The housing market looks pretty solid right now. Inventory is low and consumers are challenged with rising home costs. If you’re interested in investment property, now may be the time to make the move. Two of the most common assets are rentals and renovation projects (or both!). But there are differences between the two strategies you should understand first. This article provides the details to help you determine if rehabs or rentals are right for you.
The Primary Differences between Rehabs and Rental Investment Property:
Rehab investment property can produce income in a relatively short period of time, but obviously requires renovation upgrades to make a profit. This means a lot of activity in a short time frame since the goal is to renovate and sell quickly.
Rentals are less time-consuming and labor-intensive at the onset, but they do require maintenance and oversight. However, rentals have the potential to appreciate over time, which can mean additional profit should you decide to sell in the future.
Are you ready for the fast pace of rehabs? Or do you prefer the more relaxed aspects of overseeing the management of rental properties? There are pros and cons of rehabs and rentals to consider. But, the main question to ask yourself is, “Do I want to earn a quick return or enjoy a steady influx of income over a longer period of time?”
So, let’s delve a bit more into both.
Rehab-and-flips can gain quick income if renovated and sold at a relatively fast pace and good profit margin. Successful rehabs spend less on renovations than on the property purchase to achieve desirable income at resale. Time is money in these scenarios because the faster you flip, the sooner you score that return on your investment.
These assets are perfect for those who have a knack for finding great deals and purchasing properties for pennies on the dollar. The state of the current economy is also something to consider.
Interest rates are expected to hover around the 4 percent range in 2020, give or take, according to The Mortgage Reports. By some accounts, this may cause a surge in attempts to purchase homes before rates go up in the future. Others predict housing costs to continue rising due to the scarcity of inventory in the face of high demand. So, if you think you’d be successful investing in rehabs, well, the current environment could prove you right.
Rental Investment Property
Rental property earns consistent income over a period of time. Successful landlords enjoy the steady influx of cash that rental property generates. Location and desirability are key to their success. However, not only do you want ensure longevity of leases, you also want to capture the potential bonus of property appreciation if you decide to sell in the future.
Careful oversight and proper maintenance keep tenants happy and the property well-preserved. But both require management. Keeping a close eye on expenses without skimping on important repairs is critical. Plainly speaking, rentals are only profitable investments if your expenses are less than collected rents.
With that in mind, rental property includes an interesting mix of opportunity:
- Multifamily property (town homes, condos, and duplexes)
- Vacation rentals (in the United States and overseas)
- Commercial property (malls, restaurants, retail, and office space)
Again, your pace here is more relaxed than rehabbing in that you aren’t trying to make a quick turn-around profit.
Don’t think you have money to invest in real estate? Think again.
If you are short on personal funds to invest, you have an alternative. Real estate IRAs are a favored way to create retirement portfolio diversification that offsets the volatile stock market.
And, there are numerous types of investment property available for your IRA. Assets include tangible property, tax liens and deeds, and also private lending. All income from these investments is deposited directly into your IRA—tax free. Expenses must also be paid with IRA funds, though. So, make sure you retain enough income in the account after purchasing the property to cover costs.
IRA-owned rental and rehab assets work differently than personally owned investments. As the IRA owner, you are not permitted to perform work yourself (i.e., sweat equity) on renovations, maintenance, or management of the property. However, you do control all decisions. You choose the property, determine improvements or maintenance, and hire third parties to perform the work. You oversee and coordinate the process, so you’re definitely involved to a certain degree.
Additionally, you must perform due diligence on every investment you make. Investigate the property, location, resale value, and rental potential.
Your Real Estate Investing Takeaway
Whether you use personal funds or invest within an IRA, the type of property you choose depends on how involved you want to get with your investment. Either way, your decision is based on your operating on a management vs. work mentality—the primary difference between rehab investments and rentals.
The US economy is strong, unemployment is down, wages and profits continue to grow. By most accounts, confidence is on the rise because the Great American Dream has been revitalized. These conditions (and more) are bolstering the housing market outlook and driving costs up, making investment property especially attractive for investors.
If you have questions about real estate investing an IRA, contact Advanta IRA today.
This article was written for informational purposes only and is not intended to provide and should not be relied on for investing advice.
This article was initially published on September 6, 2018 and has been updated for accuracy.