Flip Houses or Buy-and-Hold: Which Strategy to Choose

When people begin their real estate investing, many start out buying foreclosed homes. However, most are unsure about what their primary exit strategy should be. By exit strategy, I mean what you plan to do with the property once you have it under your control. There are basically two approaches: 1) “flip houses” or 2) “Buy-and-hold “or rental properties.

Regardless of your approach, both methods require you to conduct research about the foreclosure home, location and real estate prices. You will also need to perform a home inspection (where possible) and accurately price the cost of any renovations.

Here is some basic information about the two exit strategies you help you decide on the best approach for your situation.

Flipping Houses Profits

Flipping house can be a lucrative approach to building wealth. Look at the following information from the California-based real estate analytics firm RealtyTrac from the first quarter of 2014:

“The average sales price of single family homes flipped in the first quarter was $55,574 higher than the average original purchase price. That gross profit provided flippers with an unadjusted ROI (return on investment) of 30 percent of the average original purchase price. The average gross profit per flip a year ago was $51,805 for an unadjusted ROI of 28 percent.”

These kinds of profits are possible with a combination of deep discounts and home price appreciation.

Basics of “Flipping”

Finding properties to flip was pretty easy during the height of the foreclosure crisis. It was not uncommon for “flippers” to buy foreclosed homes for discounts as high as 50 or 60 percent off of market prices for non-distressed homes.

The flipping process is pretty straightforward:
• Find a deep discounted foreclosure, short sale or other cheap home:
• Strict budget for renovating the property—make quality improvement and repairs.
• Sell the home within a short time frame.

Now that the inventory of foreclosures and short sales have dropped off significantly, you will have to work a bit harder to find cheap houses at discount deep enough to obtain a reasonable profit margin.

In addition, smart foreclosure investors hold properties for a longer period before selling them to take advantage of a slower pace of rising home prices. For example, the national average turnaround time for flipping houses was 79 days in the first quarter of 2013. In the first quarter of 2014, flippers completed repairs and sold these homes in an average of 101 days. Keep in mind that you will incur other expenses, such as maintenance, mortgage payments and other costs before you actually sell the home.

Therefore, you will need to have a solid plan in place to control your cost and a “plan B’ if you do not sell the property.

Buy-and-Hold/Rental Property Exit Strategy

Many people who buy foreclosure properties have a more long-term approach to investing in real estate. They choose to make repair to these homes and rent them out for a monthly cash flow. There are also other advantages, such as:

• Tax benefits
• Home price appreciation
• Retirement income

For rentals, it is not necessary to make major improvements, especially to building system like heating, roofing or plumbing, unless absolutely necessary. This does not mean that you not provide a quality rental unit and skimp on the repairs.

For more detail information about flipping houses or buy-and-hold, see some of our other articles; take a look at some of our other articles.

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