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Flip Or Hold: Which Is Better?

F Pi Magazine Feb Issue 44

What kind of real estate investing should you do? There are hundreds of ways to invest in the real estates, but the most popular are the Fix & Flip and the Buy & Hold methods.

A Fix & Flip property can be defined as a property which is purchased by an investor, fixed up and sold as fast as possible to gain some quick profit. It’s not easy to find great fix and flip properties and it’s also quite difficult to make money on them.

Buy & Hold involves buying a property, making possible improvements and keeping it for a long time. For paying the monthly costs of utilities, financing, taxes, maintenance etc., it can be rented to a tenant. When the monthly costs are less than the rental income, the cash flow flourishes with monthly profit.

To be precise, Fix & Flip brings you quick money, Buy & Hold means a long term cash flow.

PROS OF FIX & FLIP

Time & Money

Flipping properties enables acquiring profit within a short period of time and it also does not tie up the capital for too long.

Quick Profit

Buying, fixing and flipping a house can be done within 4 – 6 months to make a quick profit. The more experienced you become, the higher your returns will be.

High Return On Investment (ROI)

Flipping brings a higher Return on Investment (ROI) if you manage to flip it soon enough. This is contrary to Buy & Hold where you’ll have to wait for a long duration before making substantial profit. 

Market Fluctuations

Real estate markets are prone to fluctuation. But they fluctuate over time, not within a short term like the stock market. The whole process of Fix & Flip can be completed within 6 months from buying to selling. Within such as short time span, your profits are less likely to be affected by market fluctuations.  

CONS OF FIX & FLIP

Takes Time to Become an Expert

You cannot just become a flipping expert by watching some online webinars or reality shows. It takes time and real world experience to be good at house flipping. So you need to choose the right education and seek mentors’ help to make the most out of it.

Unexpected Challenges

Even if you are a flipping expert, you are likely to face unforeseen situations such as unexpected renovation costs. Anticipating them is just a part of the business.

Greater Expenses

Be prepared for paying transactional costs, both when you are buying and when you are selling. Finance and interest costs will accompany if you’re flipping houses without enough money of your own. Such costs can affect your profits tremendously.

Taxes

The tax implication for flipping houses is different than that of long term investments. It is important to estimate your margins accurately and also factor the costs in your projections. Stamp duty and Real Property Gain Tax eat into your profit margin significantly.

PROS OF BUY & HOLD

Creation of Wealth

It is absolutely certain that you can amass great wealth through Buy & Hold investing. The property value increases over the long term mainly due to inflation. The longer you hold the property, the higher is its potential for appreciation.

Steady Income

When you are the owner of multiple properties, it is possible to build a steady stream of rental income. To do the same through house flipping, you’ll need to have a steady and continuous stream of house flipping deals. This reliable and steady monthly cash flow is basically the most attractive feature of Buy & Hold investments.

Ownership Pride

It feels great to be the owner of a couple of properties knowing that they belong to you. Besides, you are also helping people who need a good home to stay. If you can have a bunch of good tenants who take care of your property and also pay on time, then Buy & Hold investment can be pretty sweet.

No Rush for Immediate Sale

Another big advantage of buy and hold investment is that there is no hurry to sell it off, you can wait until the market reaches a profitable stage. If you already have a steady monthly income and don’t need any emergency funds, you can hold on to them as long as you wish.

CONS OF BUY & HOLD

Market Fluctuations

In critical times, the real estate investor will have to sell the property at the existing market price, or might even have to sell their property at a loss. However, refinancing is always a smarter way to take out some tax-free money from the equity of a property while keeping the property for a better time to come.

Beginners Beware

Long term real estate investment can be a good competitor of the stock market. But if you are a new and not adequately prepared to deal with all the responsibilities of owning a rental property, you should think it over.  

Finding Good Tenants

It is an incredibly stressful and time consuming job to find good quality tenants, servicing them, assigning payment responsibilities, managing upkeep, etc. It requires time, energy and a lot of patience to find good tenants.

Longer Appreciation Time

Market appreciation (not capital appreciation) is what long term investors rely upon for profit, and this appreciation does not accumulate over a short period of time. So the value of a long term property depends largely on the market than the landlord themselves.  

CHOOSING A STRATEGY

In order to choose a strategy, there are some critical questions an investor needs to answer. Is the allocation of capital permanent or a transient one? Or is it a part of an investment strategy expecting high returns? It is also important to understand the risk-to-return ratio of an investment, as well as the tolerance and skill level of the investor.

Depending on different market situations, however, one can be better than the other. For example, in the beginning of a housing / credit bubble, people were heated by flipping strategy as it delivered high profit with low risk. While at the end of a property crash, people started to hold for the next ride. If you start early when market is at the bottom, you are free to choose and enjoy from either strategies. If you start late when the market is peaking, you cannot avoid suffering from the coming crash with either strategy.

Comparing these two strategies is akin to comparing an apple to an orange. If you already have the skillsets for both, then the decision depends completely on the market situation.

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