Buy-and-hold

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After many days of writing and editing, my first eBook has arrived and I’m giving it away for free! Yep, just as a gift for hanging out at Real Estate In Your Twenties.

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P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

We love the flipping reality tv shows. Shows like Flip That House, Flip This House, Property Ladder, and a dozen other television shows have been popular over the past several years (remember Armando Montelongo?)  The abundance of these shows has made “flipping” properties appear to be the only real estate method worth talking about these days.  However, is flipping really better than a long term “buy and hold” strategy?

For those new to the business, “flipping” a home is the process of quickly selling a property for quick profit.  These homes are sold within days, weeks, or several months.  Many times the home is quickly remodeled with new paint, flooring, appliances, and more. On these television show, the “flippers” often make tens of thousands of dollars over the course of several weeks.

In contrast, the “Buy and Hold” method of real estate investing involves purchasing a home (hopefully at a low price) and holding that property for a long number of years, collecting both monthly cashflow and future profit.

While both methods can produce income for investors (and I have done both over the past five years,) I am a firm believer in having as many “buy and hold” properties as possible.

Here are five reasons why buying homes for the long-term is more beneficial than flipping:

  1. Residual Income: When you “buy and hold”, you create monthly income versus a one-time payment.  When you stop “flipping”, the income stops. When you stop acquiring homes to “buy and hold”, the income on the properties you already own continue to come in.  True wealth is only found when your money is earning you money, rather than your labor earning you money.
  2. Tax Benefits: House “flippers” pay a much higher tax rate than long-term investors. Additionally, “flippers” can become classified by the IRS as “dealers” of real estate, thus subjecting their income to regular tax rates and self-employment tax (Social Security, Medicare, etc). Long-term investors pay only long-term capital gains tax (or often not using a 1031 Tax Exchange) and income tax on the monthly cashflow (which is generally largely or completely written-off with deductions.)
  3. Agendas: A house flipper is subject to numerous outside agendas that affect if and how success is found. Hard-money-lenders, private investors, future buyers, partners, and others all have an agenda and their best interest at heart. When you buy-and-hold, the main agenda is your own.
  4. Whims of the Market: When flipping a home, you are hoping that you can sell the home quickly, which is largely based on how the market is functioning in your town. Are there far too many homes being sold, causing yours to sit for months or years? When you hold a property long term you are not dependent on the whims of the market. You are able to sell only when it is advantageous to sell.
  5. Risk: When you flip a home, you have monthly carrying costs such as the loan payment, taxes, insurance that will add up each and every month until the home is sold. Additionally, there is the chance that there will be unforeseen costs that arise when repairs are being performed.  Both these items can blow the budget and eliminate any chance of making a profit. When you buy a home for the long term (and manage effectively), you can balance out your risks over a long period of time, lowering the chance of losing money and maximizing your probability of building serious wealth.

With that said, I do want to emphasize that flipping a home is not always bad.  Often times flipping a home, when done properly, can add a sizable amount of cash to your wallet – which can be added back into future buy-and-hold investments.  As the phrase goes, “it takes money to make money”. While I am a firm believer in the concept of using “other people’s money”, it is always easier to use your own.  I believe in flipping a home only when you lower your risks considerable. Blindly purchasing a home in hopes of selling it quickly for mass profit is not only stupid, but dangerous to your financial future.  Next time I am going to talk about how to lower your risk when flipping a home.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.