Some investors focus on flipping — that is, turning properties over quickly, rather than keeping them long term. In most cases, holding property generates more long-term wealth for you than flipping. Therefore, you may consider flipping some properties and holding others. On the other hand, you may consider using the flipping strategy a while, and then begin holding rental properties later. The big question is, “When should you hold versus when should you flip?”
The Advantages of Flipping. The main advantage of flipping is that you get your cash out immediately rather than later. For many people, the certainty of getting a paycheck right away is highly appealing. Flipping takes the real estate market per se out of the equation. If you buy a property correctly, whether the market is rising or falling is almost irrelevant, except for how long it will take you to resell the property. (Of course, if you buy cheap in a soft market, you can afford to hold a property longer.)
Flipping is generally good for your cash flow, which is important in any business. If you purchase houses and acquire too much equity and not enough cash, you may get into a cash crunch if you don’t have additional income.
Don’t forget that you can flip houses as a part-time or full-time business. You can do as much or as little as you want and you can also afford to take a break from your flipping business. In short, once you empty your inventory, you’re not tied to your business; you can take long vacations or up and move to another city and start over.
The Disadvantages of Flipping. The main disadvantage of flipping is that it’s “hands-on” income: Once you stop flipping, you stop making money. If you’re young and like to work for a few months and then take a few months off, the flipping strategy can work for you. However, at some point, you’ll realize that if you keep spending the profits, you won’t accumulate wealth.
In addition, if you flip, you lose the benefit of market appreciation. While market timing is a risky venture, a good market timer can gain wealth quickly with little effort by buying properties at the right time in emerging markets (developments, cities, or parts of the country that are ripe for economic growth and new jobs, thus new home building). On the other hand, if you buy a property in the wrong place at the wrong time, particularly for the wrong price, you can end up with a property you can’t get rid of quickly enough. You could also get in over your head in a rehab project and have to bail, risking the loss of thousands of dollars.
Finally, if you don’t spend all your income on living expenses, what will you do with it? A diversified portfolio is a good idea — you could put some of this cash in bonds, money markets, or mutual funds—but you're likely to earn a better return by leaving your profits in real estate rather than taking them out.
The Advantages of Holding. Property holders can generate true wealth over the long term. Historically, property values appreciate at a rate greater than the rate of inflation in the United States. If you buy in the right neighborhoods, your annual appreciation may reach double digits. You can use properties with equity as collateral. You can provide rental income for your retirement years, and you can pass property down to the next generation. Once your rental properties are owned “free and clear,” you have passive income from the rents paid that gives you an income even when you’re not working.
The Disadvantages of Holding. The main disadvantage to holding on to property is that your assets aren’t liquid. Unlike stocks or bonds, real estate isn’t easily converted to cash. When selling real estate, you have to locate a buyer and then pay transaction-related costs. If you must sell when the market is down, you won’t get the best price. If you have tenants in your property under a lease, you can’t simply kick them out without notice. You have to wait until the lease expires, pay the tenant to leave early, or hope to find a buyer who doesn’t mind having someone living in the property. Moreover, of course, the future is always uncertain. While real estate may have appreciated in a particular area an average of 10 percent over the past 20 years, it doesn’t mean it will do so in the future. If you hold properties, you may also risk running into negative cash flow. There may be times when your properties are vacant or need repairs. That’s when you have to dip into your savings to feed the proverbial “alligator at your door.”