In 2021, is it better to hold or flip your property?
Reflecting on these final days of 2020, I think we all can admit this year was high drama, with lasting impact. While this year has been dramatically different from years past, as we look to 2021, the question of whether to flip or hold real estate has resembled the age-old tale of the Tortoise and the Hare.
In that story, the moral was: Slow and steady – in the form of the tortoise – wins the race. But in real estate investing, the answer depends on what race – sprint or distance – you’re running. What are your goals? Whether you’re a current property owner considering flipping your property in 2021, or in the market for purchasing an investment property to flip or rent, here’s what to consider.
Holding: Going the Distance
Owning a rental property and becoming a landlord is akin to a marathon. You’ll invest money and time. In return, rentals typically offer long-term security via a predictable and steady stream of passive income, provided you can retain tenants. This enables your investment to appreciate over time. If you choose well – considering location, unit maintenance, and potential tenant pool – and keep your units rented, you’ll make money automatically while still holding an asset that grows in value over the years. Eventually, you’ll be able to cash in on that value.
Challenges of holding onto property investment
The challenges of holding onto a rental property include the need for ongoing maintenance of your property and the need to interact with tenants. Hiring a property manager can be a way to manage this challenge but will also cut into your profit line. Making a profit on a rental means limiting its vacancy rate, which can also be a challenge in some markets. Time is an essential factor where rentals are concerned. Before you decide to hold or rent a property, ask yourself if you have the time to be a responsive landlord as well as the time and money to hold onto the property long enough to have it appreciate. In other words: Can you go the distance?
Flipping: A Sprint to the Finish
The fix-and-flip investment model has exploded in popularity over the past decade. As the reality shows reveal, flipping real estate is an all-in process. Investors must be present from the purchase, through renovation to final sale. Usually, time is essential, too: The shorter the time between purchase and final sale, the better. For this reason, fixing and flipping is a sprint. It’s also considered a form of active income. One huge benefit of this model: With a typical purchase-to-sale timeframe of six to 12 months, investors can make large amounts of cash in short order – far more quickly than by holding onto the real estate for years.
Property flipping can also be a good way to try out real estate investing without a long-term commitment, and with funding that is easier to obtain through hard money loans. Such loans are based on the valuation of the property rather than on a borrower’s credit rating or employment, factors that can delay the loan approval process and sometimes even derail it for first-timers. Hard money lenders also often lend money for construction renovation – usually a requirement for flippers.
Risks associated with flipping property
Possible downsides to fix-and-flip properties: Capital gains taxation rates can be high when a property is held for a short time and sold at a high profit. If you decide to flip property in 2021, be sure to get solid real estate tax advice. Also consider market fluctuations, which can put flipping success at risk. You need to make sure the improvements you make add value to the property that will translate into real money at sale. You also need to ensure that your property lands on the market at a time when it will sell, not stagnate. Talk to your hard money lender about these issues. The question to ask before you jump into the sprint of fix-and-flip: Is the timing right?
Whichever real estate investment race you run, I’d be happy to discuss options with you and show properties in Philadelphia that fit your needs. Contact Maxwell Realty to learn more about how we can help you.