I complete 10-15 fix and flips a year and I also own 16 long-term rental properties. One of the most common questions I hear is “how do I determine whether to fix and flip or rent a house.” Many people think it is easier to find a rental property than a fix and flip, but I find it harder to find rental properties. I have very strict guidelines that my rental properties must meet; cash flow, cash on cash return, location, condition, age and more. With fix and flips I want to make sure I can sell the house for a profit in less than 6 months and I am not worried about the location, cash flow or cash on cash return as much.
Here is an article on why I think long-term rentals are a better investment than fix and flips.
Why is my buying strategy so strict on long-term rentals compared to flips?
It is easier for me to find a property to fix and flip, because I have such strict buying criteria on my rentals. I buy my rental properties based on cash flow and I assume I will hold them for many years, if not forever. I want to make sure my rentals are great properties that will be easy to manage. I am very picky about the location, condition and age, because I am holding these properties so long. For more information on my rental properties check out these articles that detail my purchases and numbers. I am looking at many more factors when I buy a rental property, because with flips I only care about profit. As long as I know what my after repaired value will be, I can make money if I buy the property cheap enough.
How does location affect whether I will fix and flip or buy and hold a property?
I primarily buy fix and flips within a 40 mile radius of where I am located. I buy rental properties within 10 miles of where I live, although I prefer them to be much closer. The reason I buy flips further away is because I am selling them quickly and I am only concerned with when they will sell and for how much. With rental properties I need to think about long-term prospects of the area I am buying in, the future economy and the rental market.
I also buy many fix and flips in small towns with less than 5,000 people. As a real estate agent, it is easy for me to determine the values on houses. Figuring rental rates is much tougher, especially in small towns. Since the small towns are farther away and have less certainty in the rental market I do not buy rentals in them. Small towns are also the first hit when the market goes down or vacancies go up.
How does the age of the home determine whether I will fix and flip or hold a property?
I prefer homes that are less than ten years old for my rental properties. The newer the home the less maintenance and repairs a home will need. Finding great rentals that are less than ten years old is not easy and most of my rentals are about 30 to 40 years old. I try to stay away from any rental properties that are older than 50 years.
When I see 100-year-old homes, I tend to get very cautious when considering them for rental properties. The older a home is, the better chance it will need major work at some point. I am also cautious when buying old homes as fix and flips as well, but I will not be holding a fix and flip for years. There is less of a chance that I will run into a major problem with a fix and flip than a long-term rental because I will be selling it quickly.
For more information on flipping houses; check out the ultimate guide to house flipping.
How does the amount of work needed on a home determine of I will fix and flip or buy and hold?
Every house I buy is bought below market value. You can’t fix and flip without getting a great deal and it is hard to get great cash flow without a great deal as well. Buying a home below market value usually means the house needs work.
If a house needs a lot of work; new kitchen, new baths, carpet, paint, roof it can cost $20,000 to $30,000 or more to repair the home. I am already putting 20% down on my rental properties and adding $30,000 in repairs on top of the down payment means I may have $50,000 or more into a rental property. Having that much cash into a rental will lower my cash on cash returns and limit my ability to buy more rental properties. Here is a great calculator to determine the cash on cash returns.
I prefer my rental properties to have as few repairs needed as possible. On my fix and flips I also like to limit the repairs needed, but it is not as big of an issue. It takes more money to make a lot of repairs on a fix and flip, but when I sell the home I will get that cash back. With a rental property that cash is locked up until I refinance the home.
How do rent to value ratios affect whether I fix and flip or buy and hold?
There are some neighborhoods that have great rent to value ratios. Rent to value is the amount the home will rent for compared to what I have to buy it for. I am lucky that the rent to value ratios in my town are better than the surrounding towns. There is also a sweet spot for rent to value ratios in the $80,000 to $150,000 range. Most of my fix and flips are not in my town, even though I would love them to be! I think because I live in a bigger town, there is more demand for houses and less great deals because of that. Most of my flips are in different towns with a less favorable rent to value ratios. Here is an article on why rent to value ratios are not the only thing that creates great cash flow on a rental property.
Even though I think long-term rentals provide a better investment over time, I still do many fix and flips to generate income. I actually use much of the income from my fix and flips to purchase long-term rental properties. For me to have the success I have had with my rental properties, I have to be very cautious about what I buy. When looking at the numbers on my rental properties, I could fix and flip many of them and make a profit, but I will make much more by keeping them as rental properties.
For more information on how to buy the best rentals which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.
Also for more information on flipping houses, including how I average over $30,000 profit on each flip, check out my bestselling book Fix and Flip Your Way to Financial Freedom on Amazon. It is available as a paperback or eBook.