Flipping and Holding Property

Between flipping property, buying and holding property, which one is better? Before we can answer that question, we need to get an overview of the significant difference between the two.

Property flipping is the practice of buying a property normally under construction from a developer at a discounted price, foreclosure property or under- market-value property due to the property condition and then disposing of it at a profit. Sometimes, for foreclosure or under-market-value property, some cosmetic enhancement is required before it can be successfully flipped for profit.

House flippers do their best to not hold onto a house for a long period of time. Instead, they flip them quickly. To gain maximum profit, this is preferably done within the shortest period of time possible. The time frame is normally less than three years.

Buying and holding an investment on the other hand, involves buying a house, possibly making some improvements, but then keeping the property for a longer period of time. The investors will pay for the monthly costs of financing, taxes, utilities and other maintenance, the property will be rented out to a tenant. In some cases, the real estate investor might buy the property with the purpose of selling it at some point in time, but normally for up to five years or more.
The Pros and Cons

The two types of real estate investing have their largest differences in the fact that one produces quick profit in a shorter period of time (not more than 3 years) while the other creates monthly positive cash flow perpetually (best case).

Now lets study some of the biggest pros and cons for both.

The Pros of Flipping

Less Risky: Unlike the stock market, which at times can fluctuate quite extensively even in a single trading day, real estate markets are more easily predicted.
With this, flipping properties could be considered a less risky investment strategy because it is intended to keep low capital risk for a minimal amount of time and because it lacks the management and leasing risks inherent in holding real estate. Because you are holding the real estate for a short period of time, drastic local market fluctuations, if any, are less likely to affect your profitability.

High ROI: The property flipper can make a higher return on investment (ROI) if he/she can manage to flip the house in as short of a time as possible. This is in contrast to buy-and-hold real estate investing where the investor has to wait for longer periods of time before they can cash it out for a profit when selling.

Tenants Free: Perhaps best of all, property flippers dont have to deal with landlord and tenant headaches. Generally, in Malaysia, the law protects tenant more than the landlord. Some of the issues that flippers dont have to face: eviction, repair and maintenance of properties, and chasing tenants for rent collection.

The Cons of Flipping:

It Takes Actual Practice To Be Experienced: You don t get really good at property flipping by just reading some books or attending a seminar on property flipping and then claiming that you’re an expert. It takes time, to study and to gain first-hand experience to get really good at it.

Unforeseen Circumstances/ Conditions: Even when you do get really good at it, you’ll still encounter situations where its not in your control. For example, the completion is delayed, the failure to get Certificate Of Completion and Compliance (CCC), failure of your contractor to deliver on time if you are doing some property enhancements, upward revision of interest rates, introduction of new ruling e.g. loan margin, net income borrowing etc. As a house flipper, you have to anticipate these curveballs -even expect them. Its all a part of the business.

High Costs: Flipping houses does come with transactional costs on both sides of the equation. When you buy and when you sell, there are costs. When you sell, if you are taking a loan, the bank will impose early settlement penalty, apart from that, the legal fees and agency fees. Not forgetting the interest as well as stamp duty that has already been paid when acquiring the property. These transactional and holding costs can directly affect profits. But if managed well, you can still make a healthy profit.

Taxes: When flipping houses, the newly revised Real Property Gains Tax at 30% on the profit for property acquired less than three years. So to accurately predict your net profit, you will need to factor these costs into your projections as well.

The Pros of Holding

Owning multiple properties which are all producing positive cash flow and steady rental income is a very appealing way to build a reliable stream of income. Although you can get this kind of steady income with house flipping, you’ll need a steadier stream of house flipping deals. Usually, one right after the other.

Wealth Creation: There’s no question that great wealth has been amassed through buy -and -hold real estate. Its well-documented that real estate values increase over the long term. All things being equal, the longer you hold the piece of real estate, the greater your potential for appreciation. Most “old money” in Malaysia and abroad was accumulated through real estate ownership. Some of the wealthiest individuals in the world like Li Ka-Shing, Donalad Trump amassed their great fortunes through buy-and-hold real estate investing.

No Urgency to Sell: A big advantage to buy and hold real estate is that if the real estate investor does not need to sell immediately, that he doesn’t have to. Unless it s an emergency, the buy-and-hold real estate investor can wait out market downturns until market conditions improve.

Pride of Ownership: When I first started buying rental properties, I would just drive by them at least 3 times a week. Also, it felt pretty good to be helping people in need of a good home to find a nice, clean and attractive place to live. If you have good tenants who pay on time and a house that requires little, if any maintenance and you’re also realizing a tidy monthly profit with healthy cash reserves, then buy and hold real estate investing is pretty great indeed.

The Cons of Holding

Market Fluctuations: Of course, if hard financial times hits the buy and hold property investor will need a quick injection of cash, they can only sell their property at prevailing market values. They cant hope for the market to recover at that point in time, they are stuck with selling at the current market prevailing price even if its lower than the acquisition price.

Legal Tenant Issues: Buy and hold real estate investing comes with its own inherent management and legal issues with regards to tenants. There are a number of management related issues you need to deal with on a regular basis for instance eviction, repair and maintenance of properties, and chasing tenants for rent collection. All these if not handled well, will have serious repercussions financially as well as emotionally.

Tenants Management:
Finding quality tenants, servicing those tenants, handling repairs, upkeep of accounts, managing rental collection, all can be incredibly stressful and time consuming if they are not managed well. The process of finding and managing good tenants requires time, energy, and lots of patience.

Flipping properties is considered more of a tactical strategy whereas holding properties is long-term investment strategy. In order to decide whether flipping properties or holding them long-term is the more appropriate strategy, one needs to answer a few critical questions. An investor must decide whether the capital allocation is long term or short term and whether it is a core part of an overall property portfolio or a means to enhance returns. Also, one needs to determine what risk and return is appropriate for this portion of their property portfolios.

Although the choice between the two strategies in question depends on ones particular financial situation and investment goals, the long-term holding strategy is generally more appropriate for those using real estate as a core portion of their overall property investment portfolios; flipping properties is more appropriate for investors wishing to realize short-term capital gains for as long as the present market will allow.