First consider the condition of the property, among other external factors
Although a property’s condition does play a role in determining whether you should rent or fix and flip the structure, there are also a number of caveats that come with this decision. If home values are rising in an area, for example, the buy and hold technique may yield a higher return on investment in the long run. Conversely, falling home values may be more conducive for fix and flip financing. The shorter turnover associated with “getting in and getting out” during the fix and flip process means a better likelihood of capital returns in a shorter time frame.
There is an additional layer of nuance built into the equation – this can be boiled down into one word, ‘condition.’ It goes without saying that older properties carry a higher risk of repair – even though these repairs range in scale from a broken pipe to a new roof, they can easily (and quickly) break into potential capital for the property. When faced with an older property, fix and flip financing is best. This helps avoid difficult situations down the line when faced with costly repairs.
Like property condition, the local real estate market is an important factor to keep in mind – this will be discussed further in a different section, but preemptive research is a must before the decision to rent or fix and flip is even reached. A depressed local market may cause acquiring property to become easier (even once renovations are finished.) When there are more renters than rental units in an area, however, rental costs can drop to a level that barely covers the mortgage and other property-related expenses.
Financial predicaments can impact housing-related decisions
A few benefits of buy and hold:
- Rental properties can begin to generate revenue right away
- Income streams from rental properties are predictable
- That income tends to increase over time
- The fix and flip marketplace fluctuates depending on supply and demand
A few drawbacks of buy and hold:
- The profitability of owning a rental property depends on finding and retaining tenants
- The availability of tenants can vary greatly depending on geographic location and the overall status of the economy
- If the rent price is too high, a vacant dwelling can hurt your bottom line – this can be compounded when repair costs are taken into consideration
Conversely, an advantage associated with fix and flip properties is that capital is usually not tied up for a long time. For the most part, fix and flip dwellings sell within a few months – this allows capital to be redeployed to other projects in a timely manner.
Accessing regional trends – a closer look at the New Jersey market
A recent study by Auction.com states that nationally property owners tend to favor buy and hold strategies over fix and flip financing – however, trends vary widely by geographic region so this data should be taken with a grain of salt. Although rental properties are more popular in the Midwest and South, fix and flip properties are generally more popular in the Northeast.
Looking specifically at New Jersey, the fix-and-flip market is booming and there is ample opportunity for experienced and novice investors alike. Distressed properties have been flooding the market for some time now, while more attractive properties in desirable neighborhoods are in reduced supply. Owing in part to NJ’s lengthy foreclosure process, many repossessed properties from the Great Recession are only now going back on the market – which represents a significant opportunity for house flippers. Here are some other data points to keep in mind:
- Flipped homes made up about 6 percent of home sales over the last two years
- Social media and web marketing have made it easier than ever before to work with a New Jersey hard money lender
- Home prices in NJ have risen 4-5 percent in the last year
Throughout the state, New Jersey has seen a 20-year low in unemployment, which helps put the power back in buyers’ hands.
The bottom line? Renting or fix and flip comes down to personal preference
Despite the triumphs and shortcomings associated with both fix and flip and rental properties, it is often the case that a decision to go one way or another depends on personal preference and past experience with a particular property type. Some investors thrive on the uncertainty and challenges associated with fix and flip financing – this uncertainty is too much for others to bear. Buy and hold property owners, on the other hand, are the first to extol the virtues of a consistent income stream.
In any case, conducting a simple search for private money lenders who specialize in buy and hold or fix and flip financing may help you gain a better understanding of what hard money lenders in New Jersey and New York offer; moreover, careful research and geographic trends could help you determine what property type works best for you.
Contact Park Rock Capital to learn more about this process. In no time, you will be able to master the art of both investment types!