There are many ways to invest in real estate. Two of the most popular ones are to either fix and flip a house or, on the contrary, to hold on to it. Although they both involve the same initial step – purchasing a property, often in need of some serious rehab – the following strategy is entirely opposite. While flippers try to sell the house they bought as quickly as possible, buy-and-hold investors intend to keep the building for at least several years.
The way each investment property generates a revenue is different, but which one is the best strategy?
Pros and cons of flipping a house
A house flip consists of purchasing a distressed property below market value, improving it, and selling it for a profit as rapidly as possible. The goal of the flipper is to avoid paying the carrying costs – such as property taxes, maintenance, HOA fees, utilities, etc. – as much as possible.
The most significant advantage of a fix and flip is that you should be able to make a profit relatively quickly, at least in theory. Your money isn’t tied up in a deal for very long, and you can be more flexible. If you can do part of the renovation work yourself, it is also an excellent way to save some money on contractor fees.
On the downside, as anyone who has ever taken part in a construction project can tell you, things rarely go as planned. Things often take a lot longer and are costlier than desired. Besides, there is always a risk that the house does not sell for as much, and as quickly as you would have hoped. Finally, by holding the property for such a short time, any profits you make on the resale can be subject to a hefty capital gains tax. There are many mistakes that can turn a flip into a flop.
Pros and cons of buying and holding a house
When you buy and hold a home, the goal is to rent the property in the long term in order to generate a steady monthly revenue instead of a one-time profit. In the long run, the asset also appreciates, creating even more benefit when comes the time to sell it.
The most interesting side of holding on to a building is that it creates reliable cash flow in the long term. It can be used to offset the building expenses, including the mortgage, maintenance, taxes, and so on, but also to finance the investors’ personal needs. On the long term, you can also use the equity in the building to fund other projects. Unlike a house flip, which is often a time-intensive project, a well-managed building is a good fit for part-time investors.
However, being a landlord comes with its own set of headaches. You are responsible for the upkeep of the building, whether all units are occupied (and the profits optimal) or not. A few bad tenants can also rapidly bring the value of the property down, not mentioning incurring the possibility of a lawsuit.
Should you flip or buy-and-hold a property?
There is no absolute right or wrong answer. Whether you should opt for a short or long term strategy depends on the building you are considering as well as your cash flow needs.