It’s interesting that although many people invest in real estate because they’re tired of the ups and downs of the stock market, real estate investors often end up asking a question that’s frequently shouted on CNBC: “Buy-and-hold vs. buy-and-sell? Which one is the most successful investment strategy?”
When it comes to real estate both investment strategies have their pros and cons. Let’s explore the benefits and drawbacks of each.
Things to Know about Buy-and-Hold
One of the biggest regrets of real estate investors always begins with, “If only I hadn’t sold that.” Whether it was a bungalow in the middle of what’s now a downtown mecca of high-rises and restaurants or an townhome in a once-middle-of-nowhere that’s now a thriving suburb, everyone has a story of ‘the one that got away’.
One way savvy investors avoid real estate investing mistakes is by using a buy-and-hold strategy with their investments. Buying and holding real estate will take time to generate a return, but it can certainly have its benefits, especially if you choose the right property in the right place.
When you choose buy-and-hold vs. buy-and-sell, patience is key. It’s not the only ingredient to a successful investment, however. Here are some of the things to know about investing in a property for the long-term.
Location is Key
You’ll notice that the common thread in both of the real estate regrets mentioned above are properties in what became very valuable locations. While it’s unlikely that most investments will start out as a cottage in a quaint neighborhood and end up a high-valued piece of property surrounded by skyscrapers, you should investigate the trends in any area you think of investing. Make sure the market is stable and on the upswing.
Financing is Easier
Typical financing for a long-term real estate investment will require you to put 20 to 30% down on a 15- to 30-year loan. If you have the cash to pay in full, this can prove attractive to a seller during negotiations, but won’t be necessary.
You Can Earn Passive Income While the Property Appreciates
To make the most of a buy-and-hold investment, you shouldn’t simply hold onto it. Renting is a great way to generate passive income as the value of your property begins to increase. Because it could take years for the property to be worth enough to generate a hefty return, monthly rent checks will help you cover the mortgage and cost of maintenance – and possibly a little extra. Purchasing a turnkey property will help you begin generating those rent checks right away, as your property will already be rentable and ready to go.
Things to Know About Buy-and-Sell
If you watch any home improvement TV channels, you’ve likely seen the scenario play out on a popular TV show: a couple finds dingy old houses in neighborhoods where the market is growing. They purchase the properties, bring in a construction crew to work like mad, and then sell the houses (hopefully) for a profit. Is this a viable strategy for investors who don’t have their own cable TV show?
Most Buy-and-Sell Investors Pay in Cash
Time is of the essence when you’re flipping a house, so most traditional loans won’t work with a buy-and-sell investment strategy. This means you’ll need to pay for the property in cash or have private investors ready to back your project.
With Buy-and-Sell, You Have to Choose the Right Property
It’s not just a matter of choosing any available property. When you’re buying a house to flip it, you need to find a house where you can spend the least amount of money to get the most renovation bang for your buck. A home that needs cosmetic updates is a great candidate, while one with major issues (cracked foundations and structural issues, for example) can end up costing more to fix than you’ll ever recoup when you sell it.
Which Strategy Is Best?
In the world of buy-and-hold vs. buy-and-sell, what works best will depend on your current financial situation and long-term goals. How much money you want to put down right away and how quickly are you hoping to make it all back? Although house-flipping generates fast returns, buying, renting, and holding onto a property will generate long-term monthly income and provide a greater length of time for the property to appreciate. What strategy will work best for you?