First Person: Flip Real Estate or Rent It?

First Person: Flip Real Estate or Rent It?

Most real estate investors that are in favor of buying, holding and renting will usually give the same reasons as to why they feel this is the best option. First, when you buy real estate you can expect an appreciation over time in the value of the home. Second, you will get a monthly check from your renters establishing a nice residual income. And, threem you can always sell the home if you need to.

Now, while on the face, this sounds great, from the perspective of a financial advisor I will tell you why it is not and why, in almost every situation I have come across, it is always a better idea to flip.

Let's take a look at issue number one: that you can expect real estate to appreciate over time. While this is normally true it does not take into account market depreciation, the rise and fall of neighborhoods and of course the fear of a real estate bubble. The fact is that although it does normally hold true that real estate appreciates over time it is no guarantee. It is a fact that there have been entire neighborhoods and even entire towns go under due to unforeseen calamities.

Let me give you an example. Back in the 1980s there was a huge condominium development being undertaken in the Florida Keys, close to mile marker 102. Many investors bought heavily into the development planning to turn them into rental units for the yearly tourist trade. Then along came the largo rat, more correctly identified as the Key Largo Woodrat, an endangered species. And then came the environmentalists. Long story short, unforeseen circumstances shut down the development and to this day it lies abandoned. What about the town that was shut down due to groundwater contamination? Or entire neighborhoods boarded up when a company decides to send it manufacturing/ operations overseas?

In the first scenario the investors lost their entire investment. In the second scenario, you would have no renters and you would have no buyers. So now you are stuck with a house you cannot sell, no one who wants or can afford to rent and you still could quite possible have a mortgage and you definitely have property taxes.

The second issue, the monthly rent check. Unless you put a very large amount of money down on your investment property your rental check normally will not cover your mortgage payment. Furthermore, in most cases you have to take any surplus you do make and put it away for those months you have no renters or in the worst case scenario a major repair issue. Remember, you are the landlord and most of the time you can be held liable for major repairs to the home.

Lastly, you cannot always sell the property. As previously mentioned you cannot always foresee what is going to happen in the market or in the neighborhood.

By contrast, you can buy a property, renovate it and then flip it pretty quickly; usually within 45 to 90 days. You pay a tax at closing but you would have to do that anyway, regardless of when you sell. And cash in hand is always king! Not to mention the fact that you do not know when and if they are going to raise those taxes. Better the devil you know than the devil you don't know. Not only that, but with the right financial advise you can take your cash, invest in the next property flip and then invest in some stocks that pay you a nice dividend guaranteeing that monthly residual income without the headache of dealing with renters.