Many people associate real estate investing with flipping houses, which is when someone buys a house with the intent to sell it for a profit within six months. In reality, single-family rental investing represents a completely different approach to profiting from real estate. While flipping can provide a large windfall under the best market conditions, SFR investing provides insulation from shifting market conditions and short-term home price dips. If you want to build your portfolio and earn consistent yields from real estate, consider managed SFR investments before you try to flip a home. Here are some facts that highlight the difference between these approaches to real estate:
Flipping relies on homebuying
Flipping is only a sound strategy if you can quickly sell the houses you buy. Otherwise, you could end up with a home that sits on the market and costs you money to maintain. The only time a flipper makes money is during the home’s eventual sale. The current real estate market may not be conducive to this model. Existing home sales are on the rise, and the National Association of Realtors announced sales were 4.7 percent higher in February 2015 than in the same month a year ago. That increase is somewhat deceptive, however, as it coincided with constrained supply that drove prices up across the country.
While this might appear to be good news for flippers who want to take advantage of rapid price increases, it’s actually making it difficult for many people to purchase a home. Lawrence Yun, the NAR’s chief economist, noted, “Insufficient supply appears to be hampering prospective buyers in several areas of the country and is hiking prices to near unsuitable levels.”
People who invest in fully-managed rental properties benefit from home price appreciation and don’t get left out in the cold when it’s difficult to find a buyer. A rental property starts generating income the moment tenants move in, and the data indicates the number of prospective tenants is set to increase. According to a study of rental trends by the Joint Center for Housing Studies of Harvard University, the number of renter households will increase by 4.0 – 4.7 million people by 2023. That growth follows years of increases in the number of renters nationally. The demand for rental properties, and their relative affordability, means it is simple to begin generating revenue from a managed rental property investment. Additionally, the home can be sold for a profit if the investor chooses to shift direction after years of rental income.
The tax issue
Even if the flippers find a buyer for a home that has seen significant appreciation during their ownership, taxes could chip away at their potential profits. By purchasing and selling an asset inside of a year, flippers incur higher capital gains taxes, which can be levied at up to 35 percent, according to Bankrate. SFR investors who hold their property for more than 12 months can secure a lower capital gains rate when they eventually decide to sell the home, in addition to collecting rental income during the time they keep the house.
Managed SFR investing can be simple
Countless television shows propagate the unrealistic idea that flipping houses can be a quick and easy route to serious profits, but the reality is that effective flipping relies on planning and expertise. On television, flippers regularly maximize the value of homes they purchase by undertaking renovations. While television makes it seem that these renovations can be completed in a matter of days by a few people, the reality is that home improvements often involve unexpected expenses and rarely hit their scheduling goals. It’s easy for would-be flippers to get in over their heads on improvement projects, and that can quickly eat into profits when they finally sell the home.
Even if flippers are able to execute their planned renovations flawlessly, the returns may not be worth the cost and effort. Remodeling Magazine conducts a yearly survey that analyzes how much money people recoup from various home improvement investments. Unfortunately for flippers, even the most cost-efficient renovations only recoup about 80 to 90 percent of the required investment. Renovating a building for strong returns requires the flipper to be deeply involved with the property, and many investors may not be ready for that responsibility.
While purchasing a rental home for long-term investment may seem more daunting than flipping a home quickly, fully managed properties from HomeUnion make the process easy. Registering on HomeUnion’s site provides access to prevetted homes in the nation’s best rental investment markets. These houses are selected using a combination of in-person research and deep data analytics. HomeUnion provides investors with financing options through an in-house lender and handles property and asset management through an online portal that allows investors to take a hands-off approach while reaping the unique rewards provided by SFR investing.