If you’re new to the business and want to make money in real estate investing, the first thing you need to decide is which investment strategy to follow. The choices available are numerous. However, there are two strategies which are the most popular among real estate investors – rental properties and fixer-uppers. This brings us to the main question of this blog: which investment strategy is better in real estate investing: buying an investment property to rent or to fix-and-flip?
The answer really depends. You have to factor in your personal goals, financial standing, level of knowledge and experience in the real estate market, etc. However, assuming you’re a beginner real estate investor and you want to take your first step in the business, most experts will recommend buying an investment property to rent over a fixer-upper. How come? Keep reading to learn 4 reasons why.
1) Buying an Investment Property to Rent Generates Passive Income
The first and most obvious reason to invest in rental properties is that they are a source of passive rental income while fixer-uppers are not. What we mean by this is that after your investment property is rented out, you’ll have a steady stream of cash flow that comes in the form of monthly rent. Property investors benefit from this cash flow as it pays off their monthly rental expenses (like mortgage payments, taxes, utilities and other running costs) without having to work for it. In addition, when done right, investing in a rental property generates positive cash flow which is absolutely important for any real estate investor.
Fixer-uppers, on the other hand, are a completely different story. These are cheap properties that require major renovations in order to sell them and make a quick profit. So, after buying the investment property, it won’t make any money as long as you’re working on improving it. Property investors receive their profits only after selling the fixed property. As you can see, buying an investment property to rent will not require you to work as much as fix-and-flips to make money in real estate investing AND you’ll see your profits almost right away.
2) Buying an Investment Property to Rent Has Long Term Benefits
With rental properties, not only will you benefit from immediate cash flow and rental income but also from potential real estate appreciation. By that, we mean that the longer a real estate investor holds his/her investment property, the more value it’ll gain. You’ll also gain more equity in the property if you took out a mortgage (whose payments the rental income should cover!). Over the long term, this will allow you to sell rental properties for a much higher price than the initial purchase price, making an attractive profit.
This is obviously not the case for fixer-uppers. These investment properties must be sold ASAP right after renovations are complete. The longer a flipped investment property is held, the more money a real estate investor will LOSE! This is because you will have to pay the mortgage, taxes, and insurance on the property for as long as you own it. Adding up maintenance costs, these expenses will pile up which will take a large chunk out of your budget and profits.
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3) Buying an Investment Property to Rent Has Fewer Risks
You should know that fix-and-flips are risky real estate investments for many reasons. The first reason, as already clarified above, is the risk of losing money due to not selling the investment property quickly. Another factor that makes flipping properties risky is unexpected expenses that could arise. This includes everything from building permit expenses, contractor delays, material delays, permit delays, and expenses of renovations and materials you had not budgeted for. These expenses will quickly add up and eat into any potential profit for property investors. You won’t have to deal with any of that from buying an investment property to rent.
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Moreover, once the investment property is renovated, the city or real estate market in which you’re investing may increase your property taxes. Not only will this affect you as you’ll have to pay these taxes yourself, but it will make it difficult to find buyers as well because they may rethink buying the property due to the higher tax bill! Not to mention, any profit that you make from selling the investment property may be subject to capital gains taxes, meaning you might lose your profit to taxes.
When buying an investment property to rent, however, you can write off a lot of additional expenses such as depreciation, which will save you thousands each year in taxes! (For more information on this, read: What You Need to Know about Real Estate Taxes as an Investor.)
4) Buying an Investment Property to Rent Protects You from Inflation
Inflation happens due to an increase in the cost of living. In general, real estate has been known to protect investors from this. This is especially true for rental property investors as, historically, cash flow has kept pace with inflation. This simply means that as inflation occurs, rental rates go up! Thus, if you’re buying an investment property to rent and the cost of living is increasing, you, as a real estate investor, can charge your tenants higher rents which will result in higher rental income and, if you’re spending wisely, positive cash flow.
Additionally, inflation does not affect mortgage payments, meaning they technically decrease as inflation increases. Fixer-uppers, however, are not as directly linked to inflation as rental properties because they don’t generate any rental income. Yet another reason why buying an investment property to rent is the smarter decision for beginner property investors.
The Bottom Line
Though both are great investment strategies to make money in real estate, experts believe that buying an investment property to rent is a better option than to fix-and-flip. Rental properties are passive income investments, have long term benefits, fewer risks, and protect you from inflation. To find your first rental property in any city of your choice across the US housing market, make use of our tools like the property finder, investment property calculator, and heat map! Click here to learn more about our tools.
Do you have any questions about buying an investment property to rent? Leave them in the comments down below and we’ll be more than happy to answer!