When it comes to your real estate investments, you have some decisions to make, including how you're going to use that new property. Should you buy a fixer-upper and flip it for the cash, or should you hold on to a move-in ready property and rent it out? You need to decide what you're looking for before you get serious about shopping, because your decision will affect everything from the location where you buy, to the financing you choose.
How to Decide Whether to Flip a House or Make It a Rental
For starters, you need to decide what kind of investor you are. If you like the idea of becoming a landlord, you'll need both time and money to invest in a rental before you see returns in the long term. You'll also need sufficient cash savings to cover building maintenance and good enough credit to pre-qualify with a traditional lender.
On the other hand, if you'd rather not be tied to a property for five or ten years, flipping the house may make more sense for you. You'll need to have the time and energy to focus on the property while you upgrade it for resale, and it’s important to have a reliable contractor as well. A short-term, hard money loan can put make purchasing a home to flip doable without a big cash outlay upfront.
Know Your Neighborhood
Before you buy, it's important to understand the neighborhood's real estate market, so do your research online or with a professional realtor. Specifically, you want to check on comparable properties in the area.
Check to see if there are a lot of rental comps. If there is only one or two rentals in the neighborhood, it may not be the best neighborhood for a rental property and will require some additional due diligence.
Know Your Property
The rule of thumb is that high-end neighborhoods are better for flipping and low-end neighborhoods are better for rentals. People with the money to afford a fancier house simply aren't looking to rent. It's the mid-range houses that are hardest to decide what to do with, so, once again, go back to your comps. A house that's not as nice as ones in the rest in the neighborhood is a great opportunity for a flip, because your upgrades will bring it up to the level of the market. The nicest house on an iffy block, on the other hand, could make an attractive rental.