To keep things simple, we look at all real estate investment strategies from two primary ownership objectives:
Fix & Flip vs. Buy & Hold
Below, we’ll examine each separately to put some perspective on why we boil it down to such a simple dichotomy. Obviously, many transactions & investment strategies will incorporate elements of both.
Strategy #1.) Fix & Flip
The goal of any real estate Fix & Flip investment is to buy low & sell high.
Generally, this is a short-term strategy, holding the property for about a year or less while you add improvements and/or wait on price value appreciation (if you’re in a super hot market).
For most Fix & Flip strategies, whether you’re looking at Single Family Residences (SFRs), small multi-family (up to 4 units), apartment buildings (5+ units), or commercial properties, you are almost always going to need a private hard money lender for your financing needs. Especially when it comes to SFRs and 2 to 4 unit multiplexes, banks are rarely going to be willing to loan on an “as is” property that needs improvements.
Based on our experience as both direct investors & lenders, the most challenging bits of a successful Fix & Flip strategy you’ll need to keep in mind are as follows.
Challenges Of The Fix & Flip Ownership Strategy
- Actually finding the deals. This can be accomplished a variety of ways, from “We Buy Real Estate” websites, to direct mail & yellow letters, to outbound telemarketing, to local display advertising & even bandit signs. On average, we’ve seen established acquisition lead generation processes costing from $1,000 – $5,000 per transaction (at a rate of about $50 – $250 per lead, looking at 20+ leads to find a single hot deal).Sourcing real estate investor acquisition leads is a specialty of our sister company, Real Estate Virtual Assistant Services. Check us out if you’re looking for some acquisition lead generation help.
- Securing the capital to close fast. Whether you’re paying all cash, working with financial backers, or securing real estate financing (bank or private loans), you’ll need to have your capital ready to go. Be mindful that different buying situations require different financing. For example, some auctions require cashier’s checks on the spot, and many “as is” properties will require a “cash buyer” who is either self-funded or pre-approved for a hard money loan (with a Proof of Funds letter to verify).
- Making property improvements quick & affordably. Most Fix & Flip scenarios involve some type of needed property improvements, renovations, upgrades, and repairs (the “Fix” part). If you aren’t familiar with this type of construction & renovation work, and don’t already have an established team you can trust, it’s easy for a deal to go south during this stage of the game.The clock is against you when working on property improvements, as your funds are tied up, each property has a real monthly hard cost to own, and (if you have financing) you’re probably paying a monthly loan note regardless of how fast your Contractors are finishing their work.
- Getting the property sold. Obviously, the last step of a successful Fix & Flip is when you actually sell the property for a positive Return On Investment (the “Flip” part).Whether you’re a licensed Agent or Broker yourself, you intend to list on the MLS with your own Broker, or you plan to go the FSBO route… you’ll need to pick the right asking price, generate interest in the property, show the property to potential buyers, and ultimately close for a profit. This can be a difficult journey, and if you don’t already either have your own proven procedures, or a great Agent / Broker you can count on, you might end up losing money in this final stage of the Flip.
Every single element of the Fix & Flip process has its own difficulties & nuances.
While we can definitely help you overcome some of these challenges (especially through our sister company, Real Estate Virtual Assistant Services), at the end of the day your Fix & Flip system is going to need to be developed, implemented, tested, and refined based on your own first-hand experience doing deals.
Strategy #2.) Buy & Hold
The most common real estate investment strategy is Buy & Hold. The goal here is to amass an ever improving real estate portfolio that generates a growing stream of positive cashflow from lease & rental income.
Whether you manage your properties yourself, or utilize a property manager…
Whether you make your purchases in all cash, or you leverage financing to build your portfolio…
The goal is the same: maximize cashflow, build equity, scale up, repeat.
While of course most landlords & rent collectors would prefer to eventually sell their property at a net gain (price appreciation), we’ll consider that an element of the “Fix & Flip” strategy. Regardless of price appreciation aka capital gains realized at time of sale, a pure Buy & Hold strategy, focused strictly on profit from rents, comes with its own set of challenges & risks to keep in mind.
Challenges Of The Buy & Hold Ownership Strategy
- Accurately managing income & expenses. By far, the single most difficult element of building a profitable Buy & Hold rental property portfolio is accurately forecasting and manager your income & expenses. There are many elements that even seasoned investors find difficult to predict, or too easy to neglect. Collecting rents is rarely (if ever) a high margin endeavor, so tracking, forecasting, and optimizing cashflow is absolutely crucial to stay in the black.Some of the more important factors to keep in mind when forecasting rental portfolio budgets include:
- Cost of capital. How much are you spending on your monthly mortgage or hard money loan note?
- Cost of insurance(s). You’ll need at least one or two specific policies at the bare minimum, including potentially:
- Homeowner insurance.
- Commercial insurance.
- Landlord insurance.
- Mortgage insurance.
- General Contractor bonding & insurance.
- Cost of maintenance & repairs. While by no means a comprehensive list, you’ll have to account for every one of your properties’:
- The lifecycles & replacement costs of all of the above very tremendously, from once every 20+ years, to multiple repairs per year. There are many resources you can look into to help budget for these repair costs, and we’re happy to help you run some numbers (so feel free to contact us here for help).
- Keeping properties maintained, occupied, and rents paid. Whether you have a portfolio of single family homes & apartments, or commercial properties & agricultural land, the objective is the same: keep the income flowing. From tenant complaints to routine maintenance issues to evictions, collections, bankruptcies, and deaths, managing your properties and their lessees is real work. That’s not to mention marketing vacancies, pre-qualifying potential renters, running credit & background checks, getting leases signed, and receiving & disbursing payments & deposits. Of course you can use a property manager and/or facilities manager to do this for you, but you’ll need to carefully select the right match for your needs & budget accordingly.
- Staying Informed & On Top Of Macro-Economic Trends. The larger & more diversified your real estate investment portfolio, the more you’ll be affected by macro-economic trends at both Main Street & Wall Street levels. As your rental portfolio grows, you need to focus on real estate merely as one asset class, and diversify not only your real estate holdings, but also your overall savings allocations based on broader trends in the global economy.While real estate is an excellent long-term investment, and one of the more stable assets available, it is very illiquid and still subject to macro-economic pressures like any other asset class. This means if you’re not careful & staying informed & on top of the trends, you could potentially be left with a portfolio that is suddenly looking a lot less solvent or profitable.
Ultimately, a savvy real estate investor will use a mix of each strategy: Fix & Flip and Buy & Hold.
Indeed, every single Buy & Hold transaction has an element of Fix & Flip within. Every time you buy real estate, ideally you’ll be able to buy low & sell higher (even if that’s not the primary objective).
The most important factor to keep in mind are the numbers: is it going to be a profitable investment, compared to similarly risky opportunities for your time & capital?
If it appears to be a good ROI by your best measures, and is a better bet than comparable investment options (stocks, bonds, etc), then you can absolutely reap great returns with both Fix & Flip and Buy & Hold ownership strategies. Indeed, they should play a role in every well managed portfolio.