In the Current Market, Is It Time to Fix and Flip or Buy and Hold?
Were currently living with greater uncertainty than most of us have ever known. COVID-19 has shut down the global economy and most of the world is under lockdown. We dont know when things will go back to normal or what normal will even look like, and we have no way of knowing when the economy will begin recovering. The stock market is volatile (though recovering from the mid-March crash) and a large portion of the country is freshly unemployed.
While the US hasnt officially entered a recession yet (a recession needs two quarters of declining GDP, and were still in the first quarter), its looking more and more likely that were headed towards one. However, if your goal is to invest in real estate, a recession isnt the worst thing. After all, the first lesson of real estate investing is: buy low, sell high. With so few people looking to purchase property during a recession, buying low is looking more and more viable.
If youre patient, do your research, and get your timing right, you can put yourself in a position to succeed and build a business that will grow as we recover from the downturn. While the uncertainty makes it hard to know what the right decision is, the most important thing right now is to take a conservative, level-headed view of your situation and your plan. Dont make any rash decisions that you might regret down the road. Its never been more important to have a solid exit strategy. Which begs the question: in the current market, is it better to fix and flip or buy and hold? Well walk you through the benefits and disadvantages for the current market and state of the country.
Fix and Flip
There are many complications to the fix and flip model during a downturn or a recession, and even more when dealing with a pandemic. Namely, that it can be hard to sell the property after rehabbing it, because fewer people will be buying property this summer.
Flipping works when youre buying low and if youre lucky sellers are motivated to make a deal. For this reason, flipping is best during the recovery phase of a recession. It doesnt work well while the market is declining. However, once the recovery phase begins, contractors will be eager for work and prices will still be low, but buyers will be on the rise.
Timing is crucial here. With fewer buyers in the market right now, youll need to time it right so you arent sitting on a property waiting for a buyer to come along. In addition, youll need to pay close attention to your chosen markets guidelines relating to the pandemic, to ensure that youll be able to move paperwork forward and hire contractors to work on the property.
Buy and Hold
Because of the complications and timing of flipping during a pandemic, it might be worth looking into buying and holding until the market begins to recover. Unlike flipping, you dont have to worry about selling right away, so you can be patient and hold onto the property as long as you need to in order to make a sufficient profit.
Buying single-family or multi-family properties and renting them out is a viable strategy throughout all phases of a recession, largely because the rental market grows during recessions. During the recession and recovery phases, prices tend to be low, so its a good time to buy. Theres less competition from flippers and newcomers to the industry, which helps keep prices low and increases the chances of finding a great deal.
Renting, in general, isnt very impacted by recessions. People still need places to live, after all. Some homeowners will downgrade by selling their houses and moving into a rental unit. Other people will hold off on buying their first home until the market recovers. All of these factors result in a larger rental market than usual, meaning an increased likelihood of stable monthly income for landlords.
Of course, renting also comes with complications, from fixing expensive problems that inevitably crop up, to dealing with tenant issues. During the pandemic, with rampant unemployment, theres the added complication of renters being unable to afford their monthly payments. To mitigate some of these complications it can help to be extremely picky about the market you enter and the property you chose, as well as the tenants you lease to (if they dont come with the property).
Make Smart Decisions
We always encourage our clients to be patient, do their research, and make informed decisions, but its even more crucial now, given the current state of the world. Keep an eye on economic data like unemployment rates and average sale prices in your desired market, as they will affect your strategy.
For more information about investing in the current conditions, or if youre ready to apply for a loan from Rehab Financial, read our recent blog post.
Stay calm, and be patient. You never know when the perfect opportunity will present itself.