Fix And Flip vs. Buy And Hold
When ever we meet people that are new to the Real Estate Investment business, we are often asked this one question, “should I buy and hold or fix and flip properties?”. Well, there are a few things that you have to know and questions you must answer yourself before you choose. In this short article we will cover some info that will help you decide which path you should select.
The very first thing you have to take into consideration is your finances, and the money that you are going to use in your RE business. If you have a 9 to 5 job and make really good money and have some money, 100k or more saved up, you can probably do either one.
If you are an investor that has a significant amount of cash with a 9 to 5 the next thing you must consider is your skills for repairs and amount of time that you are able to devote to your investment. Time is a large factor, which we covered in the post “Tips For The New Real Estate Investor“. Are you going to have time to oversee repairs for a fix and flip? Even if you have a buy and hold, it will eventually need repairs, so you will probably want to use the services of a property management company.
Unfortunately, most people don’t have that kind of cash put away, so their options are more limited. So let’s move on to breaking it down for what we recommend for new investors with limited funds.
Why Fix And Flip Investment Properties
For newbies that have a rather small sum of cash (20k – 50k) we always advise that you should do fix and flips before buy and hold. Why? Simple. By performing rehabs and quick turning these properties you will be able to quickly build a rather large sum of cash. Engelo Rumora just made a post in BiggerPockets.com that explains it the same way we see it:
Personally, I think you should not be buying and holding unless you have significant amounts of capital that will allow you to buy, fix, and hold or to buy and hold a property but still continue to buy, fix, and flip. Money makes money, and you need to stay liquid unless you are making millions and millions of dollars in your 9-5, you’re a dentist, you’re an attorney, or you’re a high executive at some company. Most of you are not those things. You’re making $50,000, $60,000, or $100,000 a year and working your butt off every single day. Be frugal. Save the $50,000 to $100,000 and then go into your first flip. Let’s just say hypothetically that you make $20,000 to $30,000 on that flip. In my opinion, that is very reasonable. Unless you are making 20 percent minimum margins on the flip, don’t even do the flip.
Buy & Hold When You Can Afford to Forget That Money
So you invest $100,000 hypothetically, you make a $30,000 profit, and then you do it again—and again. Now you should have around $190,000. Use $50,000 to $90,000 of that money and buy, fix, and hold. Set it and forget it. Let’s start getting some residual income and cash flow. You still have $100,000 in liquid capital to continue buying, fixing, and flipping.
Read The Full Article “Should You Buy & Hold or Fix & Flip Properties?“
We couldn’t agree more with Engelo. We really like this model for people starting their own RE business and will really help people that are wanting to become a full time real estate investor. This could very well be an important part of creating your plan, which we outlined in “Tips For Becoming A Full Time Real Estate Investor“.
Another reason we prefer new investors start with fix and flips is because of how difficult it can be to find and keep good tenants. If you borrow money to purchase a rental and you don’t have a tenant in it, you are loosing money!
Asset Based Lending wrote an article back in February that explains:
Buy and hold properties are an investment that can be a “cash-cow” for investors, continuing to produce income every year, however, there are inherent disadvantages. Finding the right tenant may be a difficult feat, especially depending on the location of your property. Certain properties may attract difficult tenants based on the surrounding neighborhood. In situations such as this, it may be hard for you to collect your rent on a timely basis, if at all. Be sure to take the time to find good tenants who will take care of your property!
Continue Reading “Fix And Flip Or Buy And Hold?“
While we totally believe in the fact that rentals can be a “cash-cow” like they outlined, we know that keeping good tenants in a property can be pain staking. High turn overs can lead to many repairs as well as lost revenue for properties being empty. Again, if you borrowed money to purchase a rental, then it will take you a long time to see real amounts of cash flow, most likely not until the property is paid off.
Summing It All Up
Unless you have access to ample amounts of cash, as well as a 9 to 5 job, we think it’s best for you start with fix and flips. Build your cash reserves, then and only then, start using some of your cash to purchase rentals while saving some of your cash reserves for fix and flips.
If you are in the market for either a fix and flip, or a buy and hold investment property, visit our site MPGDeals.com to find you next deal in Atlanta! Until next time 🙂