Buy and Hold vs. Flip: Which Investment Strategy Is Right For You?
11 Jan 2022
5 min read
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Want to make money through real estate investing? Purchasing a home or unit is the first step. Next, you need to figure out what you plan to do with that space. Two of the most popular options are to fix, flip, and sell the property to another buyer or hold onto it and rent it out for passive income. There isn’t a right or wrong route to choose, and there are benefits and drawbacks to each one. The best approach is one that allows you to meet your investing goals, turn a profit, and set your business up for long-term success. Today, we’re taking a look at how each strategy works and sharing the pros and cons that curious investors need to know. This can help you choose the best option for you so you can take that next step in confidence.
What Is Buy and Hold Investing?
With buy and hold investing, there isn’t an immediate exit strategy. Instead of trying to sell, you’d choose to maintain long-term ownership over the investment property you buy. In most scenarios, this means purchasing an asset, renovating or rehabbing it as required, and then leasing it to renters. In place of a one-time profit, you’ll earn monthly rent on a recurring basis.
Pros of Buy and Hold Investing
Considering taking a buy and hold approach on your next real estate investment? Here are the top two benefits to know.
Generates Future Wealth
Though the market ebbs and flows, real estate values trend upward and your asset should appreciate with time. If you’re willing to wait out those fluctuations, you could sell at a later date for even more than you put into the property. While you might not notice major gains at first, this strategy is the epitome of the saying, “Slow and steady wins the race.” When you are ready to sell or pass down the property to a loved one, it should have established a significant amount of wealth and liquidity. The longer you hold, the more appreciation you can earn.
Ensures Steady Income
In today’s uncertain economy, it can be hard to find reliable earning opportunities, which makes real estate investing even more attractive. As long as the property is in safe, sturdy condition and in a desirable location, you should be able to fix and rent it without major hurdles. This keeps money in your pocket and gives you extra income to invest back into the property when it needs maintenance or repairs. Most lease terms are one year in length and renew automatically, which can give you invaluable financial security -- and peace of mind.
Cons of Buy and Hold Investing
While buy and hold investing can be a great way to earn money and acquire wealth, it does have its drawbacks. Here are two potential issues to keep in mind.
Stress of Managing Tenants
As the property owner, you’re legally obligated to keep your home or rental unit safe, sanitary, and well-maintained. This means responding to calls any time something goes wrong, day or night. Depending on the condition of the property and the personalities of your tenants, this could easily turn into a full-time job. Then, there are tenants who simply don’t respect the property they’re living in, or don’t keep it to your standards. This can lower its inherent value and make it less attractive to future renters, but convincing them to leave can create even more difficulties. To avoid these roadblocks, many investors choose to hire a property management company to handle everything from tenant screenings to maintenance requests and evictions, though this doesn’t guarantee against future complications.
Can’t Replace Full-Time Job
One of the most favorable aspects of the buy and hold strategy is that it allows investors to learn the ins and outs of real estate on their own time. Once you buy your property and rent it out, the day-to-day work shouldn’t be all-consuming.
That said, the money you earn from rent might not add up to a full-time income, even if you own multiple assets. This approach is best suited for part-time investors who want to gain experience in the industry and build their rental property portfolios as a means to supplement, not replace, their day jobs.
What Is Flipping?
Chances are, you’ve seen fix-and-flip shows on your television screen or social media feeds. Channels are replete with individuals, couples, and even entire families who have turned flipping into a lucrative career. With this strategy, investors buy a real estate asset (usually at or below market price), perform repairs to improve its form and function, and resell it at a higher price. These steps usually occur at a rapid pace to keep carrying costs low and profits high. If you need financing to help you buy, renovate, and sell your property while the timing’s right, check out our flexible fix and flip loans! We even offer advanced rehab draws so you can start as soon as possible.
Pros of Flipping
Flipping properties can be an incredibly gratifying venture, especially for investors who need access to a big payout all at once. Here are two of the top benefits to know.
Fast Financial Gains
If the idea of playing the waiting game doesn’t appeal to you, then flipping might be your best bet. The sooner you can fix and flip your property, the sooner you’ll start earning. Not only are turnaround times shorter, but profit margins can be relatively higher, too. This is because investing in certain aesthetic and functional repairs adds value to the property. Even if you secured funding for fix and flips or bought it at a great price, you’ll only break even if you sell it as-is. House flippers know which upgrades will increase the resale price the most (such as a remodeled kitchen), and can use this knowledge to focus their efforts.
Less Affected by the Market
It’s natural for the real estate market to oscillate over time. Values can be up one day and back down the next, depending on a range of external conditions. While it can be challenging to navigate this uncertainty as a buyer or seller, house flippers are less affected by such changes. The process of fixing and flipping typically takes place in such a short period of time that the market hasn’t had time to majorly change before the property is back on it again. If you get a good deal when you buy, you should get a good deal when you sell.
Cons of Flipping
The “make money fast” aspect of flipping is certainly appealing, but this approach can also come with disadvantages. Here are two to remember.
Repair Work Needed
Flipping might look glamorous on TV, but it can be incredibly difficult and dirty work. If you’re skilled in DIY repairs and upgrades, you might be able to handle all the projects on your own. However, most house flippers need to hire local contractors to get the job done. If you’re not careful, those expenses can cut into your profits, especially if the home needs a major repair, such as a new roof. To avoid this issue, remember the 70/30 Rule, which states that the maximum purchase price for a property should be 70% of its after-repair value (ARV) minus the costs of necessary repairs.
The income you earn from selling a flipped property is called a short-term gain. This can ramp up the taxes you owe, especially compared to a longer-term buy-and-hold investment. In addition, you usually won’t be privy to some of the other tax breaks afforded to long-term investors. It’s smart to hire a tax accountant or financial advisor if you’re thinking of going this route.
Find the Right Real Estate Investment Strategy
Whether you choose to buy and hold or fix and flip, we’re here to make each step easier. At Temple View Capital, we offer a variety of lending services designed to help real estate investors break into and capitalize on the local market. From industry-leading DSCR rental loans to rehab loans and new construction loans, we have the solutions you need to get started. This can be a rewarding and successful venture no matter which strategy you use. To learn more and get started, contact us today!