One of the most common questions asked by many beginner real estate investors is “What real estate investing strategy should I choose?”Of course, there are many ways to be introduced to the world of real estate investing. Thus, stating that a certain strategy is the only or even the best way to invest in real estate would be untrue. However, from hundreds of investment strategies, buy and hold real estate and fix and flip real estate are seen as some of the greatest ways of making money in real estate. Yet, which one is the better?
#1 Overview of the Investment Strategies
To get the final answer of which investment strategy is the best, we will explore the buy and hold real estate strategy as well as the fix and flip real estate strategy separately.
What Is Buy and Hold Real Estate?
Buy and hold real estate investing is basically a long term real estate investment strategy. Investing in long term rentals consists of buying a property, doing some renovations if needed, and keeping the property for the long term. The main idea of investing in long term investment property is making money in real estate in the form of rental income. If the expenses of managing the property are lower than the collected rent, then great news, your investment property generates profit. Interested to learn more about buy and hold real estate investing? Make sure to read “Real Estate Investing 101: Buy and Hold Strategy.”
What Is Fix and Flip Real Estate?
Many new real estate investors probably already know from different reality shows what the fix and flip real estate investing strategy is all about. Yet, let’s examine this type of real estate investment strategy. As the name states, fix and flip real estate investing is all about purchasing a property for a price below market value. Then, the investor conducts some improvements and sells it for a profit. Does it sound like one of the fastest ways of making money in real estate? Well, actually yes, as flipping houses is seen as a short term investment strategy. How fast the process of flipping houses goes strictly depends on the real estate investor’s abilities/skills.
The main idea of flipping houses is about buying, renovating and selling an investment property within the shortest timeframe in order to get the most profit and not be eaten by various costs. For instance, while flipping houses, the real estate investor will be obliged to pay property taxes, utilities, maintenance costs, etc. Consequently, the less time it takes for the investor to flip the house, the better the profits he/she gets from selling. Curious to learn more about fix and flip real estate investing? Make sure to read “Real Estate Investment Strategies Guide: Fix and Flip.”
#2 Fix and Flip Real Estate Pros
We will first explore the most common advantages of investing in fix and flip real estate.
Fast Way of Making Money in Real Estate
One of the main advantages of fix and flip real estate investing is actually the fast way of making the profit. Let’s explore a situation with this short term investment strategy. Imagine that the real estate investor is able to buy the property, renovate and sell it in less than half a year for a nice profit. Consequently, this is really a fast way of making money. Let’s talk numbers: just imagine that for less than half of a year, you can make a profit of $25,000-40,000. Sounds pretty awesome right? Of course, this will not happen all the time. However, the more you invest in fix and flip real estate, the more experienced you get. Thus, a real estate investor can expect better profits with practice.
One of the differences between the real estate market and the stock market is the fluctuation. The great news is that the real estate investing market does not fluctuate as fast as the stock market. Therefore, with a prior real estate market analysis, the investor is able to predict approximately the movement of the market. So, the investor is able to hold the property before selling it. For an investor dealing with fix and flip real estate, this time period should be less than six months for the purchase to sale period.
#3 Fix and Flip Real Estate Cons
One of the cons of this short term investment strategy is the high costs. When you purchase an investment property as well as sell it, there are certain costs the investor needs to cover. Moreover, if you invest with no money, most probably the investment property financing method will be coming from private or hard money lenders. Thus, the chance of having high interest rates is very high. Of course, you can escape high interest costs if private lenders are your family or close friends. So, you need to carefully choose investment property financing possibilities before investing.
It Takes Time to Become the King of Fix and Flip Real Estate Investing
Do not consider reality shows as a reliable source when learning about fix and flip real estate. It takes time to master this investment strategy. First, study a lot, and then work on gaining real-life experience. To become truly good with such an investment strategy, it is advised to have a mentor that will guide you. Yet, to be proficient with fix and flip real estate investing, you should put hundreds of hours into learning and working.
#4 Buy and Hold Real Estate Pros
Steady Rental Income & Wealth Formation
One of the main reasons many investors start with long term investment strategies is the steady rental income. Moreover, buy and hold real estate investing is the greatest way of building financial wealth. It is also a well-known fact that the more the real estate investor holds the property, the greater the potential appreciation. This means that when the time comes to sell your long term investment, you will be able to make good profit.
However, in order for all this to be true, the real estate investor should correctly choose the best real estate investments. One of the best ways to invest money in property is with the help of a real estate investment calculator. More specifically, Mashvisor’s real estate investment calculator will select the best real estate investments, suggest how much rent to charge and much more! So, to start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Investment property appreciation
The great thing about buy and hold real estate investing is that there is no need to sell your rental property immediately. Consequently, the investor may wait until the conditions of the real estate market improve in order to have a great deal when selling long term investment property. Consequently, this is one of the reasons why buy and hold real estate investing is seen by many as the best way to invest in real estate.
#5 Buy and Hold Real Estate Cons
Managing the Property
If you are new to owning a rental property, most beginner investors make the same mistake of being unprepared. The secret of being a great landlord is knowing how to manage an investment property. This includes knowing how much rent to charge tenants as well as how much money to spend on upkeep, and much more. Moreover, finding good tenants that will keep your rental property in good shape is hard. Therefore, it takes time to find one.
How does appreciation also fit into the category of cons? Well, let’s explain. Many investors rely on natural appreciation instead of forced appreciation when investing in buy and hold real estate. Consequently, a couple of years should pass in order for the value of your long term investment property to increase, maybe even up to 10 years. Moreover, there are factors that are forcing many investors to sell their income properties earlier than they may plan. For example, market fluctuation, as well as hard financial times, may appear. Ready to know if it is ok to invest just for appreciation? Make sure to read “Is It OK to Invest in Real Estate Just for Appreciation?”
#6 Which Investment Strategy Is the Best?
Both investment strategies are seen as great ways to start making money in real estate. However, which is the best way to invest money strictly depends on certain factors. One of the main determinants is the real estate investor him/herself. Other factors that help in understanding which investment strategy is the best are the following: financial situation, real estate investing aims, your personality as well as tolerance for risk. After all, you should decide whether buy and hold real estate or fix and flip real estate is the best way to invest in real estate for you.