House Flipping Vs. The Buy And Hold
Find out the difference between flipping houses and the “buy and hold” in this Real Estate Investing Guide.
In the world of real estate there are several different ways to make money from buying properties. As a newcomer in the business, deciding which path is right for you might be your first and foremost concern. You might ask yourself…
What is the best and easiest way to make money?
The answer to this question is quite subjective, actually. There is no route in the real estate business that won’t make you money if done correctly. As long as you are a hard worker and have the right motivation, you should be able to succeed.
Before you choose, you should know the differences between the different avenues of real estate. In this real estate investing guide article, we will discuss two of the most common strategies: flipping houses, and the “buy and hold”.
While these strategies might appear similar, they are in fact very different. House flipping is something that is relatively new in the grand scheme of real estate, while the buy and hold has been around for ages.
Historically, owning land is a way that people have made money for centuries. One of the main reasons the English started colonizing North America was because there was no more available in their own country. Private investors funded the first trip to Jamestown in order to establish a colony. They claimed land that they could later sell or rent out to the colonists.
House flipping has three main parts: buying, rehabbing, and selling. The idea is to buy a house that is below the market value for its type and neighborhood. By fixing it up, you increase its value significantly and sell it for a profit.
Buy And Hold
With a buy and hold, instead of selling the property immediately, you will hold on to it until the market changes and the property appreciates.
You can also make money while you are waiting by renting out the property to tenants.
One of the most apparent differences between the two ventures is the amount of time each takes. Which direction is right for you will depend on your lifestyle and how immediately you need to see a profit.
Flipping houses, if done properly, is a very fast process. After you buy the house, you might be selling it again in a month or two. Essentially as soon as the rehab nears its end, you want to put the house on the market and sell it as fast as possible. Keeping it in your possession for longer than needed might result in a profit decrease because of soft costs like insurance, utilities and maintenance.
Buy And Hold
In contrast, buying and holding is a process that takes a considerable amount of time. You will not have to worry as much about losing money while you are holding onto the property. In fact, you will probably make money off of the rent from the tenants.
If you’re happy being a landlord, you don’t even necessarily have to ever sell the property. As long as you have the patience to wait, and don’t have any time-sensitive financial obligations that you are depending on this money for, this might be the road for you.
With any type of real estate venture, both house flipping and the buy and hold come with substantial risks. To purchase these properties, you will have to invest a lot of money, whether it is your own or someone else’s. Learning what the risks are and how you can minimize them is always your best course of action. However, these two styles of investing each come with different types of uncertainties.
Flipping a house requires a lot of calculation before buying. You need to know what the ARV, or “after repair value”, is. Then you will need to find out what needs to be repaired and how much the repairs will cost. You will negotiate down as low as you can and only buy if the offer is below 70% of the ARV. Finally, you will try to sell the house for no less than the pre-predicted ARV.
If any of these estimates and predictions are off, you could wind up loosing money on the deal.
The most common way new house flippers lose money is from the rehab. Either the rehab costs more than expected, or there are problems with the house that were not seen upon the initial inspection.
Sometimes, flippers are offered an incorrect ARV before purchasing. A good way to avoid this is by asking a trusted real estate broker.
Buy And Hold
The biggest risk when buying and holding involves the market. If you wish to sell at a later time, you want the market to improve. However, if it does not, then you will have wasted a lot of time and money.
That being said, the longer you hold onto a property, the greater the chance that the market will turn around. You just need to have patience.
Another risk involves the property itself. Ideally, each month you will make money from the tenants rent. However, if problems are constantly occurring, you might not profit at all. Things like plumbing problems, bug infestations, broken appliances, or even roof leaks can all cost you money.
The average person doesn’t invest simply as a hobby. Rather, the real reason most people get into the real estate business is because of the profit. Both house flipping and the buy and hold each have their own unique ways of generating income.
The house flip is relatively straightforward. You increase the value of a house in poor condition and then sell it for a profit.
The whole process is fast and once you get into a routine, you will be cashing a big check monthly. Flipping houses has a decent ROI, or “return on investment”.
Buy And Hold
… buying and holding has an even greater potential ROI. In this case, slow and steady wins the race. If the market turns how you predicted, you can sell your property or properties for a much larger profit.
Meanwhile, you will get a steady flow of income each month from the rent. If you own multiple different properties, you could even be making as much as a house flipper on a particular month without having to run around and manage a rehab project.
Or, if you don’t feel like playing the part of a landlord, there are other options. You could try a sandwich lease, or a sandwich lease option. In this case, you would be renting from a landlord, and then subletting out to a third party. The third party pays more than you pay in rent.