Flip Or Buy And Hold Your Properties
Trying to decide between buying and holding or flipping property can be difficult.
There are multiple factors to consider to figure out what is best for your situation.
One isn’t necessarily better than the other; they both have pros and cons.
In this article, we’re going to look at what might make each a better decision for your purposes.
What is Buying and Holding?
Buying and holding is a real estate strategy where an investor buys property and holds onto it for a period of time. During this time, many property owners rent out the space.
Unlike flipping property, this is a long-term investment. Most investors engaging in this strategy enjoy a reliable monthly cash flow from rental income. Properties range from single-family homes to apartment complexes to condominiums and more.
Buying and holding typically goes hand in hand with renting out property. There aren’t many investors that can (or would, even if they could) leave property vacant for an extended amount of time.
Buy and hold cash flow, at the very least, should cover the cost of owning and maintaining the property, and the monthly mortgage payment. And it’s important for monthly rent income to exceed the expenses for the property if an investor wants positive cash flow.
So, most investors make short-term money by renting out property they’re holding onto. Then, they make long-term money by selling the property after the value appreciates over time.
Buy and Hold Advantages and Disadvantages
Buying and holding property has some distinct advantages over flipping property. Let’s look at the main ones below:
Appreciation
Real estate almost always appreciates in the long run. It’s the driving force behind most investors buy and hold strategies. The longer someone owns property, the more it’s worth.
Financing
If someone owns real estate, it often helps support other investments. For instance, an investor can leverage their equity in one property to finance other investments in different properties.
Rental Income
Reliable monthly income is great. And rental income provides exactly that.
Many investors, depending on the market, buy and hold properties generate 4% to 10% return on investment (ROI) from rental income.
Tax Benefits
Owning real estate affords the owner some lucrative tax benefits. Tax deductions available to property owners include mortgage insurance premiums, mortgage interest, repair and maintenance costs, property depreciation, and property taxes.
Principal Pay Down
The principal is money owed on a loan. Real estate investors may use money made from their buy and hold property to pay down the principal on that property’s mortgage. The loan accrues interest based on how much of the principal is left. Thus, the quicker someone pays down the principal, the less interest they must pay over the loan’s lifetime. And they’ll have more equity because of the investment they’ve put in.
Increasing Profits
Rent, maintenance and repair, administration, and property management fees rise with cost-of-living increases. That said, property tax and debt service stay fairly constant, which means your profit margins increase in the long run.
Hedge Against Inflation
The buy and hold approach can protect your portfolio because properties appreciate as time goes on, particularly if inflation rises.
Passive Income
With the help of a rental property management company, buy and hold investments are stable sources of passive income because of the consistent cash flow. Furthermore, your portfolio offers another source of financial stability during retirement or medical emergencies.
Elastic Exits
Even though part of the buy and hold strategy typically involves “holding” property for an extended amount of time, you can sell whenever you want. There isn’t a contract or law forcing you to hold property for a certain time period. That said, if you took out a loan, you must pay off that mortgage.
While it has many advantages, buying and holding also has some distinct disadvantages:
Vacancy Costs
Finding good tenants isn’t easy. And if your property sits empty for months (or years, yikes), then that can obviously take a toll on profits. Thus, before investing in a property to buy and hold, you need to ensure that your budget can withstand one to three months of vacancy each year.
Management and Legal Difficulties
If you own real estate for a while, this management-intensive pursuit will test your management skills. Many new investors aren’t equipped or ready to deal with the challenges that inevitably come from owning and renting property. Finding good tenants, managing repairs and maintenance, and meeting tenant needs is demanding in many circumstances.
What is Flipping Properties?
Flipping properties involves purchasing property (typically at a low price), then selling it for a profit after renovations and/or repairs.
Flipping properties requires a large upfront effort due to repairs and renovations. You must enhance the value of the property to turn a profit.
Flipping Properties Advantages and Disadvantages
Like the buy and hold strategy, flipping properties has advantages and disadvantages. Let’s start with the pros:
Fast Income
Flipping properties leads to much quicker cash flow than the buy and hold strategy. Thus, you’ll be cash strapped for a shorter time and see a cash influx right when you sell.
Less Time
Flipping requires speed, so you will have the property off your hands quicker and cash in your hands quicker. Flipping properties also may increase your confidence and provide a little experience with properties before you move into buying and holding.
Reduced Risk
When it comes to value, flipping properties is lower risk than buying and holding because long-term real estate fluctuations can impact return on investment. Flipping properties also avoids leases and management risks associated with buying and holding.
Fewer Headaches
Lower carrying costs means fewer issues. Most flips involve distressed properties, so the initial investment is below the market rate. And you don’t have to deal with tenants like you do with the buy and hold strategy, which means vacancies won’t impact your profit.
What about the disadvantages? Let’s look at them:
Cost
Flipping properties involves costs you don’t run into with the buy and hold strategy. High transaction costs for buyers and sellers can impact your potential profit.
Taxes
The fast turnaround usually causes changes in income that increase your taxes due. This is particularly true if the process goes too fast to capitalize on long-term capital gains tax rules. In many instances, you must pay a higher capital gains tax rate based on your earned income if you own property for under a year.
Conclusion
Buying and holding and flipping properties both have pros and cons. Your decision should be based on what you now know and your goals and business. Neither is an inherently better strategy.
