One of the particularly attractive benefits of real estate investing is its versatility. There are dozens (if not hundreds) of different tactics and strategies you can use to carve out your own lucrative niche as a real estate investor. But when it comes down to residential rental properties, there are two strategies that take the proverbial cake (in terms of popularity). We’re talking about flipping houses versus buying and holding.
While both of these strategies offer the potential for healthy gains, they’re not created equal for every situation. It all depends on your specific needs, goals, timeline, cash, and risk tolerance.
In this article, we’ll explore each strategy and give you some key factors to consider when choosing between buying and holding or flipping.
The Buy and Hold Strategy
Buy and hold real estate investing is one of the most tried and true forms of investing. It’s where an investor buys a property and holds onto it for an extended period of time, typically meaning you hold it for a minimum of two years (but usually much longer).
Buy and hold investing is appealing to investors because of the number of different financial benefits it provides. It’s able to put an investor’s money to work in multiple ways. There are short-term gains associated with rental income, as well as long-term benefits like depreciation, tax write-offs, and potential appreciation in the value of the property.
Generally speaking, investors try to get a capitalization rate of somewhere between five and 10 percent. This provides a good short-term ROI, while the long-term ROI comes from the future sales. In hot markets, it’s not uncommon for a property to increase significantly in value over a five-to-10-year period, which can effectively increase the capital in the deal.
The key to successful buy and hold investing is research. It’s a very analytical game – searching for the right property by evaluating numbers and using objective metrics to project cash flow and ROI over the life of the investment.
Once you find a deal that makes sense, you have to consider your financing strategy. There are plenty of options, including traditional lender financing, hard money, private money, FHA purchase loans, seller financing, and more. While traditional financing is the most common and accessible, most buy and hold investors eventually find hard/private money lenders for easier investing.
Pros of Buy and Hold
- Regular Income: The rent from tenants provides a steady source of income.
- Appreciation: Over time, real estate properties generally increase in value, leading to potential profits when sold.
- Tax Benefits: Rental property owners may be eligible for certain tax benefits, including deductions for mortgage interest, property taxes, and operating expenses.
- Equity Buildup: As you pay down your mortgage, you’re building equity in the property that can be tapped into later if needed.
Cons of Buy and Hold
- Maintenance and Management: Being a landlord requires time and effort, dealing with tenants, and maintenance issues. This can be mitigated to some extent by hiring a property management company.
- Market Fluctuations: Real estate markets can fluctuate. If property values decline, you might find yourself owing more on your mortgage than the property is worth.
- Tenant Risk: There’s always a risk of having bad tenants who don’t pay rent or damage the property.
The House Flipping Strategy
If buy and hold investing is for building a long-term portfolio, house flipping is the short-term equivalent. It gives you a quick bang for your buck but requires you to take on greater financial risk without as much certainty.
With house flipping, you aim to buy a house that’s undervalued, put some work into it in the form of renovations, and then quickly turn around and sell that property for a gain. This strategy works best with properties that are distressed sales and/or nearing foreclosure. You usually need to find off-market properties for this approach to work.
House flipping works exceptionally well in hot markets where real estate values are climbing fast. It’s a little riskier in declining or stagnant markets (though it can still technically be a viable option).
Pros of the Flipping Strategy
- Profit Potential: Flipping properties can yield significant profits if you buy low, control renovation costs, and sell high.
- Shorter Investment Period: Flipping typically involves a shorter investment period compared to buy-and-hold. If successful, you could realize profits in a few months rather than waiting for years.
- Outlet for creativity: For those who enjoy the process of renovating and transforming properties, flipping can be a rewarding endeavor both financially and creatively.
Cons of the Flipping Strategy
- Financial Risk: If renovation costs go over budget or if the property doesn’t sell quickly, flipping can result in financial loss.
- Time and Effort: Flipping a house often requires a significant time investment and hands-on management of the renovation process.
- Unforeseen Problems: Renovation projects can uncover unexpected issues like structural problems or building code violations, leading to additional expenses.
Key Factors to Consider When Choosing a Strategy
While there’s no rule that says you have to choose between buy and hold investments and house flipping – you can layer both approaches into your portfolio – we’re assuming that you’re reading this article so that you can pick which option is best for you. In light of that, here are some factors to take into account:
- Timeline: What is your investing time horizon? In other words, when do you need your capital back? If you want the cash back in hand in less than 12 months, a flip is the way to go. But if you’re okay putting the money to work for several years, then a buy and hold might make more sense.
- Risk tolerance: How much risk are you willing to take on? If you’re more conservative with your money, buy and hold offers less downside. But if you’re willing to embrace a little more risk for the possibility of greater upside, then flipping could be a consideration.
- Market conditions: Always pay careful attention to the conditions of your local market. Buy and hold investments work really well when a recession is approaching (as rentals are in high demand and you don’t have to worry about the short term dip in property value). Flips work well in hot markets where prices are climbing and there’s lots of activity.
Green Residential Property Management Services
At Green Residential, we aim to make your life easier as a real estate investor. We specialize in offering comprehensive property management services for buy-and-hold investors who don’t want to deal with the day-to-day responsibilities of being a landlord.
If you’d like to learn more about the specific services we offer – including tenant screening, rent collection, and repair coordination – we’d love to chat. Contact us today for a free property analysis!