What is the Right Type of Real Estate Strategy for your Investment?
Let’s talk about which Real Estate Strategy is better for you and your investment, but we’re only going to focus on two of them. One is buy and hold, and the other one, it’s flipping. What is the best approach for you? and what is the best method to invest in real estate?
Let’s review the list of pros and cons because the answer will depend on your investment strategy. It will all depend on what you’re looking to do.
For those who have no idea what flipping is, basically, it means you’re buying a property that requires some level of work, whether it’s massive renovation, or just taking down walls, or just simply some cosmetic fixes that you can do to the kitchen or maybe to the bathroom, and that’s in essence, what this real estate strategy is.
The investment and flipping houses are actually very hands-on, it’s very active, and it will require you to be there, almost 24/7. Because you have to make sure that you’re getting the construction materials on time, you have to go to court, to the city, to make sure you get all the permits approved, so that you can start your construction.
It simply means that you will not get any entry of income over the next couple of months. Why? Because as long as you’re flipping the property it’s not an income-producing property. It’s just there, becoming an expense because you have to nurture it, you have to make it pretty, you have to fix it. On the contrary, when you’re doing buy and hold, that becomes a lot more passive.
It becomes active when you’re searching from the property or you are actually going through the closing, and the search of a tenant, searching for a property manager. That’s the only time when it becomes active unless you rent it out to a bad tenant, because you didn’t do the proper due diligence, and therefore now it will require more management on your side.
A Real Estate Strategy: A Passive Investment
Assuming all goes well, and that you have found a great tenant to place the property, this becomes a passive investment, because all you gotta do is just to collect rent at the end of the month, and off you go, make sure that everything is running properly. Some major repairs here and there, but it’s not something that will require you to be there all the time just to make sure that the constructions are done properly, that everyone is following your instructions properly.
Once you get the property ready, for a buy and hold and it hits the market, it’s just literally monthly income that you receive along the way, because assuming that you get a property that’s readily available for rent, that’s all you have to do. You just to replace it and then you are receiving a “monthly stable income” that you are getting along the way.
Your Real Estate Strategy: About the gains in Flipping
When you’re flipping a property, and assuming you’ll survive all the multiple months, flipping that property with no type of income whatsoever, that after you sell it, you get big gains, and it can start with $10 Plus or even $20, or even $30,000. You name it, there’s no limit in terms of how much you can get out of it, as long as you pick the right house, and you pick the right area, and you manage to keep your renovation cost.
That will all be dictated by the market, but on the buy and hold side, whenever you’re having in your rentals, the gains are actually slowly coming in and they’re not as big, as you will get on the flipping. For example, you have a rental property for $1,000. After all expenses, mortgages, you wind up cash flowing $100.
After everything, after all expenses are done, after you pay the mortgage, you’ll wind up with $100. When you multiply that by 12, you are just getting $1200 a year, and this is just hypothetical, you can get more or less. Which means with this, you have to do a lot of volumes of homes. You have to have at least 10, so you can cash flow $12,000 a year, or maybe 20 or 30 properties.
Depending on how the market is doing, the investors could either choose to just simply sell a property and get the money and do another flip, or if there’s a downturn in the market, and the properties are not worth as much as they expected they go into a cost analysis, a buy and hold analysis, whatever you might want to call it. Then they decide whether it’s more convenient for them to actually hold the property for a certain amount of time and wait for the market to come back up, and then perhaps sell it there.
Another thing to take into consideration when deciding your real estate strategy is having the ability to do a cash-out Refi because that’s how you pull the equity out, and that’s how you continue to expand your real estate portfolio. In the event of a cash-out Refi, this is what will happen with your portfolio. You buy a property, and you flip it, let’s say six months. In six months it is ready to be sold, and let’s assume you bought the property for $100,000.
Then after you flip it, you end up spending $20,000 in renovation. The total cost of the property is $120,000. After fixing it, after six months, you’re able to force the appreciation of the property, and the value of the property goes up, to $200,000, for example. You can actually sell this property for $200,000 and get the money out of it, or you can just simply take this property and do a cash-out Refi out of it, and refinance $80,000 worth of equity, and just simply buy another one, and perhaps you can take this property and leave it in the market and just hold it, or you can just simply sell it and gain $80,000 in equity.
The opportunities are endless, it’s completely up to you, but with the caveat that you have to have the time and you have to have the experience to also do a flip because things can get out of hand in terms of costs if you don’t know what you’re doing.
Buy and Hold
On the other side, if you’re doing a buy and hold, let’s say we’re talking about the same property, you bought it for $100,000, and then you put the usual 20% down, which means you owe $80,000 because then you’re financing 80% of the property.
When you have a mortgage, and you have a rental and you are paying things slowly, your mortgage debt will go down very, very slowly. Assuming you don’t pay anything extra towards the mortgage. For example, every month you make a payment of some mortgage, the most you’re going to bring down is $100. That means, by the end of the year, the most you were able to bring down in that debt, has been only around $1,000.
You have to bring down a good amount from your mortgage in order to do a cash-out refi
The more you have, the most you are able to bring down and that there has been $1,000. What exactly does it mean? If what you were able to bring down, and that was exactly $1,000, that means, in a period of five years, when you multiply that 1,000 times 5, you were able to only bring down that debt to $5,000. Now, is $5,000 a good amount for you to do a cash-out Refi? No, because just in closing costs itself, it’s going to eat up all the $5,000.
However, if all goes well, and if the market is doing very well, then it will naturally appreciate. Let’s assume that the economy is doing excellent, and then your house that you originally purchased for $100,000 went up to 150,000, which means now you have accumulated an equity of $50,000, just because of the appreciation. You’re going to add that $50,000 appreciation, and to whatever is it that you managed to pay down, which means you can do a cash-out Refi for $55,000. Now, it is entirely up to you and what you’re looking for.
Flipping is like a never-ending thing. You always have to do it over and over again. It requires a lot of hours during a normal day and you would have to dedicate a big part of your energy and time exclusively to that
If you are the type of investor who loves doing flipping because you find that to be creative, it’s your hobby, it doesn’t feel like work, then this is the right investment for you.
If the opportunity comes and things are great, you have to decide which strategy suits you better. Some questions you should ask yourself related to the Real Estate Strategy you’re about to choose are:
1- Which strategy is better for me?
2- Which of the strategies would you prefer after you get both sides of the spectrum?
3- Do I have the full-blown picture to make a decision?
4- What are your skill sets?
5- Can you actually do a flip? Do you have the time for that?
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