Monday, December 9, 2013

Flip vs. Hold For Rental Income

If you're anything like me, you would prefer to cash in on your hard work rather than sit around and see your money slowly trickle in through rental income.  But depending on your situation, either of these options might be the best decision for you.  So how do you decide whether to flip or hold your property for rental income?

First of all, this decision is very important and could make or break your ability to be successful, so make it carefully and upfront.  Not only is this decision going to guide the way you work, it will be guided by your position and financial situation.

As a new professional in this industry, you are most likely going to have to choose between two strategies early on - 1) hold your first few properties and apply for equity lines for future projects or 2) sell the properties and use profits for future projects.  Either strategy will be focused on generating low costs financing for future projects - a key focus early on.

Once you have established yourself and have some flexibility from a financial standpoint, the decision really comes down to one thing - whether or not you are willing to get your payout slowly.  There's no hard and fast rule that applies to all properties, but if you've purchased the right property and rehabbed it accordingly, I would suggest that you can make more money by holding properties over the long-term and collecting rental income along the way.  You will build less cash equity this way, but much more cash flow, and you'll still own the asset that you can sell down the road if needed.

Either way, you will need to consider the plans for the property when purchasing and going through the rehab project.  The right property for you and the type of project you undertake will be considerably different depending on what you plan to do with it.  In most markets, rehab projects for rental usage will need to focus on cleaning the house up and providing a new look but it does not need to be expensive.  Whereas projects geared towards a resale will need to impress the buyers and be up-to-date with higher end amenities.  This is a mistake that can be made by people with little experience in the real estate market.

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