When it comes to real estate investing, is it better to buy-and-hold or fix-and-flip? The answer depends on your investment goals, your personal preferences, and your local market. Let’s looks at each strategy and figure out which is the better fit for you.
What is Buy-and-Hold?
Buy-and-hold is when you purchase an investment property for the long-term. Most investors start with a single-family home or small multi-family property (2-4 units).
You simply find a property where the rent will exceed all your expenses (as a general rule of thumb, investors like to see the monthly rent be more than 1% of the purchase price), then find reliable renters for the property.
The rents collected will pay down your mortgage debt, pay all your investment-related expenses (like taxes, insurance, and maintenance), and put money in your pocket every month for decades to come!
The Upside:
Buy-and-hold properties are relatively safe investments that provide monthly cash flows, tax benefits, and long-term appreciation.
And they are fairly low-maintenance. You can handle the management of the property yourself or, if you’re more interested in purely passive income, hire a property manager to handle everything for you.
The Downside:
It will take time to recoup your investment.
What is Fix-and-Flip?
With fix-and-flip investments investors want to get in and out of the deal as quickly as possible.
This is the “HGTV model” where you find a fixer-upper, complete the renovations in just a month or two, and immediately sell the newly-renovated property.
Many investors like to follow the 70% rule when evaluating properties as fix-and-flips. They like to see the purchase price around 70% of the projected After-Repair Value (ARV) minus the project expenses. (ARV x 70%) – expenses = ideal purchase price
So if you have a property you can sell for $300,000 after the renovation, and your expenses will be $50,000, you’d like to buy the property for $160,000 or less (300,000 x 70% = 210,000 – 50,000 = 160,000).
For most investors, this formula confirms that the property will turn enough of a profit to be worth their time and effort.
The Upside:
Fix-and-flip properties can provide quick returns. You could recoup your investment plus a hefty profit in a matter of months.
And, for the right investor, fix-and-flip properties are fun and rewarding work.
The Downside:
Fix-and-flip properties are labor-intensive. You’ll either invest a lot of time in renovating the property yourself, or you’ll invest time and money in managing contractors to provide the labor.
Inaccurate estimates and projections can cause your project to go over-budget. There’s even some risk of losing money on a deal if you can’t sell the home quickly.
The Bottom Line
If you want to be a hands-on investor, actively engaged in a renovation project, the fix-and-flip strategy may be a good fit for you. Just take the time to do your research: understand how much work will be required, learn the going rates for local labor and materials, and know your local real estate market. Fix-and-flips always work best in a hot market where home values are quickly rising.
On the other hand, if you’re looking for something more passive and with less risk, buy-and-hold might suit you better. Just be sure you’re comfortable tying up your money in the investment long-term and spend the time to carefully evaluate the available properties and thoroughly screen potential tenants.
Choose the real estate investment strategy that best fits your goals and personal preferences. Will you buy-and-hold or fix-and-flip?