Housing investors have differences of opinion when it comes down to what to do with a residential property. Some investors are flippers by nature. They don’t want to be landlords. Instead, the understand the concept of buying for a dollar and selling for two. They buy cheap houses, fix them up fast, and then sell them at a profit. Other people are preternaturally disposed to being landlords. They enjoy the constant passive income that flows into their lives and bank accounts when they own multiple properties. As a real estate investor, I have my own preferences. But I am also interested in deriving the most profit from any given situation. That’s why I tend to prefer the landlord approach compared to the flipping approach. I’ll explain below.
I love buying a new property. Every part of the process: the first walkthrough, the home inspection, the offer, it just does it for me. After many tries at this, I have learned to spot a good deal when I see it. I have both flipped and sold houses. What I decide to do with a given property often has as much to do with what’s going on outside the house as what’s going on inside.
Landlords make their money from rent, obviously. No matter how nice a house is, it’s potential rent is going to be limited by the rent that nearby neighborhood houses are renting for. In some cases I have been fairly sure that I have managed to pick up the best home on a given street. But I can’t just charge 25% more for rent than anyone else in the neighborhood. Nobody will pay that. So there has to be a rule of thumb to follow.
I want to be getting a 10% return on the houses I own, every year. This is pretty easy to do, but it’s not always in the bag. Once you figure in tax costs, repairs, and other sundry costs, I’m usually in the 10% range, at least. But there are other factors to contend with. Houses tend to gain 4-5% on their value each year, adding to my annual profit. But some houses lose value. If I’m seeing a significant loss in equity, despite rent levels that remain constant, I’ll consider cutting my losses and selling the house. I often employ management companies which take 10% off the top. So there’s another expense. In some cases, a house just won’t give me enough in equity and profit for me to keep it in the fold.
There are some cases when I can make a great deal on a house, but have no interest in owning the property long term or in that area. In a case like this, I will sell as soon as I know I can make 30% on my purchase price and renovations spending. Sometimes I can’t make that much, but the property is still dangerous to keep. So I’ll sell, always making sure that I at least break even. As you can see, there are many considerations to make when evaluating a property’s value. I’ve learned to make the right choices. I hope you do, too.