What kind of real estate investing should you do? If you’re a relatively new real estate investor, this is a question that would definitely come up in your mind. There are hundreds of ways to invest in the real estate business and if you keep digging up, you might find out even more. Out of all these ways, the most common and popular are the Fix & Flip and the Buy & Hold methods.
What is Fix & Flip?
A fix and flip can be defined as a property which is purchased by an investor, fixed up and sold as fast as possible to gain some quick profit. It’s not easy to find great fix and flip properties and it’s also quite difficult to make money on them.
The biggest challenge of the fix and flip method is that you need to find a property which is cheap enough and which can be sold at a decent profit. With the rapid improvement of the real estate market, it’s becoming increasingly difficult to find good deals. When you’re buying a flip, be prepared to pay not only the repairing costs, but also the carrying costs, selling costs and opportunity costs. This is something that the investors need to keep in mind.
What is Buy & Hold?
Buy & Hold is a long term investment process. It involves buying a property, making possible improvements and keeping it for a long period time. It can be rented to a tenant in order to pay the monthly costs of utilities, financing, taxes, maintenance, etc.
When the monthly costs are less than the rental income, the cash flow flourishes with monthly profit. In many cases, the investor might be interested to buy the property with a plan to sell it at some point of time, but not very soon.
So to be precise, Fix & Flip brings you quick money, Buy & Hold means a long term cash flow.
Pros of Fix & Flip
Time & Money:
Flipping properties enables acquiring profit within a short period of time. It does not tie up the investor’s capital for too long.
Quick Profit:
Buying, fixing and flipping a house can be done within 4-6 months and quick profit can be made in the process. The more experienced you get at flipping properties, the higher your returns will be.
High ROI:
Investing in property flipping brings a higher Return on Investment (ROI) if you can manage to flip the house soon enough. This is contrary to Buy & Hold investing where you’ll have to wait for a long period of time before making substantial profit.
Market Fluctuations:
Real estate markets are prone to fluctuation. But they fluctuate over time, not within a short term like the stock market. The whole process of Fix & Flip can be completed within six months from buying to selling. Within such as short period of time, your profits are less likely to be affected by fluctuation of market.
Cons of Fix & Flip
Required Time to Become an Expert:
You cannot just claim yourself as an expert in house flipping by watching some online webinars. It takes time and real world experience to be good at house flipping. So you need to choose the right education and seek out for mentors if you really want to make the most out of it.
Unexpected Challenges:
Even if you are an expert at house flipping, you are likely to face unforeseen situations such as unexpected renovation and holding costs. Anticipating these ups and downs is just a part of the business.
Greater Expenses:
Be prepared for paying transactional costs on both sides. When you buy, there are some costs, when you sell, there are some costs too. Finance and interest costs will accompany if you’re flipping houses without enough money of your own. The holding and transactional costs can highly affect your profits.
Taxes:
The tax implications for flipping houses is different than that of long term investments. It is important to estimate your margins accurately and also factor the costs in your projections. Stamp duty and Real Property Gain Tax eat into your profit margin significantly.
Pros of Buy & Hold
Creation of Wealth:
It is absolutely certain that you can amass great wealth through buy and hold investing. The value of a real estate property increases over the long term mainly due to the nature of inflation. The longer you hold the property, the higher is its potential for appreciation.
Steady Income:
When you are the owner of multiple properties, it is possible to build a steady stream of income from the rents. If you want to make the same steady income from house flipping, you’ll need to have a steady and continuous stream of house flip deals. This is basically the most attractive feature of buy and hold investing, that you’ll always have a reliable and steady monthly cash flow.
Ownership Pride:
It feels great to be the owner of a couple of properties knowing that they belong to you. Besides, you are also getting to help people who need a good home to stay. If you can have a good bunch of tenants who take proper care of your property and also pay on time, then buy and hold investment can be pretty sweet.
No Rush for Immediate Sale:
This is another big advantage of buy and hold investment. There is no hurry to sell it off immediately. The investor can wait until the market reaches a profitable stage. If you already have a steady monthly income and don’t need any emergency funding, you can hold on to the property as long as you want.
Cons of Buy & Hold
Market Fluctuations:
In case of critical financial times, the real estate investor will have to sell the buy-and-hold property at the existing market price. If the market values are on the low side, investors might have to sell their property at a loss.
Beginners Beware:
Long term real estate investment can be a good competitor of the stock market. But if you are a new real estate investor and not adequately prepared to deal with all the responsibilities of owning a rental property, you should think it over.
Finding Good Tenants:
It is an incredibly stressful and time consuming job to find good quality tenants, servicing them, assigning payment responsibilities, managing upkeep, etc. It requires time, energy and a lot of patience to find good tenants.
Longer Appreciation Time:
Market appreciation is what long term investors rely upon for making a profit, not capital appreciation. In case of buy-and-hold properties, this appreciation does not accumulate over a short period of time. So the value of a long term property depends largely on the market than the landlord themselves.
Choosing a Strategy
Now let’s focus on the ultimate question. Which one should you choose? Fix & Flip or Buy & Hold? In order to choose a strategy, there are some critical questions an investor needs to answer. Is the allocation of capital permanent or a transient one? Or is it a part of an investment strategy expecting high returns? It is also important to understand the risk/return ratio of an investment, as well as the tolerance and skill levels of the investor.
Depending on different market situations, however, one can be better than the other. For example, in the beginning of a housing/credit bubble, people were heated by flipping strategy as it delivered high profit with low risk. While at the end of a property crash, people started to hold for the next ride. If you start early when property market is at the bottom, you are free to choose and enjoy from either one or both strategies. If you start late when the market is peaking, you cannot avoid suffering from the coming crash with either strategy.
Comparing these two strategies is almost like comparing an apple to an orange, despite the fact that both of them fall under the overall heading of “property investment”. If you already have the skill set for both, then whether it is a better decision to flip or hold a property, depends completely on the market situation. Both investment goal and opportunity presented by existing market must be taken into account as part of an investment strategy.
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