When purchasing a house to fix up and sell for a profit, you face two options. You can fix it and sell it and move on, or you can fix it and then rent it out for a monthly income. Which is right for you? Should you fix and flip or hold and rent? Below are some pros and cons for both options to help you decide which option is best for you.
Fix and Flip Pros
More Money up Front
You'll receive your entire profit as soon as the house sells. There's no guesswork when it comes to your profit. You'll receive all of it at once after the house sells. You don't have to wait to pay off the house, collecting your profit in small amounts over the next several years, because the minute your house sells you receive your reward.
Once You Sell the Home, You’re Done
No matter what happens with the house years down the road, it's not your responsibility. Homes need repairs over the years, and since you've sold the home, it's the homeowner's responsibility to fix those issues. You will not receive a call from a renter complaining about electrical issues, HVAC systems, or roof damage. You're done with the responsibility the moment you sell.
Your Money Isn’t Dependent on Whether the Buyer Stays
When renting a home, you are susceptible to turnover. Your renters may decide to move, for whatever reason, and then it's up to you to find new renters, or you don't get your money. With fix and flips, you sell the house, get your money, and that's that. It doesn't matter if the buyers move five years later, because you've already collected your profit and moved on.
Fix and Flip Cons
You Have to Find the Right House
Sometimes it's hard to find a house that's cheap enough to make a decent profit. You need to find something that, with all the repairs costs, will still turn a decent profit when it sells. You don't want to buy the house at a cost that's going to make turning a profit difficult, but you also don't want to purchase a house that will cost a fortune to fix. You will have to find the perfect fix and flip property, and that's not always easy.
You'll Have to Fix Everything Perfectly
You and your team will have to go over every tiny detail to make sure the house is in tip-top shape. Buyers are a lot pickier than renters, because they are committing to the house. They will live there for years, they're tied to the home, so they will want everything in perfect condition. That's not to say that you should cut corners if you're going to rent the house, but you certainly don't have to make as many improvements.
Holding Costs are Higher
It often takes a lot longer to sell a home than it does to rent one. Simply because a renter is often ready to move in immediately. When selling a home, you'll have to wait for an offer you're willing to take, and then wait for them to inspect the house. It could take over three months to sell your house, and every day the house stays on the market, the more profits you lose.
Hold and Rent Pros
You will have a steady income of money as long as you have renters in your home. Having that stability is a huge benefit when holding and renting. Plus, you own the home, so not only will you make money each month, and pay down the mortgage, you can always choose to sell the house later on.
You Won't Have to Make the House Perfect
Yes, you should make it structurally sound, and nice, but you don't have to fix every tiny issue, because people don't get as invested in rental properties as they do when they're buying. They aren't tied to the property, they don't have to stay there forever, so they aren't quite as picky. Plus, they know that if an issue arises, they can call you to fix it.
Save On Closing Costs
You don't have to pay real estate agents, or closing costs, which can add up quickly. You simply put your property up for rent, collect the deposit, and then start earning a monthly income. Plus, your home will rent faster than it would sell. Renters don't have as many options, because while there are plenty of homes for sale, there are considerably fewer homes for rent. If you're offering a nice house at a reasonable price, your house will move quickly. Your new tenants will likely move in right away, and pay you a deposit up front. You don't have to worry about your house being on the market too long with a rental.
Hold and Rent Cons
You are Responsible for the House
Over time, the house is going to need repairs. If the renter breaks something, they will have to fix it, but if it's just normal wear and tear on the house, that falls to you. If there's hail damage, or the AC breaks, or the fridge stops working, you are responsible for fixing it. You'll get a call, and you'll spend the money.
People Don't Rent Long Term
You have no guarantee that your renters will stay longer than their lease. While they may decide to sign on for another year, they can choose to leave after a year or two. That leaves you, once again, in need of renters. You'll likely have to fix a few things in the house before acquiring new tenants. That could cause you to lose a few month's income.
Not All Renters are Kind to the House
You require a deposit in case of damages, but sometimes the damage is extensive. You can certainly ask them to pay what the deposit doesn't cover, but there's simply no guarantee that they will. If they leave you with a problem, that problem is yours to fix.
There are certainly pros and cons to both options. A lot of the time it depends on the house. If you are able to buy it at a good price, and you can sell it for a nice profit, then fixing and flipping is a great option. However, if you aren't going to make a huge profit, and like the idea of having a steady monthly income, then holding and renting might suit you better. It really depends on what your personal preferences are. If you don't mind paying realtors and closing costs, and you want the profit up front, then fix and flip. If you would rather own the property, and get someone into the house right away, so that you can move on to other things, then hold and rent. Whichever option you choose, please contact us if you need financing for your upcoming project.
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