Buy-and-Hold or Flip?
When buying investment real estate, choosing which strategy to use can be challenging. Buying a property to hold and rent out vs. buying one to fix and flip require different planning and math calculations as they are two distinct investment strategies. The decision to choose one over the other depends on your investment goals, risk tolerance, and financial capacity.
Here are some potential benefits of buying real estate to rent out as an investment strategy:
Benefits of Buy-and-Hold Investments
- Steady Cash Flow: By renting out a property, you can earn a steady stream of income in the form of rental payments. This can help you build wealth over time and generate passive income.
- Long-Term Appreciation: Over the long term, real estate tends to appreciate in value, meaning that your property may be worth more in the future than when you initially purchased it. This can provide you with an additional source of wealth.
- Tax Benefits: Real estate investors are eligible for several tax benefits, such as mortgage interest deductions, property tax deductions, and depreciation deductions. These tax benefits can help you reduce your tax liability and increase your cash flow.
- Bonus: Less down payment is required if you’ll be moving into the property first to rent out later and/or renting out your second bedroom. If you don’t have enough for the full down payment, you can get a CMHC insured loan to help cover the cost between the loan from your lender (80% of the purchase price) and what you have saved up. They will charge you an extra fee, but many feel it’s worth it to get into the market.
Benefits of Flipping Investment Real Estate
On the other hand, house flipping involves purchasing a property, making improvements or renovations, and selling it for a profit within a short period. Here are some potential benefits of house flipping:
- Quick Profits: House flipping can be a lucrative investment strategy if you do it right. By purchasing a property at a low price, making improvements, and selling it for a higher price, you can earn a quick profit.
- Less Holding Time: Unlike rental properties, you don’t have to hold onto a house flip property for an extended period, which can tie up your capital. Once you sell the property, you can move on to the next flip.
- High ROI Potential: House flipping has the potential for a high return on investment (ROI) if you can find the right property and make the right improvements.
Deciding on a Real Estate Investment Strategy
Ultimately, the decision between buying real estate to rent out or house flipping depends on your investment goals, risk tolerance, financial capacity and current market conditions. Both investment strategies have their pros and cons throughout the different market cycles so it is necessary to research before deciding on a strategy.
A great book to learn more about buying real estate by timing the market is by Don R. Campbell along with other contributors called Secrets of the Canadian Real Estate Cycle. Real estate investing is property-specific so deals can be negotiated in any market, but it’s important to carefully consider your options as well as current and potential future market conditions before making a decision.