As a real estate investor, you’ve got three strategies to consider pursuing: buying and selling real estate (flipping houses), buy and hold real estate (renting), or you can do both.
The goal of this post is to take a deep dive into each of these strategies, so you can better decide which strategy is the best for you.
How I Got Started
When I first started out in real estate investing some years back, I wanted to build a large portfolio of rental properties, so a buy and hold real estate approach was the single strategy I stuck with and focused on relentlessly.
The deal that changed my mind
There was a season where inventory was sparse, and my business partner and I became a little desperate to find deals at the very least to keep our 14-man construction crew busy.
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As a result, we decided to seek deals outside our normal territory. We found a property about 20 miles outside of where we normally buy. It was a foreclosure, the price was right, so we bought it.
A few months later, as renovations were nearly complete, I became nervous about renting the house due to the distance of the property from where all of our maintenance guys were located.
Furthermore, it was a new city, so we had to deal with different city taxes, another utility company, etc.
So, we decided to put the house up for sale. The property sold in a week, and we made $14,000.
Let’s do the math
Now, at least where I buy properties, in and around Springfield, MO, if you net $200/mo. on a single family rental, that’s pretty decent. This net assumes you’re factoring in a mortgage payment, property taxes, insurance, vacancies, and maintenance expenses.
So, I asked myself, “How long would it take renting the property to make $14,000?” Some quick math told me that 14,000/200 = 70 months. That’s almost six years folks.
Now, I understand that’s a very limited view of the different financial benefits to renting a property, but it was enough for me to change my strategy.
Let the market guide you
In my opinion, instead of being married to one strategy, you’re better off allowing the market to inform you on which strategy is best.
If you find a great deal on a distressed house, and the market suggests you can fix it up and sell it reasonably quickly for a nice return, why not do that. On the contrary, if buyers are scarce, then fix up the property and find a good tenant.
Whether you pursue a buy & flip or buy and hold real estate strategy there are advantages & disadvantages to each. That’s what I’m going to discuss next.
Pros & Cons of Buying and Selling real estate (Flipping Houses)
I think the biggest pro of buying and selling real estate (flipping houses) is you have the potential to make a bunch of money quickly. Additionally, you can gain a ton of knowledge about renovating properties even after just a couple of flips.
A downside to flipping houses, especially if you’re looking to do it full-time, is there may not be that many good house-flipping deals to be had at any given time.
On top of that, you’re likely competing with other investors which makes finding and landing a good deal that much more difficult.
Furthermore, your property may sit on the market for an extended period of time before you find a buyer, and, even if you find a buyer, if they don’t qualify for a loan, then the deal falls through, and you’re back at square one looking for another buyer.
Capital Gains Tax
Finally, the tax implications that go along with flipping houses is also something to consider. Here’s a great piece by fitsmallbusiness.com that discusses taxes.
Pros & Cons of a Buy and Hold Strategy
I would argue that a buy and hold strategy is the only way to build real wealth in real estate.
Consistent Cash Flow
When you buy and rent, you get a rent check every month, so you’ve got cash flow.
Additionally, there are tax write-offs & depreciation. Here’s what the IRS says about tax deductions for rental properties.
Appreciation is an increase in the value of an asset over time. The longer you hold onto real estate, the more it will likely increase in value.
The Waiting Game
Unlike flipping, you’re not going to make huge profits up front.
Repairs & Theft
The longer you hold on to real estate, the more problems you’ll likely have to deal with. This includes repairs and even theft and vandalism.
So, is buying and selling real estate better than a buy and hold real estate strategy? Well, there are pros and cons to each that I’ve covered in this post. However, I think the best answer to the question is, “It depends on the market.” Be open to considering either strategy depending on what the market tells you. That’s my advice.