Should
I Flip or Should I Hold?
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Holding
There are tax advantages to holding property, plus
it creates residual income and equity as the property is paid down. The goal would be to pay off the property owning them free and clear for
good cash flow.
Do the numbers:
If you have 10 properties paid off by age 60 with $1,000 rent from each house that is a $10,000
a month cash flow minus operating costs. And, that $10,000 a month cash flow is considered income when qualifying for new investment loans.
Most "old money" in the U.S. and abroad was accumulated through land
ownership. Even after periods of decreasing land prices, land values have almost always rebounded in the long run because there is a limited
supply of land. Long-term real estate ownership can carry management and legal issues that investors in stocks and bonds never have to contend
with. Real estate ownership is management-intensive that is outside the skill set of many investors.
Many first-time rental property owners are ill-prepared to deal with the responsibilities
that come with managing rental property. The process of finding quality tenants and servicing their needs, along with ensuring the maintenance
and upkeep of the property, can be a stressful and time-intensive undertaking, but successful property management is necessary for ensuring
ongoing cash flows from one's investment. Many investors prefer to utilize property managers who have the tools and legal knowledge required
for maintaining property, and finding and maintaining tenants. |
Flipping
Flipping can provide instant cash while
building up your rentals. Most investors
will use flipping to pay off rentals and
provide cash for business growth. If a property
doesn’t sell, you can always convert
them into the rentals you need for long-term
wealth. The
most apparent advantage to flipping property
is the ability to immediately realize
gains and to have capital tied up for
the least amount of time possible. Also,
unlike the stock market, which can turn
in the middle of a day, real estate markets
are more easily predicted and can produce
extended time periods that compensate
investors for flipping properties. In
this sense, flipping properties could
be considered a less risky investment
strategy because it is intended to keep
capital at risk for a minimal amount of
time, and because it lacks the management
and leasing risks associated with holding
real estate.
For
most investors, flipping properties should
be considered more of a tactical strategy
than a long-term investment strategy.
Because transaction costs are high on
both the buy and sell side, they can significantly
affect profits. There are two major types
of properties that can be used in a buy/sell
approach to real estate investing. The
first is homes or apartments that can
be purchased below current market value
because they are in financial distress.
The second is the "fixer", a
property with a structural or design issue
that can be overcome to create value.
Investors that focus on distressed
properties identify homeowners who can
no longer manage or sustain their properties.
In te current market, however, most of
these sellers are ‘upside-down’
on their mortgage, and there is no equity.
Those who prefer fixers, on the other
hand, will rehab a property so that it
is attractive to home buyers or is more
efficient for apartment tenants. Using
this tactic, the buyer of a fixer is relying
on investing capital to increase values
as opposed to just buying property for
a low basis in order to create high investment
returns.
Flipping
properties, however, can create tax and
cost issues that one doesn't face with
long-term investments. Flipping usually
leads to swings in income that can create
cash flow and tax management issues. Also,
finding these opportunities can be difficult
over the long term, making this strategy
better suited for those wishing to take
advantage of shorter-term opportunities
in the real estate market.
Choosing
a Strategy
In order to decide whether flipping or
holding for the long-term is the more
appropriate strategy, one needs to answer
a few critical questions.
Do
I need cash now?
Is this a rental
market?
Does this market support flipping?
Do I know how to flip?
Do I have
the cash to rehab?
Do I know how to
be a landlord?
If not, can I afford
property management on my rentals?
Am I prepared for the risks involved?
A property itself may help you decide.
A listing located in a desirable neighborhood
may be a better rental in the long run,
because homes in desirable areas hold
their value. A home purchased well below
value in a neighborhood with lower approciation
may lend itself to flipping.
Some
may not provide enough cash if flipped,
but be beIf the capital is not available
to purchase a diversified portfolio, a
prospective investor must be prepared
to take on unsystematic risk including
individual property risks and potential
lack of demand for the property, whether
by homeowners or renters. In deciding
to take on a buy-and-sell strategy, an
investor must also determine whether he
or she has the skill to uncover distressed
sale properties or fixers. In this transactional
strategy, it is important to determine
whether capital can be turned enough times
within a given investment period to overcome
the transaction costs on both the buy
and sell side, including brokerage, financing
and closing fees.
Common Flipping
Costs
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- Transaction
Costs
If you’ll get a loan
to finance your purchase, you’ll
have the normal fees such as underwriting
and recording fees, document charges,
attorney fees etc.
- Real
Estate Appraisal
Cost is determined
by many factors such as location, square
footage, number of bedrooms and bathrooms,
garage (if any), etc.
- Home
Inspection
Carrying Costs include
upkeep and maintenance house, plus the
mortgage payments, taxes, insurance,
utilities. And, be conservative when
estimating how long you may actually
own the property.
- Repair
& Remodeling
You may have normal
remodeling expenses such as drywall,
painting, flooring, etc. An unforeseen
repair could increase your budget, do
what seasoned investors do. Add 3% to
5% of the projected total cost back
onto the end of your budget for any
unexpected costs. Consider hiring a
general contractor as a consultant to
help with tough calls, so you don’t
just "go with your gut", and
hope for the best.
- Selling
Costs
Figure that you will be paying
somewhere in the range of 6% commission
for most agents. As an Independence
Realty agent, I have the flexibility
to charge a smaller commission, which
saves you money, or allows you to put
more money into the property where you
need it. You will have other closing
costs such as document fees, title insurance,
or any agreed upon closing costs you
pay for your buyer.
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Conclusion
Although the choice between the two strategies
in question depends on one's particular
financial situation and investment goals,
the long-term holding strategy is generally
more appropriate for those using real estate
as a core portion of their overall investment
portfolios; flipping properties is more
appropriate when real estate is used as
an adjunct or a return-enhancement tactic.
Investors wishing to amass wealth and to
derive income from their real estate investments
should consider holding real estate for
the long term, using the equity built into
the portfolio to finance other investment
opportunities, with the potential of eventually
selling the properties in an up market.
Flipping properties is a tactic that is
best suited for periods when prospects in
the stock and bond markets are low, or for
investors wishing to realize short-term
capital gains for as long as the present
market will allow. |
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| Cory La Scala, Cory, 91901, 91902,
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