Should You Buy and Hold Real Estate or Flip Properties? (Part 2)
The Pros and Cons of Flipping
Pro: A Faster Return on Your Money
One big advantage of flipping properties is realizing gains quickly, which releases capital for other purposes.
Pro: A Potentially Safer Investment
Unlike the stock market, which can turn in the middle of a day, real estate markets are often more predictable.
Flipping houses can create cost issues that you don't face with long-term investments. The expenses involved in flipping can demand a lot of money, leading to cash flow problems.
The quick turnaround in properties (and speed is everything in successful flipping deals) can create swings in income that can boost your tax bill.
The Pros and Cons of Buy-and-Hold
Pro: Ongoing Income
Owning rental property provides you with regular income, no matter where you are or what you are doing. What's more, buying and holding real estate is a known recipe for amassing great wealth.
Pro: Increase in Property Values
The longer you hold your investment property, the more likely you are to benefit from inflation.
Con: Vacancy Costs
Being unable to find tenants is one of the risks of owning rental property. That is true whether you do it yourself or hire a management company to do it for you.
Con: Management and Legal Issues
Long-term real estate ownership is a management-intensive endeavor that is outside the skill set of many investors. Some investors, especially first-time rental property owners, are ill-prepared or ill-equipped to deal with the responsibilities and legal issues that come with Real Estate Investment. Taking the Real Estate Business Course by School of Estate is a great way to get properly informed.
What Strategy Should You Implement?
When choosing a strategy that works for you, you need to answer a few critical questions to decide whether flipping properties or holding them long-term is the best strategy. You must decide whether your capital allocation to real estate is a permanent investment or just a way to profit from an expected rise in home prices.
It would also help if you determined what risk and return ratio is appropriate for this portion of your investment portfolio. Finally, you must have the risk tolerance and skills to take on the management responsibilities that go along with either type of investment.
If you're considering a buy-and-sell strategy, you must also determine whether you have the skill to uncover distressed sale properties or fixer-uppers. In this transactional strategy, it's essential to figure out whether capital can be turned enough times within a given investment period to overcome the transaction costs. They include brokerage, financing, and closing fees.
The Bottom Line
The choice between the two strategies in question depends on your particular financial situation and goals. Nonetheless, the long-term holding strategy is generally more appropriate for those who use real estate as a core portion of their overall investment portfolios.
Investors wishing to amass wealth and derive income from their real estate investments should consider holding real estate for the long term. They can use the equity built into the portfolio to finance other investment opportunities, with the potential of eventually selling the properties in an up-market.
Flipping properties is a tactic that is best suited for people trying to realize short-term capital gains for as long as the housing market allows.