Many investors have asked me the question what they should go for. Is flipping properties better than a buy and hold strategy, or does buy and hold generate a better cash flow? It’s a very valid question, and I think every investor, especially at the beginner level, should evaluate both of these strategies before making a decision. In today’s article, I’m giving a detailed answer of this question, and I hope beginner real estate investors can learn from it.
So let me just start by saying that both flipping and buy and hold strategies have their own set of advantages. They also come with their own unique disadvantages, making both pretty compelling choices. So that basically means that the question any investor should ask shouldn’t be which of these two is a better investment option. Instead, the right question is this:
When you have to choose between flipping and buy and hold strategies, which investment option is currently best for you as an investor?
This is a decision that you need to take a look at in a way that’s in line with your investment goals. It is an individual decision, and there are parameters to help you decide. In this post, we will go into a little more detail about flipping properties versus buy and hold so you can compare the two for yourself. And then make your own decisions, based on what’s right for you.
House flipping or property flipping is the process of buying a property at a discounted price, improving it, and then selling it for a profit. The process of flipping requires an investment of money and putting in the effort of buying and improving the house and later selling it. However, since the flipper tries to sell it in the shortest possible time, the carrying costs are reduced tremendously. So, the faster a flipper flips a house, the better profits he makes.
Instant cash gains: Compared to buy and hold, property investment using this tactic leads to much faster gains. This also makes you cash-trapped for less time and gets you a one-time profit as soon as you sell.
Less time: Because flipping is done as soon as possible, the cash is available much faster than with a buy and hold strategy. Since it’s a faster way to get money, it can also boost an investor’s confidence and give some experience for putting funds into a couple of buy and hold properties.
“Less risky”: In terms of value, this is also a lower-risk strategy and can offer a better return on investment (ROI). The “lower risk” stems from the fact that long-term real estate fluctuations wouldn’t affect a property that is being flipped quickly.
Fewer hassles: The number of issues reduces with the lower carrying costs, and when you compare it with a buy and hold strategy, one doesn’t have to deal with tenants either. Also, as most flips deal with distressed properties, the initial investment is usually lower than the market rate.
Unrealistic expectations: While flipping can generate profits in the shortest amount of time, this doesn’t always happen. This is because good properties for fix and flip are very difficult to find. Most investors enter into flipping with unrealistic expectations, which can make matters worse.
Tax issues: Since these are short-term investments, flipping comes with its own set of tax implications. Therefore, before you get excited about the profits you’ll make, it is important to consider these as well.
Newbie problems: Flipping isn’t for everyone, and it takes time and experience before you become good at it. Many people think that a few TV shows and crash courses can make them an expert level flipping pro, but that is hardly the case. And you all know by know how much I hate the fake flipping shows.
High investment costs: Investors often think that they can make quick money on flipping; however, if they don’t have the funds they need, short term investments can prove to be expensive. This is because these investments come with higher interest rates. Many people also forget that even this type of investment can get you stuck, with your cash trapped. Even though that usually happens for a shorter amount of time, the investments made can be high, as you have to take holding and transactional costs into account as well. My advice to you is to use your own cash. Work hard, be frugal, and only enter the market when you have saved enough dollars.
I’d say that flipping properties is an ideal step to take when you have less money to invest. This can be extremely lucrative when you’re on a lower income. In fact, I recommend this to be a great place to start for beginner investors who wouldn’t mind using this to generate larger cash profits. Once the regular flipping strategy generates a good amount of profit, an investor can choose to opt for buy and hold properties as their next step.
Buy and Hold Properties
Buy and hold is known to help amass great wealth and cash flow. In fact, it is a dream investment for many investors for all the high promises it makes. This is because even when it comes to decreasing land prices, real estate tends to bounce back at some point in time. In this style of investment, the investor purchases a house but holds onto it for longer, if not forever. Improvements may be made to the house (if you aren’t buying turnkey), and it may be given to a tenant so that the soft costs of maintaining such a house are taken care of. But then again, buying and holding isn’t for everyone. Let’s look at its advantages and disadvantages.
Higher returns over time: Buy and hold investing is a great option for amassing a lot of wealth and cash flow, as properties can improve in value over a longer period of time. Short-term market fluctuations have an almost negligible impact on such properties. I love this quote, “The best time to buy real estate is now, and the best time to sell is never.”
Less pressure: This is a much slower process. The value doesn’t come from the resell, the market has little to no effect on your cash flow, and there’s far less involvement required to get your returns.
Steady passive income: Renters are often easier to find than buyers, and when you have renters, they’ll be paying you every month. This means a steady source of income, especially with multiple properties. Make sure your property management company is top notch here, as they will either make or break your investment.
Ownership: You’re always building wealth. There’s also an undeniable pride that comes with owning a property or a hundred. And finally, because there is no pressure on the investor to sell immediately, it helps them hold onto the estate for as long as they wish.
Fluctuating market conditions: A major drawback of this investment strategy comes from market fluctuations. When you’re looking at a long-term picture, a market that seems to have valuable properties right now can lose its value years down the line. With 2008 in the back of our minds, we all remember what that was like. Don’t go out getting stupid loans or second and third mortgages for your buy and hold properties. The last thing you want is getting caught with your pants down in a market downturn. If cash is king, cash flow the queen, then financing could very much be the PEASANT.
Management issues: This form of investment comes with management duties. And that usually means that there are issues and your time involved (if your aren’t buying turnkey). Managing properties is often outside the skill set of many investors. This usually means that the investor needs to put in a lot of extra time and energy, which can get frustrating for those who don’t have that luxury. Check out all of the turnkey providers nationwide. Most of them should offer a complete hands off experience for all of your buy and hold turnkey properties.
Lack of good tenants: While it seems convenient that you can maintain a steady cash flow for your rentals when you’re holding onto a property, good tenants are often hard to find. It does take a lot of patience and is a fairly time-consuming activity. Newbies should also be wary of legal issues that could come up with tenants.
I’d say that buy and hold is for investors who have a higher income to start with and less time on their hands. The turnkey option I suggested above can be wonderful for those who are super pressed for time and want to put money into assets that generate a steady cash flow. For investors like this, it’s easier to skip flipping since they have enough funds to play with.
No two investment methods are the same, and that goes for flipping and buying and holding as well. Flipping offers a sweet one-time profit, while buying and holding offers a steady monthly rental, along with long term profit. On the other hand, the time commitment an investor has to make varies too. So, while flipping is for investors that are looking for a quick profit in a short time, buy and hold is a completely different animal. This is for those looking at a steady cash flow over a longer period of time and who have more start up money to invest.
Especially when you can afford to spend some cash, buying and holding can be very lucrative. The headaches that come with managing a property can be dealt with by someone else. All you have to do is be able to pay them. Whatever you choose, keep in mind that every single investment goes onto become a part of your investment portfolio. If you ask me, the end game for any investor in real estate should be to own as many buy and hold properties as possible with the lowest amount of debt.
Investors: Are you team buy and hold or team flipping? Why?
Leave your comments below!