Real Estate Investing For Beginners: House Flipping Vs. Long-Term Real Estate
A real estate investing for beginners guide can help you make a decision as to whether you want to venture into house flipping or hold long term real estate.
There are more than 100 ways to get involved in the real estate investing business but the most common ones are long term real estate investing and house flipping.
House flipping has become very popular these days thanks to reality Television shows such as “Flip This House”.
The oldest form of real estate investing is buy and hold real estate which many people are familiar with. It still remains one of the most solid ways of earning an income considering the fact that many people have become millionaires out of it.
I admit I prefer house flipping but I also do long term real estate investing. So which of the two is better?
Real Estate Investing For Beginners Guide
For you to decide whether you should choose house flipping or hold real estate, you have to put each one in its proper perspective.
House Flipping
Just as a quick reminder, house flipping is purchasing a piece of real estate at a discounted price, rehabbing it and selling it for a profit.
You have to flip the house in the shortest time possible if you want to
realize a profit. If you don’t sell the house quickly, you will incur soft costs such as utility bills, condo fees, property taxes, financing charges among other maintenance bills. These bills can accumulate over time if you don’t move fast and make a sale.
Pros
No Tenant management Issues
Renting out a house can bring up a series of landlord and tenant issues. If you don’t manage tenant issues well, you might end up frustrated, stressed and a huge chunk of your time and money will go to waste.
Distressed Properties
This could be a good thing and a bad thing. It’s a good thing because purchasing distressed property requires less financing than a traditional bank loan property.
On the other hand if you don’t know what you are doing, you can fall victim to unforeseen costs such as unanticipated fixes, bank related issues, zoning issues and a bunch of other problems.
Less Risky
The real estate market fluctuates over time and with some research, you can determine the direction of a geographical real estate market within the short period that you hold it before selling it.
Since house flippers hold their property for short periods of time, market fluctuations are less likely to have an impact on their profits.
High ROI
If you flip the house in the shortest time possible, you can make a profit unlike when you hold the property long term and wait for it to appreciate in value so as to make a profit.
Quick Cash
If you buy, fix and flip a house in less than six months, then this is really quick cash. The more you do house flipping and get good at it, the higher your chances will be of turning in $30-40, 000 in six months.
Cons
You Need Experience
Real estate investing for beginners can be really tough because it takes time and experience to become an expert. The good news is that you can get better at it by finding a mentor and putting in your “10, 000” hours.
Unforeseen Challenges
I always encounter something new every week despite the fact that I’ve been flipping houses for a long time. From experience, I have learned that you cannot become successful in this business if you don’t know how to handle unexpected challenges. It’s the nature of the business.
Taxes
Flipping houses comes with different types of tax implications and they differ from the ones in long term investments. Long term investment capital gains tax is lower than short term capital gains tax in the United States.
High Costs
If you flip houses with money that you acquired from lenders, you will have to pay back their money with significant interest costs. You will also have to cater for transactional costs that come when you buy, rehab and sell property. You have to carefully plan and manage your expenses if you want to make a profit.
Long Term Real Estate Investing
Long term real estate investing is similar to house flipping only this time you hold on to the property a little longer. To pay for the soft costs, the house is usually rented out to a tenant.
You can sell the house at some point in time but not as fast as a person who flips houses for a living. If the rent you collect from your tenant is more than the monthly costs, then that’s a monthly profit for you.
Pros
You Don’t Need To Sell Immediately
You can wait until market conditions improve to sell your property. This only works if you don’t need emergency funding and you are earning a healthy monthly profit from renting the house.
Pride Of Ownership
When I first started purchasing rental houses, the pride of ownership was a big deal for me. I also felt really proud of myself for being able to provide people with an attractive, clean and nice place to live.
Steady Income
If you are lucky enough to get tenants who pay on time and the house requires very little maintenance, then you can build a solid stream of reliable income. Sure, you can get a steady stream of income from house flipping but only if you have quite a number of properties to flip.
Wealth Creation
The value of real estate increases over time so the longer you hold on to a piece of property, the greater your potential for making a healthy profit. Some of the wealthiest real estate investors have amassed their wealth from long term real estate.
Cons
May Take Longer To Appreciate
Rehabbing the house does not guarantee that the value of the house will increase which is why those who choose this type of real estate investing rely on market appreciation which may or may not take longer than anticipated.
Scale To Outsource
For real estate investment beginners, managing the property falls squarely on your shoulders but with time you can hire a management company to manage your rental properties if you have many of them.
The biggest issue for beginners is outsourcing everyday tenant issues because you need to plan your budget well to be able to cover these expenses.
Finding Quality Tenants
Good tenants are not easy to find plus other duties such as assigning payment responsibilities, managing upkeep, dealing with state sponsored housing departments and servicing those tenants can consume a lot of your time and energy.
It’s Not Easy Being A Landlord
Real estate investment for beginners can be quite a challenge especially if they are not prepared to deal with the responsibilities that come with owning rental property.
Legal Tenant Issues
This depends on where you buy the property but buy and hold real estate has many legal tenant issues that you have to deal with on a regular basis.
Market Fluctuations
It’s very easy to suffer a loss if hard financial times hit you and you need a quick cash infusion. In such cases, you can only sell the property at prevailing market rates. Market values can fluctuate considerably and sometimes you may end up selling the property for less than what you bought it for.
Which One Do You Prefer?
It all depends on your financial situation, if you are a risk taker, your financial goals and your personality.
I’ve done both but I prefer house flipping because it’s what is suitable for my current financial and personal situation. But I don’t really think it’s the most superior form of real estate investment.
What do you think is the best form of real estate investing for beginners? I’d love to know your thoughts on this.
