House Flipping vs. Buy and Hold Real Estate Investing: Which Is Better?

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One of the biggest questions that new real estate investors ask is: which kind of real estate investing should I do?

As has been written on this blog, there are over 100 ways to get involved in the real estate investing business…and probably even more if you really keep digging!

But out of those hundred, house flipping and long-term real estate investing are the most common.

But which one is better?

Probably because of the proliferation of television shows on houses flipping like “Flip this House” and others, house flipping has become incredibly popular in the past few years.

This may be due to the reality shows, but it also has as much to do with the fact that are still plenty of really good real estate deals to be had in this current market – even in spite of the recent signs of a turnaround.

On the flip side (no pun intended, by the way) there’s one of the oldest and steadiest forms of real estate investing known to all of us, namely: buy and hold real estate investing.

Still popular, still solid and always a good investment, long-term buy-and-hold real estate investing is been around for years and has has created untold millions, if not billions in dollars in wealth to its participants

Although I am a “house flipping guy” at the core . . . I actually do both.

House Flipping vs. Buy and Hold Real Estate Investing: Which One Is Better? 

To get to an answer, it helps to explain each kind of real estate investing and put each one in its proper perspective.

House Flipping Overview

House flipping as you may already know, is the practice of buying a piece of real estate at a discounted price, improving it in some way and then selling it for a financial gain.

To gain maximum profit, this is preferably done within the shortest period of time possible.

A house flipper tries to buy, rehab and sell the property; all within the shortest time so that he or she can lock in profits and not get eaten up by their carrying costs. These “soft costs” as they are known, include monthly bills that accumulate over time. These include monthly financing charges, property taxes, condo fees (if applicable), utilities and any other maintenance bills required to keep the house in good financial standing.

House flippers do their best to not hold onto a house for a long period of time. Instead, they flip them quickly. The less time a house flipping professional owns the home, usually the better their profits.

Long-Term Real Estate Investing Overview

Long term real estate investing on the other hand, involves buying a house, possibly making some improvements and rehab, but then keeping the house for a longer period of time. To pay for the monthly costs of financing, taxes, utilities and other maintenance, the house is rented to a tenant.

If the monthly costs are less than the rent collected…voila – monthly profit and cash flow ensues.
In some cases, the real estate investor might buy the property with the purpose of selling it at some point in time, but usually not for a while.

The Pros and Cons

So at its core, the two types of real estate investing have their largest differences in the fact that one produces quick profits in less than six months (ideally) while the other creates monthly positive cash flow into eternity (best case).

So now that we’ve defined them, let’s get back to our debate and uncover some the biggest pros and cons for both.

House Flipping Pros:

Money and Time: The best part of flipping houses is the ability to realize a financial gain in a short period of time and not have you or your investor’s capital tied up for extensive periods.

Quick Cash: When you can buy, fix and flip a house in under six months and turn a nice profit in the process, this is really quick cash. And when you can turn a profit of $30-40,000 in less than six months of work, that’s when you realize that house flipping is a pretty cool way to invest in real estate! Does that happen all the time? No…but the more you do it, the better and more consistently you can get returns like these.

High ROI: The house flipper can make higher return on investment (ROI) if he/she can manage to flip the house in as short of a time as possible. This is in contrast to buy-and-hold real estate investing where the investor has to wait for longer periods of time before the property appreciates to make a profit when selling.

Less Risky: Real estate markets, although they do fluctuate over time, in the short term they do not fluctuate nearly as quickly as the stock market. With some careful research, you can roughly predict the direction of a geographic real estate market within the relatively short period of time that you hold it prior to sale. For us, this is ideally no longer than six months from purchase to sale. Because you are holding the real estate for such a short period of time, drastic local market fluctuations are less likely to affect your profitability.

Distressed Properties: This could be a pro or a con, but since most house flippers do focus their attention on distressed properties, oftentimes the money needed to make the initial purchase is lower and needs less financing than a traditional bank loan property. However, because you’re buying either physically or financially distressed properties, you can get eaten up quickly if you don’t know what you’re doing. Such things as unanticipated fixes, unclean title, bank related issues, septic problems, zoning issues…the list goes on and on. Any of these unanticipated costs can shrink your profits significantly if you don’t at least anticipate them from the start.

No Tenants: Perhaps best of all, house flippers don’t have to deal with landlord and tenant headaches. This, as a landlord in my state, as with many other states, can get very sticky. Typically in the geographic areas where real estate is the cheapest, there’s a greater potential for damages, eviction and chasing tenants for rent collection. As has been well-documented in this blog, if not managed well, tenant management issues have the potential to eat up lots of your time, your money, and create a tremendous amount of stress.

House Flipping Cons:

To Get Good, It Takes Time: You don’t get really good at house flipping by just watching a few reality shows and then claiming that you’re an expert. It takes time, study and first hand, real world experience to get really good at it. The good news is that you can’t get good added with the right kind of education and coaching. Many house flippers seek out mentors as well. But like anything, to get super proficient at it you do need to put in your “10,000 hours”, which comes from experience and education.

Unanticipated Challenges: Even when you do get really good at it, you’ll still encounter situations you never have seen before. It still happens to me almost every week on the house flips we have in progress. It’s amazing, just when I thought I do it all, so new situation pops up that although it may be related to something that I’ve dealt with in the past, is completely new and how it manifests itself. As a house flipper, you have to anticipate these curveballs – even expect them. It’s all a part of the business.

High Costs: Flipping houses does come with transactional costs on both sides of the equation. When you buy and when you sell, there are costs. Also, if you flip houses with no money of your own, you have significant finance and interest costs associated with private money lenders and or even hard money lenders. If you are lucky enough to get traditional financing, then your costs can be high here as well. These transactional and holding costs can adversely affect profits. But if managed well, you can still make a healthy profit.

Taxes: When flipping houses, you also have different kinds of tax implications that differ from those in longer term investments. The short term capital gains tax is higher in the United States than long term investment capital gains tax. So to accurately predict your margins, you’ll need to factor these costs into your projections as well.

Buy and Hold Real Estate Investing Pros

Wealth Creation: There’s no question that great wealth has been amassed though buy and hold real estate investing. Although anyone getting into the real estate investing market over the past five years may not think so, it’s well-documented that real estate values increase over the long term. All things being equal, the longer you hold the piece of real estate, the greater your potential for appreciation. Some of the wealthiest individuals in the world amassed their great fortunes through buy-and-hold real estate investing.

Steady Income: Owning multiple properties all producing solid and steady rental income is a very appealing way to build a reliable stream of income. Although you can get this very same kind of steady income with house flipping, you’ll need a steady stream of house flip deals. Usually, one right after the other. For the part time investor, this may be a disadvantage or an advantage. A sporadic infusion of cash is a very nice thing to have once you have properly bought, fixed up and sold your house flips. However, to have a reliable, steady and dependable source of monthly cash flow is one of the more attractive features of buy-and-hold real estate investing.

Pride of Ownership: When I first started buying rental houses, I would just drive by them on occasion and smile. Pride of ownership was a big thing for me. Also, it felt pretty good to be helping people in need of a good home to find a nice, clean and attractive place to live. If you have good tenants who pay on time and a house that requires little, if any maintenance and you’re also realizing a tidy monthly profit with healthy cash reserves, then buy and hold real estate investing is pretty sweet indeed.

No Need to Immediately Sell: A big advantage to buy and hold real estate is that if the real estate investor does not need to sell immediately, that he doesn’t have to. Unless it’s a dire emergency, the buy-and-hold real estate investor can wait out market downturns until market conditions improve. If you’re earning a tidy monthly profit and don’t need of emergency funding, but want to sell the buy-and-hold real estate investor only concerns themselves about resale when the time comes.

Buy and Hold Real Estate Investing Cons

Market Fluctuations: Of course, if hard financial times hit the buy and hold real estate investor and they need a quick infusion of cash, they can only sell their property at prevailing market values. They can’t hope for the market to recover at that point in time, they are stuck with selling at a price that the market bears. As we’ve seen over the last few years, market values have fluctuated considerably, and buy-and-hold real estate investors who dated quick cash had to sell at prevailing market rates, sometimes selling for less than what they bought the property for.

Legal Tenant Issues: Buy and hold real estate investing comes with its own inherent management and legal issues with regard to tenants. Depending on where you buy, there are a number of management related issues you need to deal with on a regular basis. This blog here is filled with so many examples, as they are almost too numerous to mention, so I encourage you to read them.

Newbies Beware: I find that many new real estate investors, who think that renting houses is the way to go, get in over their head very quickly. No doubt long-term real estate investing is a good hedge against the stock market, but I see many new real estate investors who are completely ill-prepared to deal with the responsibilities that come with owning rental property and struggle with being a landlord.

Finding Good Tenants: Finding quality tenants, servicing those tenants, dealing with state sponsored housing departments, managing upkeep, assigning payment responsibilities all can be incredibly stressful and time consuming if they are not managed well. Good tenants are very hard to find and finding them requires time, energy, and loads of patience.

To Outsource, You Need Scale: One of the main issues with buy and hold real estate investing is that in order to be in a position to outsource these everyday tenant issues to a full time or part time property management service, it often times requires great economies of scale to cover such expenses. In my experience, having a management company to manage my rental properties only makes sense because I have a number of them. So in most cases for the first time real estate investor, that property management responsibility falls squarely on their shoulders.

Longer Time to Appreciation: Most long-term real estate investors rely upon market appreciation and not capital appreciation to help them turn a profit on the sell side. Can you do both, rehab and market appreciation with long-term real estate investing? Absolutely. But most real estate investors who buy properties in this way, don’t rely on capital appreciation (i.e., rehab work) to dramatically increase the value of the property. This means that the value of a rental property is largely dependent upon the market itself instead of the landlord themselves. Each situation is different, but this is usually the case.

Which One Is Right For You?

It depends on a number of factors. But the biggest factor of all is: you.

Some of the many factors include: your personality, your tolerance for risk, your financial goals and your personal financial situation.

For me, I’ve done both. But for my personality, my personal situation and for my financial situation, house flipping dominates my real estate investing career. But do I necessarily think it’s the superior way to invest in real estate?

Not necessarily.

What do you think?

If you’ve read this far, please tell me what you think by leaving a comment below! It’s easy, just enter your name, your e-mail (not captured by anyone and we don’t spam you, BTW), and your website (only if you have one, you really don’t have to fill that part in) and leave a comment below if you think house flipping or buy and hold real estate investing is better!

Photo: Jamie Buscemi

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About Author

Michael LaCava is a full time real estate investor, house flipping coach and the President of Hold Em Realty located in Wareham, MA. He runs the website House Flipping School to teach new real estate investors how to flip houses and is the author of "How to Flip a House in 5 Simple Steps".

30 Comments

  1. Brandon Turner

    That was a super awesome post Mike! I think you covered the debate quite nicely! The biggest warning I have for house flippers is that, for many, it becomes like a game of Blackjack. You might win a few hands and think you are a pro – but sooner or later the house wins and you lose everything. This happened to a lot of flippers back when the market changed and a lot of the “pros” went bankrupt. The trick is finding ways to beat “the house” average and consistently come out on top. Like you said – having a good mentor or coach is one of the best ways to do this, as you can learn from their mistakes rather than make the same on your own dime. The BP forums, blogs like your own, and connecting with other local flippers are all ways to improve the odds to your favor.

    Thanks for the epic content! Love it!

    • Exactly Brandon. If your not understanding the market you’re in and you over leverage like a lot of investors did in the run up to 2006 You will get caught and lose big time. I know many that were caught up in that over inflated market. I did my first flip without much knowledge at all during the end of that cycle because a friend asked me to invest with him & I went in blindly. I had a bad feeling when all of sudden we couldn’t sell it. “Damn” I waited too long I said. We sold it & lost $2000. I chalked it up as an education but learned I loved the business and spent the next 18 months to learn the business & I haven’t stopped since. Kind of like the stock market, when everyone is in & telling you how great it is, it might be time to get out. Been there!

      Thanks for the comments

  2. One distinct difference was skimmed over in your article. This difference is that flipping provides you with cash (as you said usually in under 6 months) and the Buy & Hold provides you with cash flow (as you said almost to eternity). Cash and cash flow are not one and the same. As an investor you need cash on the short term to do deals, but for financial independence it all depends on your monthly cash flow. When that monthly cash flow exceeds your monthly bills & expenses – you are financially free to pursue any endeavor you want to. Comparing cash to cash flow is the same as trying to compare apples to oranges. My choice would be to opt for the cash flow into eternity!

    • That is true Dale and it is a question I get asked a lot. I agree cash flow is different from cash but wanted to explain the difference for those who may not understand it. Although if you are flipping on a consistent basis one could argue the profit from each flip if you have a solid plan with predictable income from your investment analysis may be considered “cash flow” from the profits of the flips. If it 1, 2 or 3 a year then that is less predictable & you may feel the cash flow pinch if you are relying on money each month. I personally flip to invest in buy and hold strategy for solid predictable cash flow for the “true” financial freedom your are referring to.

      Thanks for the comments!

    • It sure can be like a “JOB”. Flipping should be treated no different than any other business. The idea is to build it with systems. The emyth by Michael Gerber is a great book that speaks of that exact thing. Great Book. I will check out your post.
      Thanks for your comments.

  3. Good article, though you kinda missed one key factor–the raw level of prices vs. rents in your market. I regularly buy houses for $20-50k cash, ideally which need little or no work to rent out for $500-1000/mo pretty easily. It would be a shame to sell those “golden goose” houses, and flip those for whatever wholesale price I’d need to get to make it quick turnover, esp. if I had to deal with a FHA/mortgage buyer with all the bank requirements and time. I’d rather rent them, or Lease-Option them to a buyer for a low down payment, and let them do the fix up..

    I’ve done some raw flips, and fix and flips, but usually discover it was just a quick rush of cash, then back to finding more deals. Since I only jump the very best deals to start with, it makes no sense to me to flip, esp. when prices are appreciating now. Even if prices don’t go up (or, gasp, fall further), I know I can make a predictable cash flow renting/lease-optioning. Plus now that banks are more aggressive about refinancing investment properties again, I can pull my cash out withing a few months of purchase.

    • Great Point Thos,
      Those are some great #’s for purchase price to rental rates in your area. In some area’s home prices are just too high & you can be looking at negative cash flow which I never would recommend getting into. What area are you buying in?
      Thanks for posting important fact!

    • Those are some pretty sweet deals at those rental rates!
      Also if they don’t need much work than I assume the upside t resell isn’t great, so if you have the cash I would agree you might as well hold them!

      The biggest issue a lot of people would have with that model is that it is a lot of cash to drop if you don’t have a big warchest already. I started with some rentals and quickly slowed down as my cash reserves were eaten up.
      Currently I do mostly flips to build up cash (and pay the bills) but buy rentals when the numbers make a lot of sense.

      By numbers making sense I also live in an area that has strong rents, but much higher price points. Hard to find things that will cashflow at any price without huge cash influxes.
      I can buy stuff for $50K but I have to put just as much into fixing it. That is a lot of cash to have tied up in one rental (Yes I could refi aftr fixing it) but I can turn around and sell it for around $200K. Depending on other costs a $35-70K profit is pretty enticing!

  4. Great article. I am a “noob” to real estate investing and appreciate all the great content on this site. I think I would like to try a flip for my first deal. My question is this; where can I find good deals on properties? MLS, Craigslist, foreclosure lists? I’d like to do a “light flip”, paint, carpet, appliances, landscaping,etc.

    • Hi DJ,
      Many ways to find deals including all of the above. Check out your local REIA (real estate investing association). Google it if you’re not familiar where it is. You will find like minded investors & can create relationships with REO brokers there & wholesalers.
      Feel free to inbox me for more details if you would like.
      Bigger Pockets is a great place to learn & make contacts as well!!!
      Good Luck.

  5. Few discussions comparing one tactic vs another includes the taxation differences as a factor in whether one should do more of one over the other. I’m not an accountant, just learning this myself after 9 buy/fix/rent’s, zero flips.

    Fliping/wholesaling is an ordinary income activity at your maximum tax rate. Few deductions are legal from my understanding expecially if you aren’t claiming realestate pro. IE I hear of folks trying to deduct mileage looking for houses and other deductions that I understand aren’t permissable. If you flip inside a type S corp (LLC taxed as an S corp) you can save alot of money and have more deductions than as an individual proprieter or just a 1040 filer.

    Where fixing and renting all of your fix up becomes depreciatable value you add to the property. The only down side of fix and rent is that it consumes cash to buy and fix. Which maybe the main reason why many folks are forced to fix and flip or just flip/wholesale. If it weren’t for me needing to constantly be looking to borrow funds at 10% or less simple interest I’d never think of anything other realestate activity.

    I’m sure more tax knowledgable folks can improve upon the details above re the issue I just opened up: at the end of the day how much income do you get to keep. Including taxation gives a strong bias toward holding and renting. Then your sales are long term capital gains.

    curt

    • Thanks for the comments Curt. You bring up some great points & taxation is so individualized it can vary with investors quite a bit. As a full time investor myself I do have an LLC set up & this is my full time profession so my tax strategies are different than maybe others that have a job & did not set up an LLC. One thing I did find out is even CPA’s differ on the interpretation of the IRS code and how they should file your tax returns. I would recommend anyone getting involved to talk to several CPA to plan the best legal tax strategy for your REal Estate Investing no matter how small or big. Planning ahead is always the best move. Disclaimer :I am not a CPA & I am not giving any tax or legal advice & any advice should be seeked out by a professional CPA or attorney.
      It would be nice to have some CPA’s weigh in on this post as it is a very important subject for all.
      Thanks again for your comments!!!

  6. Great article, many truths in it. I’d venture to add the flipping is a full time business and job. Until you have a team in place – take a three month holiday and everything grinds down to halt, so not really an investment strategy – the income is far from passive.

    • It certainly can be a full time business and “JOB”. You should build it like any other business with a goal of the business operating smoothly if you not there. Having systems and a good team while you are there goes a long way to making it more enjoyable. Now you can take those 3 months off, of course checking in from time to time with management. The ultimate success!
      I am sure most of us have worn several different hats at one time or another when starting a business & that can be stressful.
      Nothing like passive income & what I believe we should all strive for no matter what we do.

      Thanks for the comment Ziv!

  7. Great article!
    My investors I worked with before did ARV (after repair value) formulas, you sure can learn a lot from them.
    In this market it makes sense to renovate and hold for a term.

  8. Long term buy and hold tactic is a true investment where one’s money works for them the greatest (not them working for money). The only reason to flip (in my opinion) is 1) the quick cash on cash return is so great in which your original capital plus profit could be re invested in a greater cash on cash return then the return of holding THAT property. 2) It is your business (in which you work and is not at all passive) and the disposable income (after paying your personal bills) is reinvested in long term holdings. Thats it. Besides buy and hold while renting to cash flow (most important to cash flow to build monthly income), when value is way up (may take 20 years 2.5 to 3 times greater value then purchased) it is often best to max out investment buy selling it with owner finance to a buyer in which you may make an additional 8 to 10% on top of your large profit (possibly for 15 or 30 years. In other words you’ve bled the property for maximum results for 30 to 50 years creating a lifetime of income from just that one property.

    • Thanks Tony for providing your excellent outlook on long term real estate holdings for passive income. One I am sure many BP member’s are using to create wealth, myself included.

      Keep the comments coming so we can support this great BP site!!!

  9. I’ve really enjoyed your article Michael. I’ve started in real estate investment this past year and so far I’ve acquired some good deals. My goal is to hold and rent out for the long term, and while I’ve been successful so far to get good tenants, I’m tempted to filp one recent property I’ve acquired as a cash deal which at the market value might provide a good 25% return on my initial investment in less then 2 months, a return which would probably require 2-3 years of rental income. I’m now in a dilemma whether to stick to my goal or mix the flip strategy for quick cash to re-invest :)

    • Hello Edvin. All depends on your cash flow. If you have a need for the money then there is nothing wrong with selling now. If you don’t then keep it for the long term.
      I do both. Good luck.

  10. Hi my name is Jose I’m a contractor and I want to start to buy a flipped houses
    But I don’t know where I start to find listings I’m living in frefericksburg va

    • Hi Jose – I would suggest you start out by calling your local real estate agents and ask for ones that work with investors. Try and get a referral first from someone you know. Also look for the closest REIA (real estate investing association) and visit there monthly meetings.

      Good Luck

      Mike

  11. Great article. I prefer the long-term approach as I have existing tennants that are good and take care of the place. But there are risks with both approaches and pros and cons as you mentioned. Diversity can be helpful but at the end of the day it’s good to stay focused and plan plan plan :)

    Thanks for the great tips!!

    Austin.

    • You are so right Brian. Stay focused and plan plan plan. Are you renting single or multi family homes. I have an interest in apts. Buildings and just starting to explore. Nothing too big to start, maybe 10 to 20 unit’s.

  12. It’s a great article!!
    I did a lot buy-and-sell deals in the early investing years because of lack of initial capital.
    I do some buy-and-hold and some buy-and-sell deals now but because of the incredible appreciation for the past five years, I don’t know if buy-and-hold is still a right choice or not.
    (I’m from Taiwan and the price in the area I live at least doubled comparing to the price five years ago. It is hard to find positive cash-flow properties now.)

    • I agree Scott and don’t know if I would buy some if it didn’t cash flow especially if the market has doubled in 5 years. Be very cautious. Maybe buy in different markets if you feel comfortable in your research.

  13. Great page and comments
    My strategy will be a little different..
    Buy a corner block or a block that can be sub divided and then sell off one half and keep the other half either for holding or flip it
    Great to read all of this info- glad I jumped on this page by accident

  14. Any recommendations for downloadable tax software that is specific to both these types of investing? With & without LLC’s and partnerships?
    Thanks!
    Karen

  15. I’ve been listening to the Bigger Pockets podcasts religiously, and I think flipping would be cool, but, I want the eternal passive income. My issue is the capital to do so. The guests on the podcasts always get asked how they got started, but, what I want to know is, how do you acquire that second rental property? I hear many of the guests talk about buying a duplex first, they live in it and reap the rewards there. But what about the rest of us who are past the living in a duplex stage of life and want to begin acquiring rental property but can only afford one? Are people refinancing their mortgage, pulling out cash for the next? or just hanging tight till they save up enough money to buy the next?

    • You might want to ask that question on the forum to get better results Leann as oppose to this article which is a few years old. Every investor answers may be different. I have never lived in a duplex and have mostly purchased with OPM and refi our with a bank to recapture my cash while leaving a good amount of equity in based on the value play of buying and rehabbing competitively.

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