Watching as people flip houses and make lots of money on reality TV shows and thinking they make it look so easy? They actually do because it is more work than they show. Many things could have been tweaked to make for great TV, and so you should do your research before investing your money in any of these deals. What is more profitable: renting a house out or flipping it?
- Property and Location
For the property to make a good investment, it has to be located in a location where property value is likely to appreciate. This way, you will sell it at a price better than the cost of renovation. Next up would be getting the ideal property at a throw-away price, but also ensuring that it is not so run-down to cost you too much in renovation. Auctions are great places to check when looking for a good investment.
- Do you have the Cash for it?
If you plan to buy and repair a home, lenders could charge you as much as 15% and some 4% more upfront. The interest will be much lower on a rental property as they will be issuing a long-term loan that will earn them interest over several months. Unless you have substantial capital to buy and repair, then a long-term loan for a rental unit would be more preferable. Also note that the interest eats into your future profits.
- How much will it cost?
Repairing a home to flip requires a keen eye on detail because buyers are interested in all the aspects of the home. Unlike renters who are not invested emotionally on the home, home owners want to be certain that the furnace is working perfectly, all plumbing is done to perfection, and the roof is in mint condition. An inspection is done before the property is sold to find any fault. So, will the property break even and make some profit when sold?
- The Holding Period
A rental property has little holding period as the new owner is ready to move in as soon as the house is ready while a flip house may take longer. It could take longer than a month to find the ideal buyer once the house is complete – depending on location – and then another two or so before inspection is complete and the buyer’s lender completes the process. All this while, you will still be paying interest on loan for a vacant house.
- Type of Income
With a flip property, you will receive income once upon sale, but a rental unit will generate you inflows over longer periods. Of course, you will be personally invested in the property in relation to maintenance, but that is what real estate management companies are for.
Unless several things fall in place, a rental unit trumps a flip property. Investment income from property in Canada is locally earned and so will not require you to fill a T1135 form. However, profits from capital gains will attract tax.