Property flipping gets a lot of airtime these days, with lots of HGTV shows and flipping couples who have even become celebrities. Buying and holding isn't quite as sexy, but has many benefits. Which real estate investment strategy should you try? Or a little bit of both? Read on for a quick list of the pros and cons of each ...
2016 was a big year for flippers. Nationwide, flipped houses (defined as houses bought and sold within 12 months) made up 6% of all home sales. And certain zip codes in the Washington DC area had close to double that rate. We all love seeing the before and after photos on HGTV specials, and dreaming about the quick ROI we could get. But what are the other real advantages to fixing and flipping properties?
- High ROI Relative to Time Invested: Most flippers have chosen their market carefully, bought “low”, and have done quite a bit of research on their “sell” price, so they know what likely profit to expect in the short term. [Read our tips for maximizing sale price and speed of flips!] Often the highest ROI is recognized right after the repairs are complete as compared with the smaller relative increase in value over the next few years. Additionally, flippers aren’t sinking money into expenses like property taxes, maintenance or utilities over long periods of time, which will add to their profit.
- Cash flow: When you buy, fix, and sell quickly, you get your profit out of the deal quickly as well. You can then use that capital toward another deal with possibly even a higher ROI. Additionally, many lenders provide better rates and terms to those who have done multiple flips, so building a track record can also reduce your cost of capital for future deals.
- No Rental Worries: The “buy and hold” method generally involves renting, which can result in a lot of expensive repairs and bad renters. By fixing and flipping, you’ll avoid this scenario altogether.
- Construction Issues: Fix and flip properties commonly involve more significant renovations than buy and hold properties that the owner intends to rent. With larger-scale renovations come a greater potential for construction surprises and delays as well as time and budget overruns.
Buying and Holding
- Longevity is on Your Side: The “buy and hold” method gives you a major advantage in that you can buy homes in depressed markets and then wait as long as needed for values to increase. This works especially well if the home is rented and most or all of the mortgage is being paid. House prices increased by an average of 6% per year from 1968-2004, without one single year of declining values. The housing crash from 2008 to 2011 brought a decline in home values, but that dip was relatively short lived and home values are now above 2008 levels. So history says that the strategy of buying and holding real estate is still a great bet.
- Monthly Income: Renting a property provides monthly income to owners that fixing and flipping does not. Over time, as rents increase and the mortgage stays the same, profits increase as well. Many investors who buy and hold buy several properties over time. The income from these properties can provide a significant monthly income to investors
- Owning Real Estate Free and Clear: If you hold onto your “buy and hold” property long enough, you’ll have the mortgage paid off completely, and any rent you make will be pure profit (after maintenance and taxes of course!) You can continue to rent or sell and realize the profit.
- Bad Renters: Thorough vetting can usually help you avoid a bad renter, but not always. You’ll need to be prepared to deal with renters who could potentially cause serious damage to your properties. And many states have strict tenant rights laws that make evicting even bad renters challenging and costly.
- Timing the Market: If you wait long enough, you can almost always turn a profit on a home you are holding. However, many external factors can affect markets, making it difficult to forecast fluctuations and time your sale for maximum profit. And if you have to sell your property at a specific time, it may be during a down market. For example, if you had to sell sometime between 2008 and 2011, when the housing market was at its lowest, you could have easily lost quite a bit of money.
- Property Management and Maintenance: Depending on how far you live from your rental property and how much time you have to spend on day-to-day property issues, you may prefer to handle management and maintenance issues yourself or choose to hire a property manager. If you work with a property manager, you will be paying management fees in addition to any maintenance costs.
Fix and Flip or Buy and Hold? Maybe a little bit of both for a balanced portfolio!
Brought to you by Walnut Street Finance, providing hard money financing to real estate investors across the Washington DC metro area.