Depends on what type of investor you want to be. Profits are made in both scenarios but choosing the right strategy depends on several key factors. Consider your age, need for cash flow, retirement goals and many other factors.
Buying and holding properties usually are for longer term investments for the purpose of cash flow. In addition to cash flow, the buy and hold investor is also building equity as the mortgage decreases and the home appreciates in value.
On the other hand, flipping properties is a short-term investment (at least that’s the initial intent). It is intended to produce capital gains quickly (in theory). There are many risks associated with flipping homes. From underestimating the repair costs, over estimating the market value after repairs, repairs taking longer to complete, property on the market longer than expected, unexpected issues such as structure and a plethora of other potential issues.
So What Approach Should You Take?
For flipping, here is the good and the bad
- Liquid – your money is tied up for less time (hopefully)
- Quick(er) Returns – generally speaking, you will see your profit (or loss) sooner than holding properties
- A lot of risk (can be minimized some with experience and some luck)
- Capital Gains tax – generally more substantial then the hold approach
Here is the good and bad for the “Holding” approach
- Generally, less up-front work then flipping
- Monthly cash flow (unless you screw up and miss your calculations)
- Appreciation – in most cases, home values increase over time
- Damage to your properties
- Managing Tenants – use a property manager or property management softwareto reduce this headache
- Potential for long vacancies
Here are some observations you should consider
- Which way is the market heading?
- Can you ride out an extra-long vacancy?
- Do you have enough capital to flip?
- What is the year of the property?
- How will either approach affect your taxes?
- What do you want? Steady cash flow or quicker cash?
We have done both. We have built units and listed them for sale. If they sold, great. If not, they would cash flow nicely. We did our financial calculations for both scenarios so that if the market tanked during construction, they would rent easily. But while the market was hot for sellers, we took advantage of the capital gains.
In either investment approach, it is incumbent on you to buy the property right. Remember the adage, you make your money when you buy, not when you sell. This is true in either situation.
PropertyZar is a real estate technology company specifically in the web-based property management software for owners and professional property managers. Read more Top Property Management Blogs. Learn more www.PropertyZar.com.