5 Reasons Why You Should Transition From Flipping To Income-Producing Assets

A diversified investment portfolio is imperative to long-term stability in retirement. But you already understand this because you invest in real estate. You know that stocks, bonds, and mutual funds just aren't enough to provide you with the lifestyle you want for an abundant retirement. 

Real estate investing is one of the best income-producing assets you can add to your portfolio. Unlike the stock market, real estate investing offers more stability and reliable income, regardless of market conditions. You can read more about the differences between stock market investing versus real estate investing here. 

Maybe you’ve been flipping properties and now, you're ready for a change. Flipping properties  can be an exciting way to earn a large return on investment (ROI). However, it can also come with a lot of headaches and maybe you’re looking for a more quiet and stable form of real estate investing that will provide you with consistent income. 

Read our take on the rent vs. flip question and why you may want to transition from property flipping to a steady, income-producing investment such as rentals. 

Benefits and Drawbacks of Flipping Properties

Flipping properties has many benefits and drawbacks. It can be a fantastic short-term investment with respectable returns if the market is in your favor. It’s possible to find a diamond in the rough if you’re willing to put in a bit of work. 

Benefits of Flipping Properties

  • Exciting and Quick Returns: Taking a dated, sometimes shabby property and turning it into the most gorgeous lot on the block is an exciting challenge. The quick and large returns also make flipping properties attractive to investors. Once you turn the property over for sale, you can get a nice chunk of change into your pocket – after expenses of the renovation – of course. The potential earnings are what made people flood the market in the early 2010s searching for the perfect worst house in the best neighborhood.

  • High ROI When Demand is High: When the market is in favor of sellers, you have a chance to earn a higher return. This can be exciting and light a fire under investors to find as many properties as possible. The more power the seller has, the more power and opportunity the investor has.

  • Short Term Commitment: When flipping a property, you are only invested in it for as long as it takes to complete the flip and close the sale. As soon as the property is sold, it’s no longer your responsibility to manage.

Drawbacks of Flipping Properties

  • Large Upfront Costs: It can be intimidating going into a renovation not knowing if your investment will pan out. When flipping properties, you have to invest a significant amount of money and hope the market is in your favor when you sell. Unexpected renovation costs are a given, but the exact amount of cash you might need to cover the renovation isn’t always predictable. 

  • Market Volatility: You can hope for a high return when the market is in the seller's favor, but no one can truly predict when interest rates will change, causing the housing market to shift. 

  • No Sweat Equity Allowed: If you are working within your self-directed IRA (SDIRA), you are not allowed to participate in any of the renovations. You will still manage the financial decisions, but you cannot physically participate in the renovation. The IRS has very strict guidelines on what you can and cannot do when managing a home flip. 

Property flipping can be a great and exciting option for some investors. But it lacks a key part of a successful retirement - consistent revenue. Investing in assets that provide you income is one of the best things you can do for your retirement portfolio. 

5 Reasons to Transition to Rental Investing 

1. Passive Income

Rental investing can increase your capital while providing you with a steady income. Whether you invest in residential, commercial, industrial, or any other type of property, you’ll see a consistent return on investment, rather than a one-time lump sum. 

You can either manage the property yourself or have a property manager handle everything for you while the income reliably flows in. But the greatest appeal may be that once the property is purchased and initially prepared for tenants you shouldn’t have to worry about the property too often. 

It will require some updating throughout the year – like any home or business – but for the most part, rental investing is a fantastic way to create a passive income. 

2. Long-Term Growth

Rental investing provides you with both short and long-term benefits. You’ll enjoy a steady monthly income while your property gains equity over time. You can hold the property until you meet other financial goals or until the market favors sellers. 

Rental investing also allows you, the investor, to slow down and make lasting decisions rather than quick decisions just to stay on a flipping schedule. 

3. Tax Deductions 

Owning a property can be quite expensive, which decreases your profit margin. But luckily, you can deduct many expenses such as mortgage interest, depreciation, insurance, and more. 

Other deductible expenses include:

  • Home repairs 

  • Maintenance or upkeep

  • Driving to and from the property

  • Paying off the home 

  • Legal and professional services

  • Advertising costs

  • Utilities

4. Guard Against Market Changes

As we’re currently seeing, a change in interest rates can quickly affect property prices. Fortunately, rental prices are more steady and not as volatile to market conditions. However, when times of inflation are high, you can increase your rental prices to help make up for your other increased expenses. 

5. Diversification of Financial Portfolio

When building your financial portfolio, it’s important to have a balance of both income-producing assets and growth assets. Income-producing assets, such as real estate rentals, private equity investing, and dividend-paying stocks, provide a consistent income over a long period of time. Growth assets, such as growth stocks and funds, bonds, and REITs, focus more on growing your capital, rather than providing a consistent income. 

Both of these asset classes are important for your retirement financial portfolio. 

In addition to the diversification of your portfolio, rental investing provides diversification in the types of properties you can choose to invest in. Commercial, private, and industrial properties all provide unique and beneficial opportunities. 

Considerations For Rental Investing

Owning rental properties is a fantastic method to create an income for yourself, even long after you’ve stepped away from other work. Though the benefits are numerous, there are some considerations you need to be aware of. 

  • Cost of Upkeep: Keeping a property up to date is not only necessary to keep your tenants happy, but also to increase the equity of the property. It’s essential to maintain and improve the property wherever necessary. These expenses might be costly, but in the long run, it is in your best interest to maintain the property. 

  • Lack of Liquidity: Unlike stocks and bonds that you can cash out, relatively easily, it takes much more effort and time to get the full value of your property in your account. 

  • Landlord Role: When investing in a rental property from your SDIRA, you cannot be directly involved in property management and repairs, but you still have to be available for decision-making.

  • Chance of Vacancy: Like with all investments, there is risk involved. There may be a chance your property sits vacant for a period of time, making you lose out on the rental income. 

Invest in Real Estate With Chicago Trust Administration Services

At Chicago Trust Administration Services, we know how important it is to have a diversified financial portfolio. We also know how utilizing a self-directed IRA can help you skyrocket the possibilities that come with income-producing assets. Some investors love the thrill of flipping homes while others are ready for a more stable income situation of owning rental properties. 

If you’re ready to navigate the changes required for more long-term real estate investing, our team is available to make the transition. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.

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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.

Steven Miszkowicz