Which is best for investors?

Blog March 2024

Buy and hold vs. Flipping real estate

There are numerous strategies for real estate investing, but the two primary options are the buy-and-hold strategy and the fix-and-flip approach. Today, we’ll tackle the benefits and downsides of each approach for investors and try to parse out which one should you choose – flipping vs holding.

Why you should invest in Real Estate

Real estate is among the most solid, reliable, hard assets on the market. There are many reasons to choose this form of investment:

  • Steady income
  • Tax benefits
  • High returns
  • Inflation hedge
  • Capital building

These are all incredibly useful factors for any investor which real estate as an asset class can provide all on its own. Most notably, the high margins of return and the possibility of building significant capital that real estate investing provides are what professional investors value about this asset class. And, of course, the fact that real estate is an excellent hedge against inflation is another major advantage. The fix-and-hold strategy is especially beneficial as a hedge against inflation, as it provides a steady source of income for investors in times of an economic crisis. On the other hand, flipping properties is also a beneficial strategy, depending on the goals behind the investment.

Investment goals: Fix-and-flip vs Buy-and-hold

When it comes down to which is the best option – fix-and-flip vs buy-and-hold – it all depends on a given investor’s goals with each project, as well as some other external factors to consider. Today, we’ll discuss the two types of residential properties rather than leasable office space – we’ll focus on single-family homes and commercial multi-family properties. In order to decide between the fix-and-flip vs buy-and-flip strategies, you must think through this fundamental aspect of the process. Determine which is your goal with this project – fast returns or steady income. If you need returns as fast as possible, you are better off flipping properties. Flipping properties enables you to buy, renovate, and sell real estate relatively rapidly and it can be done within a year or even less. The fix-and-hold strategy, on the other hand, takes a while to show results, but it allows an investor to rent out the property and maintain a steady source of income.

Why Fix-and-flip: The case for flipping property

Flipping properties has a number of advantages for real estate investors. It’s the practice of finding distressed real estate, fixing, and selling it. The main difference between flipping properties or holding them is the type of property you can flip easily. The fix-and-flip strategy is most applicable to residential real estate, especially single-family homes. This is largely due to the fact that it’s possible to renovate and sell a single-family home within a very short span of time. It gets more challenging as the size of the project grows. However, flipping multi-family real estate is also possible and it naturally tends to bring higher returns due to the sheer size of the plot and the work required for it. So, what are the biggest benefits of flipping properties?

  • Relatively quick turnaround time
  • Potential for high profit margins
  • Less competition for move-in-ready properties

The fix-and-flip strategy is enticing to many investors with its great potential for a high return rate combined with a relatively fast turnaround time. The fast turnaround also makes it a short-term form of investment which may be exactly what you’re looking for if you need fast returns without too much time invested. The additional advantage comes from the fact that flipping properties usually involves renovating distressed buildings. This, in turn, means less competition than for move-in-ready real estate as more work is required for distressed properties. But with the right strategy and forethought, experienced investors can easily recoup or even double their investment by flipping properties!

Why Fix-and-hold: The benefits of holding property

The fix-and-hold strategy is more of a long-term strategy – it requires purchasing the property, working on it, and holding it in order to rent it out. The fix-and-hold approach is especially beneficial for those who are looking for a steady source of income or a hedge against inflation. Fix-and-hold allows you to rent out properties, making them rental residential properties. This type of asset will both provide a passive income and provide some financial protection against inflation. So, what are the most important benefits of the fix-and-hold strategy?

  • Steady passive income
  • High return on investment
  • Hedge against inflation

The rentable nature of such investments makes them a long-term asset class, which means they’re often for professional investors. It can be a very desirable strategy due to the high returns it brings. But it can be challenging for beginners to invest in such an asset completely on their own – without a relevant network, connections, and knowledge. If you are a beginner investor interested in the fix-and-hold strategy, you might want to consider investing with professionals to ease your path.

Fix-and-flip or Buy-and-hold in Detroit

The Detroit economy is undergoing an era of rebirth right now. And with a rising economy comes a rise in demand in the real estate market. Combined with the number of distressed properties in Detroit right now, it makes for a very beneficial investment location. Plus, as the demand grows, the properties will increase in value and rentability. The fix-and-hold strategy can be beneficial for investors who are located nearby or have feet on the ground for each rental property they acquire. You’re best focusing on multi-family properties when it comes to rentals as it allows for more units and hence brings more income. You’d also need to hire an experienced property manager to make sure the rental multi-family is running as smoothly as possible.

Flipping multi-family or single-family residentials on the other hand, requires less involvement. Flipping single-family houses specifically requires the least amount of involvement. A single-family home needs to be acquired, renovated, and resold, which can be challenging without proper knowledge but possible to accomplish within a short span of time. Of course, flipping homes in Detroit is more manageable when you have a vast network in the field, which professionals often possess. This may be another reason you might want to invest with experienced investors, rather than start flipping houses in Detroit on your own. Flipping multi-family homes, on the other hand, can bring in significant returns – a bigger plot and the amount of work the property requires means it will be valued higher by the time it’s fully renovated.

In short, both strategies of buying and holding as well as fixing and flipping can be very beneficial – it all depends on your initial investment goals, as well as a number of other factors such as your knowledge of the field and network. Investing in rental properties as well as flipping multi-family and single-family properties in Detroit is lucrative right now because of the number of distressed properties on the market combined with the rising demand.

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FAQ

Any questions

What is affordable housing?

Affordable housing refers to housing units designed to be accessible to low- and moderate-income families, typically costing no more than 30% of their gross income.

The definition of “affordable” typically varies depending on location and income levels but generally encompasses rent or purchase prices that don’t exceed a certain percentage of a household’s income.

What is Section 8 housing in the US?

Section 8 is a federal rental assistance program in the US run by the Department of Housing and Urban Development (HUD) that helps low-income families and individuals afford decent and safe housing in the private market. 

The program provides eligible households housing choice vouchers that cover a portion of the rent directly to the landlord, with the tenant paying the remaining amount. Property owners who participate in Section 8 agree to rent units to qualified individuals and families at a rate approved by the program.

How can I invest in Section 8 housing?

There are several ways to invest in Section 8 housing:

  1. Direct ownership: You can purchase a property approved for Section 8 and rent it to a qualified tenant using a voucher and receive rent subsidized by the government.
  2. Real estate investment trusts (REITs): REITs pool investor funds to purchase and manage income-producing real estate, including affordable housing.
  3. Limited partnerships: Limited Liability Companies (LLCs) offer another option for investors to pool resources and invest in affordable housing projects.
What is the difference between multi-family and single-family properties?

Single-family property: This refers to a standalone house or unit designed for and rented to one household.

Multi-family property: This refers to a property containing multiple dwelling units, such as a duplex, apartment building, or condominium complex. Multi-family properties offer the potential for higher rental income but typically require different management strategies and considerations compared to single-family homes.

What is the difference between buying and flipping houses?

Buying and holding: This involves purchasing a property to keep it as a long-term investment, generating rental income and potentially appreciating in value over time.

Flipping: This involves buying a property, renovating it to increase its value, and then selling it quickly for a profit. This is a more hands-on strategy with higher risks and rewards compared to buying and holding.

How much do I need to start investing in affordable housing real estate?

The minimum investment required varies depending on the chosen method. Direct ownership typically requires a higher initial investment for the property purchase, and renovation up to Section 8 standards, while other options like REITs might have lower minimum investment amounts.

Do I need to be a US citizen to invest and own the property?

No, US citizenship is not a mandatory requirement for investing in affordable housing in the US. However, specific restrictions or regulations might apply depending on the investment method and your residency status.

It’s crucial to consult with a professional to understand the legal and tax implications for non-citizens.

Do I need to pay US tax as an overseas investor?

This depends on the type of investment, your residency status, and any applicable tax treaties between your home country and the US.

Consulting with a tax professional specializing in international investments is highly recommended.