliances and upgrades that will minimize your costs for repairs and maintenance over the years that you own the house.
Older houses just seem to accumulate problems, no matter what you do. That’s not as much of a problem when you’re the homeowner, and you’re handling routine maintenance and repairs, but even the best tenants don’t pay as much attention to these things. Renting an older house can end up costing you a lot of money, so flipping is usually the way to go.
Overall, take a good, hard look at what your flip is going to cost you now, during rehabs, and later with maintenance. Look at the neighborhood and the market. And make sure that you’re not going to have hassles with an HOA. With these tips, you should have a good idea of whether to flip or hold.