Buy and Hold Real Estate or Flip Properties
There is no one correct answer to the question of flipping versus buying and holding real property. Instead, it would be best if you considered your overall goals when choosing which method to use.
Also, it would be best if you considered the market opportunities. Let's take a look at each strategy and then decide which one is right for you.
Why Invest In Real Estate?
It's a great question. For many reasons, residential real estate is drawing ever-increasing attention from retail investors.
The predictable returns of real estate are better than those of stocks and bonds.
Because rental rates and investment cash flows are usually higher than the inflation rate, real estate as an inflation hedge.
Real estate is a great place to invest capital in times of uncertainty about the prospects for stocks or bonds.
An excellent source of capital for other investments is the equity generated by real estate investments. Instead of borrowing capital to invest (i.e., buying stocks with margin), investors may borrow against their equity to fund other projects.
Borrowing against a home is attractive because of the tax-deductibility mortgage interest.
Residential real estate is not only a source of cash flow but can also be used to build a home or for other purposes.
Passive vs. Active Income
The critical difference between flipping and buying properties is the passive income that the former provides, while the latter can bring you active income.
Passive income refers to money earned from investments that continue to make money without you having to take any action. For example, you could make passive income from stocks or bonds or own rental properties and earn rental income every month. As long as you hire a management firm to handle all tasks, such as finding tenants and collecting rent, you can earn passive income.
An active income is money you make from the work you do. This includes your work salary and the profit you make from flipping houses. Flipping houses is an active income regardless of how much you do the actual labor of stripping floors. You still have to engage in the business of flipping properties, including finding them, buying them, overseeing contractors, and managing the project.
Flipping is not just an investment strategy but a way to make money, like holding real estate or stocks. Keep in mind, if you work a full-time job, your spare time may be consumed by all the demands of flipping a property.
There Are Two Ways To Flip Properties
Two main types of properties can be used for a buy/sell approach in real estate investing. First, houses and apartments that are in financial distress can be bought below current value. Second, the fixer-upper is a property that has structural, design, or other issues that can be fixed to create value.
Investors who invest in distressed properties start by looking for homeowners who are unable to manage their properties or by searching for properties that are over-leveraged or at risk of becoming the default. On the other side, fixer-uppers are those who remodel or improve a property to make it more attractive for homeowners or make it more efficient for tenants.
This tactic allows the buyer to invest in labor to increase value instead of buying a property at low prices to generate high investment returns. It is possible to combine both strategies when flipping properties. Many people do this.
But, it cannot be easy to find these opportunities consistently over the long term. Therefore, flipping properties should be considered a tactical strategy rather than a long-term investment strategy.
The Positives And Negatives Of Flipping
Positives
You get a faster return on your investment.
Potentially safer investments
Negatives
Prices
Taxes
Positive: Faster Returns on Your Money
Flipping properties has the advantage of quickly realizing gains, which allows you to release capital for other purposes. It takes about six months to flip a house, but first-timers should expect it to take longer.
Positive: Potentially safer investments
Real estate markets tend to be more predictable than the stock market. While they can change in the middle of the day, they are much less volatile. Therefore, flipping properties can be seen as a safer investment strategy since it keeps capital at low risk for a short time. In addition, this strategy does not have the leasing management risks that come with holding real estate and the hassles associated with finding tenants, collecting rents, and maintaining a property.
Negative: Prices
Flipping houses can cause costly problems that are not present with long-term investments. Flipping houses can be expensive and cause cash flow problems. Transaction costs can have a significant impact on profits. They are high on both the sell and buy sides. You are also losing a steady paycheck if you quit your job and turn to flip for income.
Negative: Taxes
You can enjoy a rapid turnaround in property sales (which is crucial in successful flipping deals). This can lead to swings in your income that could boost your tax bill. This is especially true when things change quickly in properties (and speed is everything in successful flipping deals) can create swings that can boost your tax bill.
The Positives And Negatives Of Buying-And-Holding
Positives
Permanent income
Property values increase
Taxes
Negatives
Costs of vacant houses
Management and legal issues
Positive: Ongoing Income
No matter where you live or your occupation, renting property can provide you with regular income. It is also a proven way to accumulate great wealth by buying and holding property. Land ownership was the primary source of many "old money" both in the U.S.A and abroad. Despite declining prices, land values have nearly always recovered over the long term because there is limited land supply.
Positive: Property Values Increase
Inflation is more likely to affect your investment property if you keep it longer. This will increase the property's worthwhile decreasing the amount of the mortgage loan you have. Imagine that you could buy during a buyer's marketplace and then sell during a seller's market. There is also the potential to realize a substantial return on your investment.
Positive: Taxes
Flippers are not eligible for the tax benefits of owning a rental property. However, rental property is treated as income and subject to lower tax rates. Also, expenses such as repairs or maintenance, paying a property manager, and driving to and from the property can be written off.
If you decide to sell the property after it has been owned for over a year, you will be subject to the long-term capital gains tax.
Negative: Vacancy Costs
Renting a property is not easy. This applies whether you manage it yourself or hire someone to do it for you. In addition, you are responsible for paying the mortgage if your property has been vacant for more than a year. Therefore, you should ensure that your budget can cover at least one to three months of vacancy each year before you invest in a buy and hold property.
Negative: Management And Legal Questions
Investment in long-term actual property ownership requires a lot of management skills beyond most investors' reach. Many investors, particularly first-time landlords, are not prepared or equipped to handle the landlords' legal responsibilities and issues. Finding quality tenants and meeting their requirements can be stressful and time-consuming. To ensure that one's investment continues to generate cash flow, property management must be done well.
Selecting A Strategy
To decide whether you should flip properties or hold them for the long-term, you need to answer a few key questions. First, it is essential to determine if your capital allocation for real estate is a permanent investment or a way to profit from the expected rise in home values.
It is also helpful to determine what risk/return ratio you should use for this part of your investment portfolio. You must also have the ability to manage both types of investments.
Let's say that the capital isn't available to buy a diversified portfolio. A potential investor must be willing to accept unsystematic risks. This includes any individual property risks as well as the possibility of a lack of rental demand.
You must determine if you can find distressed sale properties and fixer-uppers if you consider a buy-and-sell strategy. In addition, it is crucial to decide on if capital can be turned enough times in a given period to cover transaction costs. These include brokerage and financing.
The Summary
Your financial situation and goals will determine which strategy you choose. However, those who invest in real estate as part of their core investment portfolio will find the long-term holding strategy more suitable.
Flipping properties can be a great way to profit, primarily if it's used as an adjunct or return-enhancing tactic.
If you want to build wealth and generate income from your real estate investments, consider long-term real estate ownership. The equity in the portfolio can be used to finance other investment opportunities and the possibility of selling the properties at a higher price.
Flipping properties is an option that works best when the prospects for the bond and stock markets are low. This strategy can be used by people who want to make a short-term capital gain as long as there is a housing market.
