The housing market looks pretty solid right now. Consumers are challenged with low inventory and rising home costs. New construction can’t keep up with the demand and experts predict home prices to continue increasing. Interest rates have risen, too, which makes renting appealing to many. So, if you’re interested in real estate investing, you might find the time is right to invest in rentals or renovation projects (or both!). But, first, explore rehab investments vs. rentals to discover which is best for you.
The primary differences between rehabs and rental investments:
Rehab investments are labor-intensive from the get-go, but they can produce income in a relatively short period of time.
Rentals are less time-consuming overall, but, do require maintenance and oversight. These assets have the potential to appreciate over time, which means additional profit should you decide to sell in the future.
Only you can determine if you are best suited for the fast pace of rehabs—or if you prefer the more relaxed aspects of overseeing the management of rental properties. And, of course, there are pros and cons of rehab investments vs. rentals. 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 are a great tool to generate quick income by renovating and selling at a relatively fast pace. Successful rehabs spend less on renovations than on the property purchase to achieve desirable income at resale. Time is of the essence because the faster you flip, the sooner you score that return on your investment. Plus, time is money! The more time spent fixing-up a property means less dollars earned in the long run.
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.
We mentioned higher interest rates earlier. While it’s true rates have risen, some experts expect them to hover where they are (around 4 - 4.5%) for a while. By some accounts, this may cause a surge in attempts to purchase homes before rates go up again. Others predict housing costs to continue rising due to the scarcity of inventory in the face of high demand. After all, there is only so much real estate to go around. The point is, if you think you’d be successful investing in rehabs, well, the current environment could prove you right.
Investment Rental Property
Rentals offer the ability to earn consistent income over a period of time. Many a successful landlord enjoys the steady influx of cash rental property generates. Location and desirability are key components of that success. You definitely want ensure longevity of leases, but 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 a bit of management. Keeping a close eye on expenses without skimping on important repairs is critical. Plainly speaking, rentals are a good investment if your overall expenses are less than collected rents.
With that in mind, rental property includes an interesting mix of opportunity:
- Multifamily property (townhomes, 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. Interested? Read the section in this article that explains why rentals may be a hot ticket this year since home costs keep rising.
Don’t think you have money to invest in real estate? Think again.
Real estate investing is a favored way to create retirement portfolio diversification to offset the volatile stock market. Investors use these alternative assets in their IRAs to build wealth in a number of ways that include tangible property, tax deeds, and private lending.
IRA-owned rental and rehab assets work a bit 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 control all decisions. You choose the property, determine improvements or maintenance, and you 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. You’re also in charge of your IRA’s budget. If you don’t have adequate funds in the IRA to cover maintenance and repairs on the property after the initial purchase, you’ll find yourself in a pickle. All expenses must be paid with IRA funds. You can’t even personally pay expenses and reimburse yourself one day.
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 vs. rentals.
Your Real Estate Investing Takeaway
The US economy is strong, unemployment is down, wages and profits continue to grow, and—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.
There are pros and cons to both rehab investments or rentals. The decision is personal. It depends upon how involved you want to be, the market in the area you want to invest, and how much time you want to dedicate to oversight. Either way, the this is the 'right' time and the 'right' economy for real estate investing.
For questions about real estate investing an IRA, schedule a free consultation with Advanta IRA today.