Real Estate Investment Strategies: Fix-and-Flip or Buy-and-Hold

January 8th, 2021

Many real estate entrepreneurs are purchasing properties with the idea of receiving good return on investment for their cash and increasing their wealth. A business person can choose to implement both the Fix-and-Flip or Buy-and-Hold strategy and the decision depends on what the financial resources/ the long term goal of the individual are. The key advantages and downfalls of both strategies are outlined below.

Fix-and-Flip ventures can be a wonderful source of income for local entrepreneurs looking for opportunities for quick cash flow. Generally, neglected buildings are bought at discounted price, swiftly transformed into nice looking properties and immediately after renovation listed for sale at a higher price. The average profit for Fix and Flip completed project for 2019 is $ 63,000.

This strategy requires instant action as “time is money” and discounted properties/ good deals do not last long. Generally, the term of financing associated with Fix and Flip loans is 12 months thus by fixing the property quickly the carrying costs of the venture are minimized.

Additionally, such strategy is considered low-risk as selling the property quickly reduces the chances of possible market real estate value fluctuations that can occur with the long-term strategies. Furthermore, Fix-and-Flip strategy eliminates the need to dedicate resources to deal with tenants.

On the other side, one of the main challenges of Fix-and-Flip is the higher income tax on profit. The profit from the sale of the asset is taxed as a short- term gain (the same tax bracket will be effective as your ordinary income) since the building was in sold in one year after its acquisition. International investors should be extra careful of the applicable U.S. tax bracket. Also, the interest rates for Fix-and-Flip private loans are generally higher, yet such financial solutions offer the entrepreneurs, the convenience to service just one loan and still have enough funds to both purchase the property and cover the rehab costs.

Buy-and-Hold strategy suggests the property is rented out so it can generate long-term passive income to its owner. Rent rates in the U.S.A have stayed stable even during the Pandemic thus the owners of rental properties continue to receive monthly checks (direct payments by tenants or via state aid) and still own their real estate assets. Negative real estate market shifts might decrease the value of the property over time, but if it happens that you purchase a piece of property in underdeveloped area that blooms after that you might be able to retire early.

Various tax deductions are allowed for the owners of rental properties (including yearly building depreciation), however, dealing with tenants can be time consuming and expensive, therefore collaborating with a top notch property Management Company is a must.

If you are starting small and locally: let’s say you first buy is a single family residence/duplex, you can have the tenants wire/mail you a check and do the landscape/maintenance work yourself or hire a local handyman to handle it. For multi-unit apartment buildings, it is a must that you use the services of a professional company that will also assure the occupancy rate will stay at desired rate so you can receive your monthly payments.

Both strategies have their benefits and carry certain risks thus careful consideration of the project’s budget and time- frames involved should be taken into account before proceeding further. If you have found the right property and need financing for it, please contact Universal Commercial Capital for a free consultation/ estimate.