Is it better to buy and hold or flip real estate? Neither investment model is inherently better or worse than the other. But, depending on your investment goals and local market conditions, one may be a better fit than the other for you at this point. It’s also possible that your real estate portfolio would benefit from a combination of both investment types.
Let’s take a closer look at both options, including the pros and cons of each. Then we’ll show you how you can avoid many of the cons of both investing strategies. And we’ll show you how you can invest in both buy-and-holds and fix-and-flips at the same time, even if you don’t have the cash to fully-fund both investments or the time to manage the properties yourself.
Buy and Hold Vs Fix and Flip
While the names of these investing methods are descriptive of their approaches, they deserve a proper definition before we dive into our discussion. The buying and holding strategy means purchasing an investment property for the long term and renting it out, either as a short-term vacation rental or as a traditional long-term lease. Flips, on the other hand, are meant to be short-term investments; the goal is to get in, renovate the property, and resell it for a profit as quickly as possible.
Buy and Hold
Buy-and-hold investments are generally a wise option regardless of market conditions. You might have more negotiating power on the purchase of your property if you buy during a slow buyer’s market than if you buy during a fast seller’s market. But when you invest for the long term, as with buy-and-holds, you’re less susceptible to market fluctuations than when you invest for the short term, as with fix-and-flips.
Your buy-and-hold investment could be a turnkey property that’s ready for renters right away. Or it could require some renovation to get ready for the rental market. This could be a good thing if you have the capital to cover the renovation costs because it gives you quick equity. In some cases, you can even buy a tenant-occupied property directly from an investor for immediate rental income from the existing residents.
Buy and Hold Pros and Cons
- Appreciation. As the property grows in value over time, so will your net worth.
- Cash flow. Buying and holding is one of the best ways to create passive income from real estate. As long as you buy right, your income rents will more-than-cover your investment expenses, and you’ll be able to pocket the recurring profit (or reinvest it to grow your real estate portfolio faster).
- Tax breaks. Many of your expenses, like depreciation, capital improvements, and mortgage interest, are tax-deductible, so you can remove them from your taxable income when you pay taxes each year.
- Debt pay-down by renters. Your renters effectively pay down the mortgage debt for you, which increases your equity in the property and, ultimately, your net worth.
- High capital requirements. You’ll need to have enough cash available to cover the down payment, closing costs, any renovations needed, and any vacancy until your first tenants move in.
- Lack of liquidity. Expect your capital to be tied up in your investment for at least 5-10 years.
- Property management. Buy-and-holds require ongoing management for tasks like rent collection, maintenance requests, lease renewals, and unit turns between residents. You can handle these responsibilities yourself or pay to have a property manager handle them for you.
- Ongoing expenses. Regular maintenance expenses like landscaping and roof repairs will need to be budgeted. And then there will be unexpected expenses as well. Appliances will break down, and heating systems will fail. Be prepared to have cash on hand at all times for this type of expense.
Unlike buy-and-holds, which don’t rely on specific market conditions to be successful, fix-and-flips require a growing market. If a market is declining, depreciation of the property could severely cut into your profits. But when the market is growing, your property is gaining value during the short time you hold it, and you add even more value through your renovation efforts.
Adding value is the key to flipping houses. You need to choose your renovation projects carefully to make sure the value added is worth more than the cost of labor and materials (as well as closing costs and carrying costs). This requires a level of knowledge, skill, and experience that takes time and hands-on involvement to acquire. If you’ve not done a flip before, consider partnering with an experienced flipper who can guide you through the process.
Pros and Cons of Fixing and Flipping
- Quick profit potential. If everything goes smoothly, you could complete your renovations and flip your project in under six months. Check out our education center to see how much you can make flipping houses.
- The value-add potential. Not only can you make your property more valuable than the sum of its parts, but you can actually improve the quality of a neighborhood, one house at a time.
- Even higher capital requirements than buy-and-holds. You’ll need to fund the down payment, closing costs, complete renovation, and carrying costs until the sale.
- Specialized skill and knowledge required. Renovation at this level can’t be done by just anyone. To give yourself the best chances of a profitable deal, you need to know a lot about your local market and a lot about construction.
- Substantial time and effort required. Even if you’re hiring a contractor to physically do the renovation work, you’ll likely want to oversee the work and perhaps join in to learn more about construction.
How Gatsby Investment Can Help You Avoid the Cons of Buy-and-Holds and Fix-and-Flips
While there are exceptional benefits to both buy-and-holds and fix-and-flips, the potential downsides can make some real estate investors nervous. The difficult fact is that there are several mistakes to avoid when investing in real estate. The good news is that nearly all of these mistakes can be avoided by relying on experienced experts. And modern real estate syndication is the secret to avoiding the most common investing mistakes while overcoming many of the potential downsides to real estate investing.
If you’ve never heard of real estate syndication, that’s okay. It’s a fairly new term for a classic investment model. Traditionally society’s elite would pool their capital to invest in a single real estate development project with an industry insider to manage the investment. That’s essentially what real estate syndication is, but instead of being accessible only to the wealthiest members of society, modern technology has made this type of joint venture accessible to all accredited investors.
When you invest with a real estate syndicate like Gatsby Investment, you get to pool your funds with other investors, giving you access to deals that would otherwise be out of your financial reach. You also get access to a team of real estate professionals with experience in every aspect of real estate investing.
With the Gatsby Investment model, the cons of traditional investing methods are replaced with more pros! Consider these added benefits:
- Low capital requirements. With Gatsby, you can buy into a multi-million dollar deal for as little as $25,000.
- Increased liquidity. With Gatsby, you can choose short-term investments, scheduled for as little as six months, or long-term investments of five-year increments.
- No unexpected expenses. Maintenance and repair costs are paid by the funds in the ownership LLC, so you’ll never have to pay unexpected expenses out of pocket.
- Specialized skill and knowledge. Our experienced team handles every detail of the investment from scouting properties to construction, to ongoing property management. Our track record speaks for itself.
- Quick and easy investing process. All you have to do is sign up, get verified as an accredited investor, and choose your properties. You can follow the progress made on your investment property through our online portal.
Here’s the best part: since Gatsby Investment allows you to invest with as little as $25,000, you don’t have to decide between flipping vs buy-and-hold. If you have the funds available to do either on your own, you can do both with Gatsby!
You don’t need to wait several years to build a diversified investment portfolio. You can do it this week with the support of an entire team of real estate experts behind you. Sign up with Gatsby Investment today.