The idea of flipping a house and making a healthy profit in a relatively short period of time is one that holds a lot of appeal for investors, but is it always the right option? It may be better, depending on your situation, to buy and hold versus flipping. The following are considerations to keep in mind if you’re ready to delve into real estate investing but aren’t sure of the right path for you.
You can flip properties in one of two main ways. First, you can buy a house or a multi-family property below the current market value. These properties tend to be available because the current owner is facing some sort of financial distress.
Then, the second option is to buy a fixer-upper. That property may have cosmetic or more serious structural issues that need to be addressed, and in doing so, you’re creating value.
When you buy distressed properties, you actively work to find homeowners who can’t manage their property and are currently at risk of default. If you look for flipping opportunities that need to be remodeled, it’s simpler to peruse real estate listings and find options with potential.
The pros of flipping a house include a faster return on your money and the potential that it’s going to be a safer investment than the stock market. When you flip a property, it usually takes around six months, but if it’s your first time, it’s probably going to take longer. Your capital is only at risk for that period of time when you’re working on flipping and then selling the house. You don’t have to take on some of the risks of holding the property and renting it out, like finding tenants.
However, there are significant expenses that come with flipping a house, and these expenses are very often underestimated by novice flippers.
There are also tax ramifications when you turn around a property quickly. If you own a property for less than a year, expect to pay a high capital gains tax rate on the income you earn.
Another option is to buy a property and hold onto it for the long-term, earning income typically by renting it out.
The big pro of a buy and hold strategy is the ongoing income. You’re earning passive income without going to an office every day to get it. You could be halfway around the world and still earning income on a rental property.
It’s also likely that when you buy property, it will ultimately go up in value. There may be ups and downs along the way depending on the real estate market and the general economy, but for the most part, the longer you hold onto a real estate investment the more benefits you’re going to amass thanks to inflation.
There are tax advantages to buy and hold. When you own a rental property, it’s investment income, so your tax rates are lower, and you can write off the expenses of keeping up the property. Plus, the longer you hold onto the property, the lower your capital gains rate will be when you do sell.
Is buy and hold risk-free? Absolutely not.
If you want rental income, there are risks that come with this, including the potential that you’ll have difficult tenants or tenants who don’t pay.
You’ll also have to carry the expenses of your property if it’s vacant for a period of time.
While buying and holding property can generate passive income, it’s not always passive. You’re going to have to manage the property itself and your renters, or else you’ll have to take on the expense of paying a management company to do so.
When you compare flipping versus buying and holding, you have to think about your level of risk tolerance, your investment timeline, and how active a role you want to take in the investment. You also have to weigh your financial objectives. For example, do you want to make money fast, or do you want to build long-term wealth?
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