Regarding real estate investing, there are two main strategies – long-term buys and holds versus short-term flips. Both can be profitable, but which is right for your goals, risk tolerance, and timeline? Here are some key factors to consider when deciding between long-term and short-term real estate investments.
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Time Horizon
Long-term real estate investing often centers around buy-and-hold rentals. The idea is to purchase a property, rent it out consistently over many years, and sell it for a profit. This strategy requires patience and a longer time horizon, as it may take years for the property value and rents to increase sufficiently to realize big gains. However, long-term holds typically involve less hands-on work once rented.
Short-term real estate investments like flipping focus on buying low, improving a property quickly, and selling for a fast profit. Flips can generate returns more rapidly, as you aim to resell in weeks or months, not years. But flips require significantly more hands-on work over a compressed timeframe. The right flip also depends on finding a suitable property at the right price.
If you use the right tools, you can lower your tax burden on your investment, whether it is a short-term or long-term one.
Risk Tolerance
Long-term rentals tend to involve less risk than flips. You’re not exposed to short-term market swings and can ride out downturns over time. With a flip, you only have a short window to buy, improve, and sell at the right price. Hit the market at the wrong time or go over budget on your flip, and you may end up selling at a loss. Those with lower risk tolerance often prefer long-term holds.
However, flips can minimize risk in certain ways. You don’t have to manage tenants or wear and tear over time. With a quicker flip, you free up capital to invest in new properties faster. And you can target less risky starter homes for flipping versus high-end luxury flips.
Capital Requirements
Long-term holds require sufficient capital to cover the down payment and closing costs. But you’ll also need reserves for ongoing costs like maintenance, repairs, taxes, insurance and periods of vacancy. Handling these expenses for years takes more liquid capital than flips, which have shorter carrying costs.
Flips require sufficient funding to buy, rehab, carry costs, and resell quickly. Hard money loans are common for flip financing but come with higher rates and fees. Overall capital needed may be higher for flips versus long-term holds per project, but flips free up funds to reuse more frequently.
Market Conditions
Local real estate market conditions impact the viability of long-term versus short-term investments. In a hot seller’s market, flips may be easier to execute as demand exceeds supply. But finding an affordable property to flip can be challenging. Long-term holds may build even more equity in appreciating markets.
In buyer’s or balanced markets, long-term holds may still generate steady rental income while waiting out dips in value. But flips become riskier if prices are flat or falling. An experienced investor can read the market to determine if conditions favor long-term or short-term plays.
Skills and Interests
Your skills and interests also determine which strategy is a better real estate investing fit. Long-term holds require ongoing property management skills if you self-manage rentals. Or a sufficient budget to outsource management. Flipping demands rehabbing and renovation expertise to add value rapidly.
Investors who enjoy hands-on projects may prefer flipping. Those who want mostly passive income from rentals may opt for long-term holds. Also, consider if you have the time for day-to-day flip project management versus periodic oversight of long-term rentals.
Consider these key differences carefully when deciding between buy-and-hold rentals versus flipping properties. Pick the real estate investment strategy that best aligns with your financial goals, abilities, interests, and market conditions. Done right, both long-term and short-term real estate plays can pay off.
