When you first get started flipping houses, you only think of the short-term cash influxes flipping brings you.
But in your quest for cash by selling your flips quickly, you may want to think about longer term wealth building strategies like building a base of recurring income.
I do this through the acquisition of rental properties.
In fact, on a bout 10-20% of my flips, I decide somewhere during the process that the flip I had in mind would actually be a better long-term buy and hold rental property.
This is how you can plan for the future by creating a stable of assets that pay you each month while using the influxes of cash for running your flipping business.
But before you do that, you should familiarize yourself with the various types of rental agreements to engage in.
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To Rent or Flip: How to Know
Once you familiarize yourself with the different types of rental agreements you will be able to change your strategy to suit the dynamic real estate market.
How do you know which ones to flip and which ones to buy and hold?
This all comes down to looking at the current market situation. If it’s plateauing or on a down turn, consider buying, rehabbing and selling the property as fast as you can.
If the market is doing well, consider doing a buy and hold. It’s all about changing your strategy to suit the current market situation.
This is not a hard and fast rule, but you need to use your best judgment.
The idea of buying and holding property is a great strategy because you can rent out the property while you wait for it to appreciate in value.
Never buy a flip based on market appreciation as your sole marker for profit, but if the market all of a sudden tanks, the home may be a better fit for renting.
This way, renting it out will help you keep up with expenses such as maintenance, property taxes and insurance.
Consider trying these different ways of renting out property.
Different Types Of Rent Agreements
When it comes to rental agreements there are really three types. Here they are below.
1. Fixed Term Lease Agreement
A fixed term lease agreement lasts no more than two years.
Once the tenant signs the lease, they are obligated to pay rent even when they no longer live in that house. So if they sign a two-year lease, they will have to pay rent for two years even if they decide they no longer want to live in that house after one year.
The only exception would be if you want to sell the home so the tenant has to leave early.
The good thing about this arrangement is that you will still make a profit without selling the property. Unfortunately, if you want to sell the property, the tenant might refuse to leave the property until their term is finished.
2. Periodic Lease
This can be a weekly or a monthly contract. If you are short on cash, a periodic lease would be ideal for you because your tenant will pay rent more frequently.
It’s also beneficial because if you decide to sell the house, you can evict the tenant in a month or a week, depending on when their contract ends.
3. Tenant At-Will Lease
This arrangement does not involve contracts. The tenant can leave whenever they want and you can evict them whenever you want without notice. This is a risky arrangement because the tenant can leave without making payments. Not recommended but many people do it.
It’s always good to go with options one or two above.
Lease Purchase Agreement
This is a contractual agreement where you agree with the tenant that after paying rent for a certain amount of time, they have to purchase the property. If they refuse to buy it, you can take them to court and hold them accountable for the costs.
Many real estate investors favor this type of arrangement because they do not have to re-list the property or look for another tenant once the lease term expires.
A lease option and a lease purchase agreement are two different concepts. With a lease option, the tenant is not obligated to purchase the property at the end of the lease period. They, however, have to pay an “option consideration” fee.
They have to pay the fee upfront. If the home is valued at $300,000, they will have to pay around $20,000 to $30,000.
You must, however, return this money to them if they decide to purchase the property at the end of the lease term. If they don’t, it’s yours to keep. Many buyers like this option because it offers them a certain degree of flexibility.
Another type of buy and hold is when you don’t always have to purchase the property in order for you to rent it out. You can rent property from a landlord and sublet it to a buyer.
We don’t do this much, but its worth mentioning here as a recurring cash strategy. This can be done with two types of leases:
1. Standard Sandwich Lease
Instead of charging the same monthly rent, you can charge more for a profit. In this arrangement, all the landlord’s responsibilities still remain his and they are not in any way transferred to you.
2. Sandwich Lease Option
This is similar to the standard sandwich lease only this time round you add the purchase element. You are technically the middleman in this arrangement. You can choose to lease purchase the property from the landlord and sublet it to another tenant as a lease option. You can still make a profit from the difference between the rent and the purchase price and the option consideration fee.
If you’ve made it this far, please leave a comment below. I’d love to know what you think about the different ways of renting out property and any other ways to build longer term cashflow strategies!