Two Approaches to Consider When You Invest in Real Estate

1 – Buy and Flip

This strategy involves buying a house with the intention of selling it for a short-term profit.  Typically, investors who take this approach look for homes that need improvements and renovations.  Here are three questions to ask yourself before you take the leap with this strategy:

• How much will the investment cost you? This includes all the costs of renovations as well as the “carry costs” of paying the property taxes, home insurance, and maintenance on the property while you own it.
• What is a reasonable sales price? A real estate agent or appraiser should be able to give you an estimate of the future market value of the property assuming you make certain improvements.
• What will be your net proceeds from the sale? The formula for this is the sales price minus real estate commissions, transfer taxes, mortgage payoff, and seller’s closing costs. Don’t forget about the possibility of capital gains taxes if you sell the property at a profit.

2 – Buy and Hold

This strategy involves buying a house with the intention of renting it out over time. Typically, investors who take this approach look for homes that can produce a positive cash flow over a certain holding period (typically 3-10 years).  Here are three questions to ask yourself before you take the leap with this strategy:

• How will you find (and vet) a tenant, collect the rents, and manage the property? You may want to consider finding a property management firm to help you with these items.
• What will be your positive (or negative) cash flow? The formula for this is gross rent minus property taxes, home insurance, maintenance costs, and mortgage payments. You should also count “vacancy loss” as an expense for budgeting purposes.  Vacancy loss is calculated by multiplying the gross monthly rent by the percentage of time you think the property will be vacant. For example, a property you would rent for $2,000/month would have a “vacancy loss” expense of $200/month assuming a 10% vacancy rate.
• What’s your exit strategy? This involves thinking about your timeframe for selling the house and your net proceeds from the future sale.

Contact me for more information!