There’s more than one way to invest in real estate, and it often comes down to a choice between the ‘fix and flip’ or the ‘buy and hold’ strategies. Each strategy comes with its own pros and cons, so if you’re considering both investment options, here is a quick guide to help you decide.
Fix and Flip
Recalling our ‘Ultimate House Flipping Cheat Sheet for Beginners’ article, this strategy involves purchasing a property, making improvements, marketing it, and then selling it for profit. Flipping houses or commercial spaces requires a lot of effort within the shortest amount of time possible. This allows for a faster ROI, freeing up investors’ capital for their next money-making project.
Finding the right property to renovate and sell
The key to maximizing profits here is to find properties lower than market price, like foreclosed homes, and giving it a reasonably financed makeover. CNBC reports that inexperienced flippers tend to put too much money into renovations. As a result, these expenses quickly add up and investors might find that their net profit is not significant enough for the work put into the flip.
But when financed and managed properly, flipped properties can promise instant gains — minus the holding and transactional costs of the buy and hold strategy. When it comes to the choice of residential and commercial property to flip, an Entrepreneur article suggests canvassing for fixer-upper properties in the ‘nicest’ neighborhoods. This means that the property should be adjacent to decent schools, have easy commute options and routes, and is part of a competitive market. The last point is especially true for flipping commercial properties. Nearby malls and buildings mean a bigger guarantee of faster returns on office and retail spaces.
Buy and Hold
Collecting properties is equivalent to amassing wealth. The biggest disadvantage of the buy and hold method is that it requires a sizable amount to invest with, especially when looking to purchase several properties. However, investors can be rewarded with steady returns by putting them up for lease, which can definitely add up over time.
What to do with residential properties
- Long-term rental – Apartment Units: Having long-term tenants ensures a more consistent income, which means that the property will continue paying for itself for the foreseeable future. As a landlord, you won’t have to worry about marketing the space, paying for utilities, or doing basic maintenance.
- Short-term rental – Vacation Homes: If you own a property in a touristy destination, real estate investor Sarnen Steinbarth explains that your property offers a higher income potential as a short-term rental. Luxury homes, seasonal vacation rentals, and Airbnb units can be very lucrative, but this means that you’d have to consistently market to renters. Depending on your agreement with the tenant, you’ll most likely be shouldering utility and repair costs, as well.
What to do with commercial properties
- Long-term rental – Retail or Office Space: In a competitive market, you’ll be able to rent out your commercial property in no time. Do note that commercial leases have longer terms than residential units, and whether a contract renews automatically or not depends on your agreement with your tenant. There might also be significant renovations to be done on the property. This is so it suits the business’ branding, especially in retail spaces, or the company’s needs, as in the case with offices.
- Short-term rental – Coworking Space: Alternatively, you can also capitalize on the growing number of startups and young professionals in your area by creating a coworking space. According to a Small Business Trends post on the rise of coworking, 2,188 spaces opened in 2018 worldwide, with half of them located in the US. The number of remote workers and freelancers continue to rise, which by this year is expected to account for 40% of the total workforce. Many of them are turning to these spaces that offer different types of packages that fit their needs. As the investor, you can have a flexible setup, similar to Industrious and its canvas suites for teams of more than 20, private offices for smaller groups, and community memberships for entrepreneurs and freelancers just looking for a dedicated desk or flexible seating. This way, you can rent out multiple flexible spaces within your property to more people at a time.
- Short-term rental – Pop-up or Events Place: For those who don’t want the hassle of managing this type of business, what you can do is to provide a space for pop-up shops or a rental space for private events. All you’ll have to do is provide basic amenities, such as bathrooms and lighting, and give free rein to your tenants.
Whether you’re dealing with a residential or a commercial property, knowing your market is key to maximizing your investment. That, and a keen sense of property management are very important. Your responsibilities include reporting your rental income to the IRS — an important step in getting tax deductions that come with owning rental real estate. And of course, knowing how to deal with tenants is essential, too.
The Bottom Line
The fix and flip strategy is more suited for investors working with a smaller capital and looking for quicker returns. This requires realistic expectations and experience with making renovations that won’t diminish profits. If you’re looking for a more long-term and steadier investment, you can opt for the buy and hold method, provided that they know how to manage people and amenities. With both strategies, understanding the market is crucial.
If you’re ready to get started, check out what we can do for you at Express Capital Financing.
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Produced by: JBee