Buying an investment property to rehab is only part of the process of being a successful real estate investor. The other part of being a successful real estate investor is what you choose to do with that property.
Some investors choose to flip the house for a quick profit, while others choose to buy and hold the property, using it as a rental for providing a stream of income over time. Neither is right or wrong, but there are advantages and disadvantages to each.
Buy and Hold vs Flipping: Which Strategy Is Right For You?
You just purchased a new property and haven’t yet decided what you want to do with it. Should you flip it for a quick profit and move on, or are you looking for a more long term commitment? Here are a few questions you should ask yourself to determine which strategy is right for you.
What Are Your Investment Goals?
First, you need to decide what your goals are:
Fix and Flip Real Estate Investors
A fix and flip investor is looking to get into a property, fix it as quickly as possible and sell it for a profit. The faster this happens, the lower the carrying costs will be and the bigger profit he/she will make.
Buy and Hold Real Estate Investors
A buy and hold investor chooses to hold onto the property as a rental for cash flow. While they may see less profit initially, they’ll have a longer-term income stream from the property than a fix and flip investor.
Do The Benefits Outweigh the Risks?
Fix and Flip Investor
The fix and flip method has a single big return to the investor, and puts cash back into the investor’s pocket quickly. As the fix and flip process takes place in a relatively short time, the investor is not subject to the normal market fluctuations in value over periods of time.
However, the flipper must keep a clear head when making financial decisions about the property. They should make sure not to overspend, or underspend on a property.
Buy and Hold Investor
Buying and holding real estate is a proven, long term strategy to assist in accumulating wealth and ensuring income flow for a prolonged period of time. Even if the property loses value over a period of time, it is well established that most property values rise in the long term, so the buy and hold investor is holding an appreciating asset and accumulating wealth, as long as they are willing to wait out market fluctuations.
The biggest risks to the buy and hold investor are bad tenants and bad property managers. Finding good tenants takes time and patience, and it can be a full-time job in itself for the new property owner. Keeping the good tenants and getting rid of bad tenants is also a difficult situation to navigate.
Keep These in Mind When Making Your Decision:
Fix and Flip Investor
Fix and flip investors must realistically project costs over time for a project and anticipate unforeseen expenses. In the flipping business, time is money. Delays will dramatically increase costs and decrease profits as extra months of carrying costs are incurred for such things as loan payments, property taxes, insurance, utilities, lawn care, snow removal, etc.
In addition, certain neighborhoods mandate certain selling prices, regardless of what is done to the property. The road to wealth through investing in flipping houses is littered with investors who under-improved a property and could not sell, even at market value, or over-improved a property thinking it would sell far above the local market value.
Lastly, house flipping shows on television make it look very easy, and something that anyone can do – nothing can be further from the truth. No one should go into the real estate investment business without understanding how to best structure their flipping business, what the tax consequences may be, or the myriad of risks associated with embarking on a business based on a speculative value. Investing in flipping houses is not for everyone, so a new flipper should start with a very small property to make sure that they have the skill set and temperament for the process.
Buy and Hold Investor
Many buy and hold real estate investors do not have the skill set to be property managers, so they either need to quickly learn the process (and the relevant landlord-tenant laws) or hire an outside property management company. A good property management company is well worth the costs, but a bad property management company can cost you time and money and cause a decrease in the value of the investment. Not to mention, bad property managers and bad tenants can allow for damage to the property, excess costs and reduced cash flow.
You Aren’t Stuck With One Strategy or the Other
Many investors that works with Rehab Financial Group do both flips for instant income and buy and hold real estate investing for the long term. They balance their portfolios in much the same way that others balance financial investments such as stocks, bonds, and mutual funds.
In either scenario, the real estate investor has to be clear about their own goals, their own financial abilities to handle a downturn in the market, unanticipated costs and what the tax implications will be.