For real estate investors, there’s more than one way to invest in real estate, and it often comes down to a choice between the ‘fix and flip’ or the ‘buy and hold’ strategies. Each real estate investment strategy comes with its own pros and cons, so if you’re considering both investment options, here is a quick guide showing the difference between fix and flip and buy and hold to help you decide.
Fix and Flip Strategy
Recalling our ‘Ultimate House Flipping Cheat Sheet for Beginners‘ article, this strategy involves purchasing a property, making improvements, marketing it, and then selling it for profit. Flipping houses or commercial spaces requires a lot of effort within the shortest amount of time possible. This allows for a faster ROI, freeing up investors’ capital for their next money-making project.
Finding the right property to renovate and sell
The key to maximizing profits here is to find properties lower than the current market price, like foreclosed homes, distressed properties and giving it a reasonably financed makeover in an optimal period of time.
CNBC reports that inexperienced flippers tend to put too much money into renovations. As a result, these expenses quickly add up and investors might find that their net profit is not significant enough for the work put into the flip.
But when financed and managed properly, fix and flip properties can promise instant gains minus the holding and transactional costs of the buy and hold strategy. When it comes to the choice of residential and commercial property to flip, and Entrepreneur article suggests canvassing for fixer-upper properties in the ‘nicest’ neighbourhoods. This means that the property should be adjacent to decent schools, have easy commute options and routes, and is part of a competitive market. The last point is especially true for flipping commercial mortgages properties. Nearby malls and buildings mean a bigger guarantee of faster returns on office and retail spaces.
Buy and Hold Strategy
Collecting investment properties is equivalent to amassing wealth. The biggest disadvantage of the buy and hold method is that it requires a sizable amount to invest with, especially when looking to purchase several properties. However, investors using this can be rewarded with steady returns by putting them up for lease, which can definitely add up over time.
What to do with residential properties
Long-term residential properties – Apartment Units
Having long-term tenants ensures a more consistent income, which means that the property will continue paying for itself for the foreseeable future. As a landlord, you won’t have to worry about marketing the space, paying for utilities, or doing basic maintenance.
Short-term residential properties – Vacation Homes
If you own a property in a touristy destination, real estate investor Sarnen Steinbarth explains that your property offers higher income potential as a short-term rental. Luxury homes, seasonal vacation rentals, and Airbnb units can be very lucrative, but this means that you’d have to consistently market to renters. Depending on your agreement with the tenant, you’ll most likely be shouldering utility and repair costs, as well.
What to do with commercial properties
Long-term commercial properties – Retail or Office Space
In a competitive market, you’ll be able to rent out your commercial property in no time. Do note that commercial leases have longer terms than residential units, and whether a contract renews automatically or not depends on your agreement with your tenant. There might also be significant renovations to be done on the property. This is so it suits the business’ branding, especially in retail spaces, or the company’s needs, as in the case with offices.
Short-term commercial properties – Coworking Space
Alternatively, you can also capitalize on the growing number of startups and young professionals in your area by creating a coworking space. According to a Small Business Trends post on the rise of coworking, 2,188 spaces opened in 2018 worldwide, with half of them located in the US. The number of remote workers and freelancers continue to rise, which by this year is expected to account for 40% of the total workforce. Many of them are turning to these spaces that offer different types of packages that fit their needs. As the investor, you can have a flexible setup, similar to Industrious and its canvas suites for teams of more than 20, private offices for smaller groups, and community memberships for entrepreneurs and freelancers just looking for a dedicated desk or flexible seating. This way, you can rent out multiple flexible spaces within your property to more people at a time.
Short-term rental properties – Pop-up or Events Place
For those who don’t want the hassle of managing this type of business, what you can do is to provide a space for pop-up shops or a rental space for private events. All you’ll have to do is provide basic amenities, such as bathrooms and lighting, and give free rein to your potential tenants.
Whether you’re dealing with a residential or a commercial property, knowing your market is key to maximizing your investment. That, and a keen sense of property management are very important. Your responsibilities include reporting your rental income to the IRS an important step in getting tax deductions that come with owning rental real estate. And of course, knowing how to deal with tenants is essential, too.
Common traits of Buy and Hold investors
Buy and Hold investors are characterized by their long-term investment approach. These investors look for sound investments that they can buy and hold in the hope of generating a steady stream of income or capital gains over time. They often invest in stocks, bonds, real estate, or other assets with the expectation that they will appreciate in value over a prolonged period.
Buy and Hold investors typically have a lower risk tolerance, and are more focused on long-term capital growth than upfront income.
Fix and Flip investors take a different approach. These investors purchase properties that need some sort of renovation or improvement, fix them up to increase their value, then quickly sell them for a profit. This method requires much less capital than buy and hold investing, but it also involves much higher risk since the amount of time invested in the property is much shorter. This method requires knowledge of the local market, and an understanding of how to spot a good fix-and-flip opportunity.
Fix and flip Vs Buy and Hold – Additional areas to consider
Investment goals
When considering the fix and flip vs buy and hold debate, one of the main areas to consider is your investment goals. Fix and flipping is a short-term strategy that involves buying a property, renovating it, then quickly selling for profit. Buy and holds are longer-term strategies that involve buying a property with the intention of renting out or reselling at a later date for profit. Depending on your goals, you should weigh up which strategy is more suitable for you.
Financial ability
Another aspect to consider when deciding between fix and flip vs buy and hold is your financial ability. Fix and flipping requires a lot of capital upfront in order to purchase the property, cover the cost of renovations, and pay other associated expenses. This makes it a difficult strategy to pursue if you are not financially equipped. Buy and holds, however, have lower upfront costs and can be a great way to start investing in real estate with limited resources.
Time commitment
Lastly, you should consider the amount of time you are willing to commit when deciding between fix and flip vs buy and hold. Fix and flipping requires an intensive amount of work over a short period of time as you will need to quickly renovate and resell the property. Buy and holds, on the other hand, require ongoing management over a longer period of time as you will need to look after tenants and maintain the property.
Property values when considering fix and flip vs buy and hold
Both of these investment strategies can be profitable, but it is important to consider the implications for future property values when deciding which approach to take.
Fix and flip involves purchasing a distressed or undervalued property with the intention of making repairs or improvements then reselling it for a profit.
This strategy can be highly profitable, however it requires significant upfront capital or financing. Investors must also take into account the cost of labor and materials, as well as the risks associated with a shorter time frame for returns. This approach is best used when the market is hot and real estate property values are expected to rapidly increase in the near future.
Buy and hold is a long-term investment approach where investors acquire and maintain an income-generating property. This strategy is best used in areas where the potential for long-term growth is strong, as it will provide more stability and less risk compared to a fix and flip approach. Property values can also appreciate over time due to natural market forces, resulting in higher returns on investment.
Do you require a property manager?
An area you hadn’t possibly considered before is whether or not you need to hire a property manager.
In general, if you are flipping a home, you will not need to hire a property manager since the goal is to sell the home quickly and move onto the next project. However, if you plan on buying and holding a rental property for an extended period of time, it may be a good idea to hire a property manager. A property manager can help you manage the day-to-day operations of the rental, ensuring that tenants are paying rent on time and the property is kept in good condition. This will free up your time to focus on other investments or activities.
Are there any tax benefits between fix and flip and buy and hold investment strategies?
The primary benefit of a fix and flip investment strategy is that any profits made from reselling a property can be treated as ordinary income for taxes.
The primary advantage of a buy and hold investment strategy is the potential for depreciation deductions. This means that landlords can take deductions for the wear and tear on their rental property, reducing their taxable income. Furthermore, landlords may be able to take deductions for certain expenses related to the upkeep of their rental property. These tax benefits can help landlords save money in the long run, making this strategy more attractive than a fix and flip strategy.
The Bottom Line
For real estate investing, The fix and flip strategy is more suited for investors working with a smaller capital and looking for quicker returns. This requires realistic expectations and experience with making renovations that won’t diminish profits. If you’re looking for a more long-term and steadier investment, you can opt for the buy and hold method, provided that they know how to manage people and amenities. With both strategies, understanding the market is crucial.
