Should I Flip or Should I Buy and Hold?

I think its best to say right from the beginning that whether you buy and sell or buy strategy does not have one correct answer or one size fits all. The decision to choose one method over another should be part of a strategy that takes the investor’s overall investment goals, as well as the opportunities presented by the existing market, into account.

Why Invest in Real Estate?

Residential real estate ownership is gaining ever-increasing interest from retail investors for many of the following reasons:

• Real estate provides more predictable returns than stocks and bonds.
• Real estate provides an excellent place for capital in times when investors are unsure of prospects in the stock and bond markets or when investors expect long-term returns in stocks and bonds to be inadequate.
• The equity created in a real estate investment provides an excellent base for financing other investment opportunities. Instead of borrowing to get the capital to go into other vehicles (i.e., buying stocks on margin), investors can borrow against their equity to finance other projects. The relative ease in borrowing against a real estate investment combined with the deductability of the mortgage interest makes this option a less-expensive method for financing other opportunities for investors who are comfortable taking on the additional financial risk.
• In addition to providing cash flow for owners during periods when residential real estate is being rented out, it can also be used as a residence or for some other purpose during periods when it is not producing cash flows.

In order to outline the implications of the flip or hold decision, one must understand the issues inherent to each of the transaction strategies. Real estate is a unique asset class in that compared to stocks and bonds, it is a relatively inefficient market and is characterized by low transaction volume and market data that is not very transparent. The difficulty of finding real estate opportunities in combination with inconsistent property and market data make real estate transactions more difficult and costly to execute than stock and bond trades.

The Pros and Cons of Flipping

The most apparent advantage to flipping property investments is the ability to immediately realize gains and to have capital tied up for the least amount of time possible. Also, unlike the stock market, which can turn in the middle of a day, real estate markets are more easily predicted and can produce extended time periods that compensate investors for flipping properties. In this sense, flipping properties could be considered a less risky investment strategy because it is intended to keep capital at risk for a minimal amount of time and because it lacks the management and leasing risks inherent in holding real estate.

For most investors, flipping properties should be considered more of a tactical strategy than a long-term investment strategy. Because transaction costs are very high on both the buy and sell side, they can significantly affect profits. There are two major types of properties that can be used in a buy/sell approach to real estate investing. The first is homes or apartments that can be purchased below current market value because they are in financial distress. The second is the “fixer”, a property with a structural or design issue that can be overcome to create value.

Something to note is that flipping properties can create tax and cost issues that one doesn’t face with long-term investments. Flipping usually leads to swings in income that can create cash flow and tax management issues. Also, finding these opportunities can be difficult over the long term, making this strategy better suited for those wishing to take advantage of shorter-term opportunities in the real estate market.

The Pros and Cons of Holding

It is a well-known fact that buying and holding real estate is a recipe for amassing great wealth. Most “old money” in the U.S. and abroad was accumulated through land ownership. Even after periods of decreasing land prices, land values have almost always rebounded in the long run because there is a limited supply of land.

However, long-term real estate ownership carries a myriad of management and legal issues that investors in stocks and bonds never have to contend with. Real estate ownership is a management-intensive endeavor that is outside the skill set of many investors.

Conclusion

Although the choice between the two strategies in question depends on one’s particular financial situation and investment goals, the long-term holding strategy is generally more appropriate for those using real estate as a core portion of their overall investment portfolios; flipping properties is more appropriate when real estate is used as an adjunct or a return-enhancement tactic. Investors wishing to amass wealth and to derive income from their real estate investments should consider holding real estate for the long term, using the equity built into the portfolio to finance other investment opportunities, with the potential of eventually selling the properties in an up market. Flipping properties is a tactic that is best suited for periods when prospects in the stock and bond markets are low, or for investors wishing to realize short-term capital gains for as long as the present market will allow.