Buy & Hold Or Fix & Flip ?
Real estate investors are often torn between two strategies, fix and flip or buy and hold. Some renovate a property and sell it for a quick profit, and others hold on to an asset and rent it out for monthly cash flow from tenants.
So which investment strategy is better?
The Fix and Flip Strategy
If you are looking for a quick profit, you can seek out undervalued property requiring minimal improvements and sell quickly. The idea is to buy at a discounted price in a stable area, renovate the property and bring the occupancy rate up to par. Then you can rebrand the improved asset and sell it at a higher price. Your financing would have to be inexpensive enough to make the deal worthwhile.
A real estate agent can identify investment properties, and you will need a team of contractors for renovations. Look for properties that are offered below the current market value due to poor condition or because the owners are in financial distress and at risk of default. You can enhance the property by making repairs and improving design or structural flaws so it is more marketable. Your capital investment in renovations will create more value, and then you can sell at a higher price.
Pros of Flipping Real Estate
Investors looking to buy low and sell high with a fix and flip Value Add investment have distinct advantages.
• Your capital is tied up for a shorter time, providing a Time Value of Money (TVM) advantage
• Frequent flips can generate a steady cash flow
• No management is necessary
• There are no leasing risks are involved
Cons of Flipping Real Estate
As in all investments, there are some downsides to the fix and flip strategy.
• You need a sizable amount of cash to buy and renovate
• The fast pace of buying and selling may preclude capital gains tax advantages
• Value Add investment properties can be time-consuming
• You need to have DIY skills and the time to renovate the property. The alternative is to pay for a professional contractor and give up some of your profit.
The Buy and Hold Strategy
Investors who buy and hold real estate benefit from long term appreciation in addition to a steady cash flow from tenants. You must be able to analyze the markets affecting the property in the long and short term by looking at employment rates, the median income, rent prices and amenities like schools, shopping and medical facilities in the area.
Once you buy the property and find renters, you become a landlord with all the responsibilities associated with a landlord/tenant relationship. You can get support by hiring a property manager to screen tenants, attend to tenant issues, collect the rent and perform regular maintenance and repairs. Another option is to invest with a real estate investment company that bears those responsibilities and identifies good investment opportunities.
Pros of Holding Real Estate
Buying and holding the right properties gives you the potential to accrue wealth.
• Holding on to real estate increases the likelihood of appreciation as values increase
• You can wait out a market downturn and sell when conditions improve
• High leverage allows you to invest in multiple properties
• As a buy and hold investor you can realize a high returns on your investment since the entire asset appreciates in value, not just the amount you invest
• You can benefit from tax advantages like deductions for depreciation and deferred taxes through the 1031 Exchange.
Cons of Holding Real Estate
While equity or buy and hold investors realize multiple benefits, there are some disadvantages.
• Ongoing maintenance of property including repairs, snow removal, etc.
• Capital Improvements are big-ticket items that might eat up your cash flow
• Unexpected expenses like sudden vacancies and emergency repairs can pop up
Tips for Choosing a Strategy
The best strategy for you will depend on your particular market cycle and conditions, your skillset, experience with real estate, availability of capital and your investment goals. If you are a sole investor, you may not have the financial capability to diversify your real estate portfolio. Many investors choose buy and hold for the majority of their investments to benefit from steady cash flow, appreciation and tax benefits while taking advantage of the occasional fix and flip opportunity. A real estate investment company can provide benefits like professional property management and the opportunity to create a diverse portfolio.
Comments (1)
This is the current great debate in our household! My boyfriend is ALL about the fix n' flip path (I expect no less from a contractor who is able to complete all the work himself). Admittedly, when I first became interested in real estate investing, I never considered rentals because I thought being a landlord would be too difficult. But now after doing much research on BP and through books and podcasts, I'm trying to convince him that rentals are the long-term wealth building solution that can truly be passive. Been trying to educate him on this ever since, but he seems solely interested in the "fast cash" appeal of flips. I think our compromise will have to be a little of both!
Kat Malkowski, about 6 years ago