Risk and effort go hand in hand when you are thinking of pursuing a career in real estate investment. There are two kinds of incomes that one can generate through real estate marketing. The aggressive cash flow comes from the “fix and flip” kind, where there is a lot of effort and high risk in buying a distressed property, fixing it up and putting it on the market. The other kind give is buying a property and sitting on it for a long time or renting it out to high-end tenants. The later doesn’t need much effort, but it requires patience as it gives passive cash flow.
How to decide with strategy is the smartest, well that’s easy, here we have the perfect guide and comparison to help you decide between the two. Comparing the two, we also have a winner as the pros and cons are pretty clear when comparing these two strategies.
THE FIX-AND-FLIP
The famous flipping entails buying a property, renovating it, and selling it at a profit. It seems pretty straightforward, isn’t it? Well, as an idea, it’s a simple thing, but when you start the practical charade, it’s quite a demanding process. Things like house-flipping TV shows, cheap loans, and gentrification have made house-flipping an extremely popular investment path. Here are the pros and cons of investing in a “Fix and Flip.”
Advantages of “Fix and Flip”
The many pros make fix and flip and extremely profitable investment path despite the extreme effort it involves.
More Than Sufficient Payoffs:
We will discuss the “fix and Flip” from the year 2019 when there was no sign of the pandemic, and everything was normal. The stats of 2019 show that the profit reaped from a single house-flip were more than $62,000.
If fixing and flipping one house takes 6 months and you sell two of these in a year, that’s a whopping $120,000 profit margin annually. This is only for people who are taking one project at a time, if you are a pro and you take on more than one project at a time, you can even double or triple this amount.
Quick Outcome:
Holding on to a property has a lot of drawbacks. One of the most prominent ones is market change; it’s hard to predict the market change these days. Take the pandemic; for example, the succession of the pandemic was rapid. Within months the markets went down the drain. In such unpredictable conditions, holding on to a property isn’t a wise decision. On the other hand, if you opt for house flipping, you’re in and out in a few months.
Disadvantages of “Fix and Flip”:
Most television shows paint a pretty picture, they show you a beautifully done house, but they do not tell you about the many risks that you may have to take before and after the whole process. House flipping can also become very expensive if you are a novice; to elaborate these points better, here are some cons of house flipping.
Huge Gamble:
The payoff is huge, but the risk is even bigger; they stay house flipping is a gamble, and they aren’t bluffing. Flipping means you are buying, owning, and then reselling a home. This “then” can be a long time, if the market dips between fixing and selling, you will find yourself with a property that you don’t need or can afford.
With a market crash, you will be forced to sell the house at a lower price than you have invested in fixing it up. This isn’t a scenario any investor would want to end up in. When the market is hot, the flippers can make a lot of money, but when it crashed, there is no escaping the consequences.
Expensive:
Again most people do not consider the fact that flipping does mean that you will own the house for a bit of time. This means that you will need to take care of the carrying costs that may include financing, insurance, utilities, etc. And these have a habit of adding up pretty quick.
Apart from these costs, there is also the fact that you have to pay other transaction costs both at the times of buying and selling the house. These costs may include commission fees, title fees, outstanding liens, repairs, etc.
Repair and renovation Cost:
Many a time, you end up paying a lot more than what you anticipated when calculating the repairs. This will have you losing money rather than making a profit on your house flipping. There is also the matter of taxes. When you sell a house, you have to pay taxes on the gain, as this is your business.
Let’s discuss the pros and cons of buy and hold and make a comparison of which kind of investment is better.
THE BUY-AND-HOLD KIND:
Buy and hold doesn’t reap you explosive benefits, but it does reap a steady income. Here are some pros and cons to consider.
ADVANTAGES BUY-AND-HOLD:
House flipping is lucrative but not without risks. On the other hand, long-term holding and renting reaps both comfortable earning and comes without risks.
Cash Flow:
Buying and renting a property means you will have a steady income every month. This isn’t a gamble but a sane way to earn money without any hassle or risks, but yes, the profits won’t be as significant as in house flipping.
Appreciation:
The longer hold on increases the value of the proper. The appreciation with house flipping is called “forced appreciation,” and it can go horribly wrong as repairs and fixing up can cost you a lot more than the selling price. Many investors are aware of the power of appreciation, and hence they are willing to hold rather than fix and flip.
Disadvantages:
Effort:
You will need to manage the property, manage the tenants, and hire a property manager and a team of people who can take care of emergencies. All this requires a lot of effort, and this is a process that continues until you decide to sell the property.
Vacancies and Tenants:
Screening tenants, drawing up a lease agreement, managing the tenants, and the property is one thing that many are ready to deal with. But what makes this even harder is the fact that you will have to manage the vacancies as well. Unexpected vacancies can stretch into months; this can take a toll on your savings.
Conclusion:
Owing to the pros and cons of both the strategies, the buy-and-hold takes the cake. It’s safe as well as gives a steady flow of cash every month. You can plan, save, and invest the money in your future finances.
If you’d like to talk more about property management, or you need help with Everest Property Management, please contact us at Everest Realty.
As a top producing Realtor and Property Manager; Terry specializes in sales, extensive construction homes, rentals, REO’s, short sales, and all aspects of Real Estate. After graduating the University of Michigan with a master in MBA, Terry continued his endeavor and now has over 15+ years of experience in the Real Estate world. If there is anything that has to do with Real Estate and sales, you can always be sure of Terry to provide important, specialized knowledge.
