Buy and Hold vs Fix and Flip (Flipping), which one is the best option to give you long term financial freedom?
Having done both strategies myself, in this post I will lay out for you the pros and cons of each one. After reading them, you should be able to make an informed decision as to what is best for you for the future.
If you are new to real estate investment then I highly recommend that you read my post on focusing on one real estate investment strategy at a time if you haven’t already.
Discuss the Advantages and Disadvantages of Both Strategies
I am going to discuss the advantages and disadvantages of both strategies here and to be clear this is about the residential market only. Look out for future posts about investing in commercial property coming your way soon.
If you have not chosen a real estate investment strategy yet then you need to choose the right one that will fit with your goals. Need help with setting inspiring goals for your real estate investment business? My post on goal setting should be a useful read for you.
Over my 12+ years in real estate investing, I have invested in both buy and hold and fix and flip properties. But when you are starting out I would not advise that you do this.
It’s best to go for one strategy at a time. They are very different and there are many things you need to learn about both of them.
Once you are an expert in your chosen strategy, you can move onto another one, if you feel that is best for you in the future.
Buy and Hold vs Fix and Flip Real Estate Investment
Buy and Hold
To be clear here “buy and hold” is investing by purchasing properties and then renting them out to single or multi families. Holding on to a property has a number of advantages.
For hundreds of years all of the world, real estate values have significantly outpaced inflation.
The problem is that it is really difficult to predict how much capital growth you will make and when you will make it. There are always peaks and troughs in the real estate market.
At the time of writing property (May 2021) values are going through the roof. So, if you can find the right deals you could make significant profits flipping houses right now.
In the US there is a high demand for rental property as a large number of people cannot afford to take the first step on the property ladder.
The latest figures suggest that there are roughly 43.3 million households now renting in the US. Meaning, the total market share of the US renting market sits at 36.6%.
Research Your Investment Area
The best way to get the best returns from a buy and hold strategy is to invest in the right locations. Interestingly there appears to be a drive towards more single family detached houses out of inner cities.
This I believe we can put down to Covid-19 and families desire for more space. This could affect apartment rental prices detrimentally, but housing rental prices outside of cities could increase.
So, before purchasing a buy and hold rental property, it is imperative for you to research your local market. Speak to other real estate investors at meetups or online at forums such as BiggerPockets.
Go and introduce yourself to agents and get the low down on the current trends in your investment area.
The other good thing about investing in real estate in the right locations, is your property should appreciate in value more quickly. You can use the new equity in your property, by refinancing, to purchase another investment property.
Buy and Hold Financing
A very important aspect of buy and hold is the financing. You need to determine what return on investment you are looking for and then implement your financial strategy around this.
There are more and more lenders available now that will provide rental property mortgages so you have a lot of options.
You need to think about the amount of down payment that you want to make and the amount of mortgage financing you need. It is also important that you know the average rents in your location so that you can calculate everything properly.
I use a good mortgage broker to find the best financing deals on my buy and hold properties. They have access to hundreds of different lenders and I highly recommend finding yourself a good mortgage broker. They are vital for your long term success.
Renovating Your Rental Property
Another thing to take into account is the condition of the property. I always like to find property I can add value to and then renovate it to a standard I would be happy to live in. This has always worked well for me and I suggest that you try and do the same.
You will make a profit from the get go, plus you will attract better tenants and can charge the highest rates.
You need to know where you stand with renovations. It is essential to have a reliable contracting team that will provide you with a solid quote that they won’t deviate from.
There is also the question of time. You don’t want to be waiting weeks for your renovations to happen because you will be losing money.
The Advantages of Buy and Hold vs Fix and Flip
You will generate a monthly income
If you buy a property to flip it then you will not generate ongoing monthly income. With buy and hold you will generate a monthly income from the rents that you charge. This is a relatively passive income stream for you.
With this in mind it is so important that you set the right prices for your rents. You must do your homework and charge the highest price that you can based on the condition and location of your property.
Use your Profits to Pay down your Mortgage or Reinvest
When you start to rent out your buy and hold property you need to decide what you will do with the profits. Once you have paid your expenses such as mortgage repayments and any maintenance responsibilities then will you reinvest the profits?
If you have another source of income then I strongly recommend you reinvest them if you can.
Alternatively, if you don’t need to touch the profits you make from your rental income then you can use this to pay down your mortgage. This builds equity in your property fast. This will help when it comes to acquiring other properties for your buy and hold portfolio.
Yes the value of any property can go up or down but if you invest in a good location, over a longer time frame, you are far more likely to benefit from appreciation. As you are not looking to sell fast you have the time for the appreciation to be pretty significant.
This is very important. With leverage you will be able to expand your buy and hold portfolio and generate even more monthly income. Mortgage lenders will be happy to work with you based on the leverage you have with the properties you currently own or the cash you have in the bank.
Fix and Flip (Flipping)
One of the most popular real estate investment strategies is fix and flip or flipping. This is where you find a property at a discounted price, carry out some improvements and then sell it quickly for a profit.
This is a great strategy but you need to be careful. I strongly recommend that you use experts to assess and inspect the property before you purchase it, as you don’t want to end up having to repair a very expensive structural problem.
Getting this wrong can completely write off your profit and even lead to a loss.
The Key Advantage over Buy And Hold is Short Term Profit
The main attraction with a flipping strategy is the possibility of short term profit, within 6 – 9 months generally.
A good target profit margin is around 20%. When you are flipping property there are many things that can go wrong, markets can change, unexpected issues arise, so it is not always possible to make 20%.
However, this should be your initial target value when doing your due diligence.
Unless the market is really pumping and shows no signs of stopping, I would always recommend you look for a property below market value and/or one you can add value to.
Below Market Value
What does below market value mean? Look for motivated sellers that need to sell quickly; because of a death in the family, financial problems, moving to another country or state, getting divorced, as a few examples.
They are happy to get a deal done quickly, at a slightly reduced price, to guarantee everything goes through smoothly, in the quickest possible time frame.
Adding Value To Your Flip Property Is Very Important
How do you add value to a property? Find properties that need rehabbing, add an extra bedroom, convert it into multiple units, look for large gardens ripe for extensions or additional buildings, extending leases, etc. etc.
To be successful at the fix and flip strategy long term, you must find properties to add value to.
When you fix and flip property it is very important to take all costs into consideration. I mentioned the value of having a good contracting team with a buy and hold strategy, this is equally important with flipping.
You need reliable contractors that will do a great job on time for you. With real estate investment time is always money.
Remember when you flip property there are many costs involved; taxes to pay, agent’s fees, conveyancing fees, mortgage setup fees and of course the cost of the renovation.
You must factor in all of the costs, whilst doing your numbers and due diligence. Go for your target 20% profit margin, if you can’t achieve this, then I would recommend walking away and finding another deal.
Using a specialist deal analyzer spreadsheet or calculator will make your life easier, when analyzing potential profits on multiple projects..
The biggest problem with the fix and flip strategy is that you are at the mercy of the housing market.
If the market is rising then it is a great time to buy and sell because your property will appreciate fast increasing your profit potential. Of course the opposite is true when the market is flat or even in decline.
So to succeed with flipping property, you must know how the property market is performing. Knowing how the market is in your specific location is vitally important.
There is no such thing as too much research with real estate investment.
My Final Thoughts on Buy and Hold vs Fix and Flip
Both buy and hold and fix and flip are great real estate investment strategies. Which one is better; that really depends on your area, the state of the housing market, your current financial situation and your long term financial goals.
Personally, having done both and knowing the returns from both, I would always go for buy and hold, if possible.
Property values should appreciate over time and so buy and hold, will give you long term income in multiple ways, for life.
How about you? What are your thoughts on Buy and Hold vs Fix and Flip? Which one have you done previously or looking to do in the future.
I would love to hear from you in the comments below. Thank you and have a great day.