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Updated over 1 year ago on . Most recent reply
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Flipping or renting
Hello does anyone know what’s better to do in this sellers market as an investor…should you work on flipping homes or just rental properties for income? I mean I was looking at it like if you’re trusting flip the house and it doesn’t sell just rent it out. What do y’all think? Please get back thx.
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Hey @Jaudon Smith
As a rental property investor and fix and flipper with 5 active projects I’m glad to weigh in here.
In a seller's market, home sellers hold the advantage due to low inventory levels and high buyer demand. This results in higher pricing power for sellers. This type of market is characterized by bidding wars and properties selling above asking price as competition among buyers intensifies for the limited housing stock available. Sellers often receive multiple offers and can negotiate favorable terms in these conditions where demand exceeds supply for homes on the market. Aka when low supply meets high demand.
Typically, in a seller's market investing in rental properties makes more sense than flipping.
For starters, high home prices make flipping less profitable. With bidding wars and homes selling over asking price, your profit margins as a flipper shrink based on entering at a higher price. The high buy-in cost coupled with the work needed to rehab and flip cuts into returns.
Secondly, Rents rise in a seller's market. When there's low housing inventory and higher interest rates, rents increase as demand rises from those priced out of buying. Locking in a rental property gives you steady income that rises as rents climb.
Third, liquidity events. Refinancing captures price gains. If you buy a rental at current high prices, you can refinance later and pull cash out when prices increase more. This captures gains without having to sell.
Fourth, you get ongoing income over time. Long-term rental income can provide more stable returns over several years versus flipping for a one-time profit. Properties continue appreciating and producing income so as conditions change, you remain insulated.
Fifth, rentals give you tax benefits. Depreciation, mortgage interest, and expenses can be deducted on rentals reducing your taxable income from other sources. Flips don't get these same perks.
However, there are also benefits from the flip side,
In a seller’s market prices are at a peak. Flipping takes advantage of the high sales prices and maximizes profits. If you can turn the property quickly you can ride the wave and capitalize on the sales price at a higher valuation. Values may decline later making it better to sell now.
This is also helpful due to low inventory aids flips. With few houses on the market, flips can sell rapidly, minimizing holding time and costs. Rentals tie up capital long-term.
In these scenarios buyers are more flexible due to limited options and are more willing to pay top dollar even for updated older homes allowing for cost recovery on fixes.
Currently all the deals I’m doing are all-cash flips. All cash flips are attractive. All-cash, as-is offers stand out and are more likely to be accepted as competitive offers. You also incur less risk because of no debt and the process is more straightforward and faster to flip without any lenders involved.
You also have a higher profit potential per deal. The profit margin on one successful flip, for me, has always been greater than the annual rental income from a property. I have a very good process for land lording and most of my doors are managed by a property management company anyway, but I thought I would also note that a benefit for some is avoiding ongoing landlord duties. Flips require short-term work, which is often way more than the responsibility and overhead of long-term rentals. However, once the project is completed and sold you can have peace of mind knowing that you are absolved of responsibility.
In the deals I'm doing currently work best as flips but would also work if I BRRRR'd them into roughly a 12% interest rate environment assuming my ARV is accurate. Real estate markets are local so these are general rules. Even within each market every deal is a case-by-case basis. Analyzing each deal with as much data as possible and having multiple exit strategies on each deal has helped me have clarity and peace of mind when going into these investments.
I wrote an article I’ll link below as well on the different digital treasure maps I use to make data driven decisions.
https://www.biggerpockets.com/forums/12/topics/1141106-digit...
With Discipline,
Josh