You probably already know that Fix-to-Rent and Fix and Flip are two popular strategies for real estate investors. How can you decide whether a fix and flip vs. fix to rent investment is the best one for you? There are advantages and disadvantages to each approach. And, a great strategy for you may not be the best strategy for your brother-in-law. In fact, the answer to this question depends almost entirely on … you!
What are your investment goals? How much time do you have to meet those goals? What are your financial resources, your skill set, and your personality? Would you rather invest in a project requiring more of your attention with the potential for a short-term return? Or, would you prefer one taht is less work intensive with a longer-term return?
The goal of a Fix and Flip investment is to purchase a property, renovate it and resell it for a profit. Investors who are looking to make a quick return on their investment often use this approach. It can provide a higher return on investment and the potential to generate quick profits. It can also be higher risk.
Alternatively, a Fix-to-Rent investment involves purchasing a property and renovating it to make it more attractive to potential tenants. Investors who want to generate a steady income from rental properties often use this strategy. It can provide a steady income stream and the potential to build long-term wealth. It also requires a longer timeline for returns, and the investor may have less control over the entire process, given that longer timeline.
Generally, Fix and Flip projects are more extensive remodels than Fix-to-Rent projects. The Fix and Flip investor wants to increase the value of the home as much as possible for a quick sale. The Fix-to-Rent investor is doing less costly upgrades to keep maintenance costs low so they can attract renters.
Let’s compare the advantages and disadvantages of each strategy. Keep in mind these are all generalizations, and certain situations could cause different outcomes.
Advantages: Fix and Flip
-Potential for a higher return on investment
-Potential to generate quick profits and higher cash flow
-More ability to control the entire process from start to finish given shorter timeline
-Flexibility to turn a Fix and Flip into a Fix-to-Rent if market changes
-Ability to gain experience in the real estate market by going from purchase to sale quickly
-Greater sense of control and autonomy
-Higher energy turnarounds with great sense of satisfaction
Disadvantages: Fix and Flip:
-Higher risk given difficulties of major rehabbing, the need for a quick turnaround, quickly changing markets, and unforeseen expenses.
-A greater level of market knowledge and research is needed as the window is narrow for turnaround
-Need for a greater level of expertise to manage a major remodel project with contractors, budgets, and marketing for sales
-Risk of unexpected expenses and quickly changing markets, with a shorter time to overcome mistakes for your bottom line
-Need more commitment of time and money in a short period of time
-More marketing and advertising expertise needed for the narrow turnaround time
-May require higher level of expertise from contractors and laborers. Must be in an area where this is available
-Finding a good investment market for Fix and Flip can be more limited. A profitable investment in the short term requires the right combination of factors
-Potential negative tax consequences (see links below)
Advantages: Fix-to-Rent
-Steady Income: Potential for a steady income stream over time
-Long-Term Wealth/Property Appreciation: Ability to build long-term wealth with several longer-term properties that can both cash flow and appreciate
-Passive Income: Potential to generate passive income over time
-Security and Stability: Offers a sense of security and stability as a real estate investment
-Less Remodeling: This may give you a sense of freedom from the process of rehabbing/remodeling. It could also be more limiting of your freedom, depending on required home maintenance and renters
-Less Expertise Required: Requires lower level of expertise in construction trades, overseeing contractors, etc.
-Flexibility: The right combination of factors is important, but Fix-to-Rents may offer more flexibility in where and when you invest
-Taxes: Tax rate may be lower than Fix and Flip (see links below)
Disadvantages: Fix-to-Rent
-Slower Realization of Profits: Less potential for quick profits
-Longer Timeline: Longer timelines mean more changing market factors to contend with. However, this can be mitigated if you have flexibility in your sales timeline
-Real Estate Experience: The purchase of one home with a sale a decade later does not offer the same real estate experience as quickly turning around properties. However, experience as a landlord is also valuable!
-Tenants: May present complications
-Long-Term Property Management: Property management requires constant attention to maintenance and other issues, and the ability to handle those issues when they arise. If you plan to hire a property manager, you’ll need to consider that within your overall budget.
Taxes on Fix and Flips vs. Fix-to-Rent Investments
The way taxes work on these strategies differ depending on your personal financial situation. But, either investment may have major consequences for your bottom line. Consult your accountant when considering any real estate investment. But, in the meantime, here are a few articles on this important subject:
-The Real Estate CPA: Article: Are Your Flips Subject to Self Employment Taxes?
-H&R Block: Article: Taxes for Flipping Houses
-The Motley Fool: Article: What are the Taxes Involved with Flipping Houses
Decision Time: Fix and Flip vs. Fix-to-Rent
After reading these advantages and disadvantages of each investment strategy, does one seem a better fit for your comfort with risk, your timeline to realize a profit, the time you have available to manage the project, your budgeting and oversight capabilities, and other skill sets? (If you need a Deal Analysis Spreadsheet, we’ve got one here!)
Fix and Flips
For Fix and Flips, are your expectations for the level of profit vs. the level of work involved realistic? How much time do you have to research properties, manage contractors, and handle the marketing and sales of the property on the back end? Do you have enough backup capital for the unexpected, the expertise to oversee budgets and contractors, and experience in minimizing expenses and maximizing profits? Do you know what aspects of a property will make your Fix and Flip sell quickly in your area?
Fix-to-Rents
For Fix-to-Rents, are you knowledgeable about what it takes to create a quality rental property in your purchase area? Are you prepared to be a landlord for the long haul? Do you have the resources, time and knowledge to manage a property’s maintenance, and the property renters (e.g. are you willing to take the midnight phone calls when the water heater or furnace stops working)? Depending on future market conditions, are you prepared to wait for months or longer for a Buyer to come along when you are ready to sell?
One thing that can make or break either investment strategy is having a lender experienced in both types of investments. Also, you want an investment lender that is willing to pass along that experience to you and to have your back along the way.
For example, if you have a major gap in your spreadsheet budget, you want a lender who will flag you on that. Are you profit expectations too high? You want to know that before you start the project. Did you forget to add in the cost of your capital and the real estate agent fee into your budget? You want a lender who will spot that before you lose all your profit on a line item. (Read this article, Avoid This Common Fix and Flip Numbers Trap for more info.)
At i Fund Cities (iFC), we are experienced investors and lenders, and we understand the needs of our clients, which is why we offer both Fix and Flip loans and Fix-to-Rent loans.
We are here to help you make the best decision for your real estate investment journey. We know that the decision to Fix and Flip or fix and rent a property is a personal one, and our team of experienced investors is here to help you make the best decision for your unique situation and get you the right loan for your project.
Good luck on your real estate investing journey – we’re here for you!
The I Fund Cities Team