We are often asked by our clients if one should buy and hold or fix and flip properties. In other words, should you invest in real estate for the long term, banking on rental income and potential capital appreciation, or are you better off investing for the short term and reaping in quick profits? Neither investment model is inherently better or worse than the other. But, depending on your investment goals and local market conditions, one may be a better fit than the other for you at this point. It’s also possible that your real estate portfolio would benefit from a combination of both investment types.
There are pros and cons to short and long term investments, not just in real estate, but also in any security. It ultimately comes down to choosing one or a blend of both methods that will help you achieve your investment financial goals. JCREIG Capital Funding team is experienced in both investment strategies. Each strategy comes with its own ups and downs, and in order to help you decide which one is better for you, we will break down both strategies in detail.
Let’s take a closer look at both options, including the pros and cons of each. Then we’ll show you how you can avoid many of the potential downsides of each investing strategy. And we’ll show you how you can invest in both buy-and-holds and fix-and-flips at the same time, even if you don’t have the cash to fully fund both investments or the time to manage the properties yourself.
Buy and Hold Vs Fix and Flip
While the names of these investing methods are descriptive of their approaches, they deserve a proper definition before we dive into our discussion. The buying and holding strategy means purchasing an investment property for the long term and renting it out, either as a short-term vacation rental or as a traditional long-term lease. House flips, on the other hand, are meant to be short-term investments; the goal is to get in, renovate the property, and resell it for a profit as quickly as possible.
When it comes to investing in single-family real estate (SFR), the best investors are focused, disciplined and strategic. In this article, we’ll explore the merits of two different investment strategies:
- Strategy 1: Fix and Flip (buy, rehab, sell)
- Strategy 2. Fix and Hold (buy, rehab, rent)
Fix and Flip Strategy
Unlike buy-and-holds, which don’t rely on specific market conditions to be successful, fix-and-flips require a growing market. If a market is declining, depreciation of the property could severely cut into your profits. But when the market is growing, your property is gaining value during the short time you hold it, and you add even more value through your renovation efforts.
Pros and Cons of Fixing and Flipping
Fix-and-flip pros:
- Quick profit potential. If everything goes smoothly, you could complete your renovations and flip your project in under six months. Check out our education center to see how much you can make flipping houses.
- The value-add potential. Not only can you make your property more valuable than the sum of its parts, but you can actually improve the quality of a neighborhood, one house at a time.
Fix-and-flip cons:
- Even higher capital requirements than buy-and-holds. You’ll need to fund the down payment, closing costs, complete renovation, and carrying costs until the sale.
- Specialized skill and knowledge required. Renovation at this level can’t be done by just anyone. To give yourself the best chances of a profitable deal, you need to know a lot about your local market and a lot about construction.
- Substantial time and effort required. Even if you’re hiring a contractor to physically do the renovation work, you’ll likely want to oversee the work and perhaps join in to learn more about construction.
Buy and Hold Strategy
Buy-and-hold investments are generally a wise option regardless of market conditions. You might have more negotiating power on the purchase of your property if you buy during a slow buyer’s market than if you buy during a fast seller’s market. But when you invest for the long term, as with buy-and-holds, you’re less susceptible to market fluctuations than when you invest for the short term, as with fix-and-flips.
Collecting investment properties is equivalent to amassing wealth. The biggest disadvantage of the buy and hold method is that it requires a sizable amount to invest with, especially when looking to purchase several properties. However, investors using this can be rewarded with steady returns by putting them up for lease, which can definitely add up over time.
- A turnkey property that’s ready for renters right away.
- A fixer-upper that requires some renovation to get ready for the rental market. This could be a good thing if you have the capital to cover the renovation costs because the value-add gives you quick equity.
- A tenant-occupied property directly from an investor for immediate rental income from the existing residents.
- A build-to-rent property that you develop from the ground up and rent out to long-term tenants. This gives you the added equity boost of the development phase in addition to the holding phase.
Pros and Cons of Buy and Hold
Buy-and-hold pros:
- Appreciation. As the property grows in value over time, so will your net worth.
- Cash flow. Buying and holding is one of the best ways to create passive income from real estate. As long as you buy right, your income rents will more than cover your investment expenses, and you’ll be able to pocket the recurring profit (or reinvest it to compound your real estate returns).
- Tax breaks. Many of your expenses, like depreciation, capital improvements, and mortgage interest, are tax-deductible, so you can remove them from your taxable income when you pay taxes each year.
- Debt pay-down by renters. Your renters effectively pay down the mortgage debt for you, which increases your equity in the property and, ultimately, your net worth.
Buy-and-hold cons:
- High capital requirements. You’ll need to have enough cash available to cover the down payment, closing costs, any renovations needed, and any vacancy until your first tenants move in.
- Lack of liquidity. Expect your capital to be tied up in your investment for at least 5-10 years.
- Property management. Buy-and-holds require ongoing management for tasks like rent collection, maintenance requests, lease renewals, and unit turns between residents. You can handle these responsibilities yourself or hire a property manager to handle them for you.
- Ongoing expenses. Regular maintenance expenses like landscaping and roof repairs will need to be budgeted. And then there will be unexpected expenses as well. Appliances will break down, and heating systems will fail. Be prepared to have cash on hand at all times for this type of expense.
Buy and Hold vs. Flipping: Which Strategy Fits Your Investment Goals?
The decision to flip or hold real estate depends on your objectives and market opportunities. Buying and holding is better for ongoing income and wealth accumulation, while flipping is tactical for short-term profits. Our experienced professionals can help you create a tailored strategic plan.
Reach out to us @ 561-303-0334 or contact us online if you require funding or have any questions.
Common traits of Buy and Hold investors
Buy and Hold investors are characterized by their long-term investment approach. These investors look for sound investments that they can buy and hold in the hope of generating a steady stream of income or capital gains over time. They often invest in stocks, bonds, real estate, or other assets with the expectation that they will appreciate in value over a prolonged period.
Buy and Hold investors typically have a lower risk tolerance, and are more focused on long-term capital growth than upfront income.
Fix and Flip investors take a different approach. These investors purchase properties that need some sort of renovation or improvement, fix them up to increase their value, then quickly sell them for a profit. This method requires much less capital than buy and hold investing, but it also involves much higher risk since the amount of time invested in the property is much shorter. This method requires knowledge of the local market, and an understanding of how to spot a good fix-and-flip opportunity.
You Aren’t Stuck With One Strategy or the Other
Many investors that work’s with JCREIG Capital Funding do both fix and flips for instant income and buy and hold real estate investing for the long term. They balance their portfolios in much the same way that others balance financial investments such as stocks, bonds, and mutual funds.
In either scenario, the real estate investor has to be clear about their own goals, their own financial abilities to handle a downturn in the market, unanticipated costs and what the tax implications will be.
JCREIG Capital Funding
How to apply for a Fix & Flip or Buy & Hold loan?
JCREIG Capital Funding is a hard money lender that can help you fund your Fix & Flip or Buy & Hold loan.
We have over a decade of experience, and have funded hundreds of millions of dollars in private money DSCR loans for commercial and residential real estate projects across 47 State.
Reach out to us @ 561-303-0334 if you require funding or have any questions.
FAQs
Advantages of the Fix and Flip: This investment practice can be a good choice if you purchase in a particularly desirable location. Additionally, if you have skill in redesigning a home, you can make a significant return. According to ATTOM data for 2021, the average return on investment was 32.3 percent, which would be considered a high return on investment.
Disadvantages: To make this investment successful, you will need to have a team of contractors assist you in repairing the home. Additionally, when home prices or interest rates are high, a fix and flip investment property can be more difficult to sell.
Advantages of the Buy and Hold: The advantage of the buy and hold option is that you will make returns, as long as you earn occupancy fees. You can also sell the property in the real estate market eventually. Our multifamily investment company observes that this situation can happen quite a bit.
Disadvantages: A disadvantage here is that you introduce risk as you continue to hold the property. For example, if you fix and flip a property during a particularly good time for sellers, you will experience high returns. If you hold, and then later you’re ready to sell and the market is unfavorable, this can hurt your investment. Others will point to renting as introducing risk, as you want to ensure you have excellent tenants.
There are a number of reasons why both investment strategies are engaging investors at this time. Here are observations about each type of investment that explain the excitement around these real estate strategies.
Fix and Flip: Fixing and then reselling a property takes some time. According to Investopedia, it takes an average of 162 days to fix, renovate, and sell a home. Remember, too, that this represents an average. If market conditions are unfavorable for sellers, fixing and flipping can buy you some time until the next market turn-around. Investors will choose to repair a home during challenging conditions with the expectation that by selling time, conditions have changed.
Buy and Hold: In a market where interest rates are high, more people have trouble affording a home. They want to rent instead, but desire a high-quality investment property that has the comforts of owning a home. Therefore, buy and hold investors can do well in these market conditions.
Both of these observations from our multifamily investment company are worth considering. They give you an idea of why the market is growing at this particular time. Therefore, it may be a good time to invest in real estate yourself. You may, in fact, realize high returns on your investment, even if you don’t qualify as an accredited investor.
Yes! We love helping first-time flippers. In fact, many of our expert flippers started their first flip financing with us. With 5k+ loans closed, we are here to help you with any questions you have including budget reviews, property valuations, and profitability analysis. Our goal is to make your flip a financial success for you!
Generally, yes. However, approval of an extension is considered with a few factors including but not limited to, on-time payment history, project status, etc.
Great- there is no pre-payment penalty, so you can pay-off the loan at anytime, without incurring additional fees. Your interest is simply calculated by the days you hold the loan before payoff.
Rates and leverage are dependent on risk. Risk is measured on flipping experience, credit, loan details, and loan term. You are able to set your loan term from 6-18 months. The rate and allowable max leverages will be determined on a number of factors including credit profile, experience and project size. Get started today to find out where you qualify. It just takes a couple minutes to submit your application!
Minimum Down Payment
DSCR loans, also known as investment property loans, Non-QM loans, or rental loans, have become very popular lately. But why all the buzz? While investors can still get traditional loans or funds from small banks, these options are difficult to qualify for and require significant cash reserves. DSCR loans are made for real estate investors and use the rental income from the property to help qualify for the loan. Let’s break it down.
Based on the Property’s Rental Income, Not Your Income
Experienced real estate investors or self-employed people without W-2s often have trouble meeting the strict requirements of conventional loans. These loans require good credit, high reserves, and proof of income. They are also underwritten using a Debt-to-Income (DTI) ratio, which compares your personal debt to your personal income. If you’re trying to get a loan for a rental property, the payment for that loan is included in your DTI calculation. You might be able to offset this new payment with rental income, but it depends on how well you can prove the expected rent. Investors with extra income from other sources might cover the gap in their DTI, but self-employed investors or those with multiple mortgaged properties might not have the extra income to make up for it. DSCR loans don’t use DTI at all. Instead, they look at the property’s rental income compared to the loan payments, making it easier for investors to qualify.
Borrow Through an LLC or Entity
Many investors prefer to borrow through an LLC or corporation to keep their personal information private and protect their other assets. This helps shield their personal assets in case something goes wrong with the property. Conventional loans can only be taken out in an individual’s name, but DSCR loans allow you to borrow through an LLC or other business entity.
DSCR Lenders Are More Flexible on Property Limits
With conventional loans, even if an investor can afford to take on several mortgages, they can only get loans for up to ten properties. Most DSCR lenders don’t have a set limit, instead looking at the total amount of credit the investor is exposed to and using common-sense guidelines.
Require Less Documentation
Conventional mortgage loans usually require a lot of paperwork, including pay stubs, bank statements, and tax returns. Underwriters thoroughly review your financial history, which can take time. Missing documents can cause delays. DSCR loans, however, focus more on the property’s value and rental income, as well as your credit. As a result, there is less paperwork needed. Most DSCR lenders won’t ask for proof of income, employment, or assets (except for liquid reserves).
While it is best to discuss your specific scenario with one of our Loan Agents, here are some general requirements:
Minimum Credit Score
We don’t have a minimum credit score, even though most DSCR lenders only go as low as 660 or 680. Most lenders also have a minimum tradeline requirement (amount and duration) reporting on your credit report, and also will consider if you have significant credit events, such as bankruptcies, foreclosures, and recent mortgage lates. Some lenders also require charge offs and collections be paid off prior to closing, although we do not require this.
If you don’t meet the credit requirements for a DSCR loan, you may be a better fit for our Hard Money loan option.
Minimum Down Payment or Equity
We can go as high as 85% LTV on purchase loans, and 80% LTV on refinance, depending on the property type, credit and DSCR ratio.
Minimum Property Value
We have a minimum property value of $100k. If you own multiple investment properties worth over $50k, ask us about our blanket loan option.
Minimum Loan Amount
Most lenders have a minimum loan amount of $100k. We can go as low as $75k.
