Investing in Rental Property vs Flipping

The buy-and-flip strategy can also  work with existing homes that the  investor can purchase from a motivated seller at a wholesale price that is below  the market value.  The investor may not  even  have  to close escrow before finding a buyer willing to pay a retail price. There may be some minor cosmetic work or simple improvements needed before reselling, but  typically, buy-and-flip investors really  make their money when  they  buy at a discount and  then locate a buyer at full market value.  This approach is risky,  but  investing in rental property can also  be rewarding.

This high-risk strategy requires a rapidly rising  real estate market with higher than normal appreciation rates to allow for profits on short term investments. Not only do you have  to have  excessive demand driving up the  prices of real estate, but  you also have  to cover all of the  costs of real estate. With online stock trading firms, you can buy shares of your  favorite company in minutes with relatively low transaction costs. But with real estate, the  costs of buying, holding, and selling  a property are much higher and unknown, and generally include

• Acquisition costs: Due diligence and  inspection fees plus  loan fees/costs and  points
• Transaction costs: Closing  and  escrow fees
• Repair or upgrade costs: Costs to renovate or fix property to make it more desirable and  generate the  highest resale price (unless the  property  is brand-new)
• Holding costs: Property taxes, insurance, and  any negative cash flow while the  property sits  vacant or if the  rental income doesn’t cover the carrying costs
• Sales costs: Commissions and title insurance from the sale of the property

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