Should you fix and flip that investment property—or buy and hold? That is the question. Unfortunately, the answer is sometimes less obvious than most of us would like it to be. When it comes to deciding which type of real estate investing is “better,” there’s no one-size-fits-all solution. That’s the bad news. The good news is that there is an answer to this question that’s specifically right for you.
Ask yourself these eight questions to figure out whether you’re better off flipping your investment property or holding on to it for the long haul.
Question #1: Do you need the money now or later?
Flipping your investment property will put a handy sum of money in your pocket a lot faster than the buy-and-hold route. However, you stand to make even more money long term if you hang on to the place for several years: the value of your property will most likely increase, and once you pay off the initial investment, you’ll be bringing in passive income.
Question #2: Is the market heading up or down?
You can actually flip a house and make a profit regardless of what the market is doing, because property values generally aren’t really going to change that much over the course of a few months. However, you don’t want to sign up for a buy-and-hold investment in a market that’s projected to go down over the next several years.
Usually, property values increase faster than the rate of inflation. That’s one of the things that makes buy-and-hold investments a good idea. But if property values are heading in the wrong direction, it undermines a big part of the value proposition. You’re better off flipping if you find yourself in this kind of situation. Research real estate trends in the area online, from a dependable source like National Association of Realtors, and see which way things are heading before you make your choice. Or, even better, consult the new Auction.com Nowcast™, which predicts market trends as they’re occurring—weeks before the findings of other benchmark studies are released.
Question #3: Do you have enough capital to flip a house?
Unlike a buy-and-hold property, it takes more working capital up front to pull off a fix-and-flip. Beyond the repairs themselves (which can get very pricey), you also have to foot the bill for contractors, carrying costs and a host of other expenses. You don’t want to start a flip only to realize that you don’t have enough capital available to finish it.
Question #4: Can you cover vacancies, financially, if you buy and hold?
Buy-and-hold investment properties will usually come with their share of vacancies. Are you in a stable enough position that you can compensate for those vacancies with personal savings or other income when those vacancies come up? If not, you may want to think about building up some savings with fix-and-flips before you move to buy-and-hold investments.
Question #5: How old is the investment property?
When you buy and hold, you’re going to be responsible for maintenance and upkeep. Newer properties will have fewer problems than older properties on the maintenance front. If it’s an older property, fixing and flipping it may be the way to go.
Question #6: How far away is the investment property from where you live?
If you’re buying and holding, the odds are good that you’ll be visiting your investment property quite a bit—especially if you’re planning on managing it yourself. You could end up regretting a buy-and-hold investment that’s located farther away than you want to drive on a regular basis. On the other hand, with fix-and-flips, distance doesn’t matter as much. Even if you’re not crazy about the commute, you’ll only have to put up with it for a little while: once the place is sold, you’ll never have to drive over there again.
Question #7: What tax bracket are you in?
This is a big-picture question that could come back to haunt you if you’re not careful. Depending on your tax bracket, some kinds of real estate investing will leave you with more money in your wallet than others come April 15. For example, if you’re in a high-income tax bracket, you’ll probably end up paying more taxes from a sudden influx of fix-and-flip cash than you will if you are in a lower-income tax bracket. Think ahead on this one.
Question #8: What would you like to do more?
This one is more important than you might think. Remember, the goal is to bring in money, not headaches. Some people really enjoy the intensity and thrill of flipping a house; others can’t handle the stress. On the flip side of the coin, some investors enjoy the steadier and more predictable challenges that come with managing tenants, while others just don’t have the patience for it. The bottom line is that if you’re going to make money, you may as well have fun while you’re doing it!
Kristine Serio is a writer and editor with Author Bridge Media specializing in business and real estate.
This article was originally published on Auction.com. Read the original here.
