It may seem like we’re putting the cart before the horse by discussing your final plan for the property. But believe us when we tell you that it pays to think ahead.
What are the most common exit strategies for flippers? Here at Navigator Private Capital, most of our clients choose to buy and sell but we also see a fair amount who choose to buy and hold.
There are pros and cons to each:
Buy and Sell
This strategy is what most people think of when they think of real estate investing. The majority of house flipping TV programs showcase investors buying a run down property, rehabbing it, and then selling it for a substantial profit. Voila! Of course, it’s not always that easy.
Pros
- Fix and flip is a relatively short-term strategy—generally 6-9 months from start to finish—so investors can realize a profit quickly and then reinvest it.
- With targeted research and an efficient rehab schedule, the profit margins can be quite high.
Cons
- The tax implications for this strategy can be off-putting. For properties sold within one year of purchase, the gains are subject to the short-term capital gains tax which will vary from investor to investor.
- Without viable market research, there is a risk of the property not selling at the estimated ARV, generating an investment loss.
Buy and Hold
The buy and hold approach to real estate investing creates the the opportunity for investors to generate passive income by renting the finished property in the long or short term. This can be a great option for those hard-to-sell properties or for an investor who is looking for a reliable income stream.
But as you may have guessed, there are pluses and minuses:
Pros
- Since renters tend to be less discerning than home buyers, the cost to rehab a rental property may be lower than one meant for a quick sale. Rather than investing in high end appliances or that granite top, the rehabber may be able to stick to cosmetic fixes, saving money in the process.
- The tax burden created by the buy and hold strategy is lower than with buy and sell since no capital gains are generated. That can mean a substantial savings for the investor.
- Furthermore, under the new tax law, investors with pass-through income earned through partnerships, S corporations, and limited liability corporations can deduct 20 percent of that income. This makes the rental of multi-family property more tax advantageous than the selling of single-family properties, from a real estate investor’s perspective.
Cons
- Becoming a landlord is not for the faint of heart. Whether an investor decides to hire a property manager (at an added expense) or assume the job him or herself, managing a rental property can be a time-consuming and somewhat stressful undertaking.
- Since buy and hold is a long-term play, there are some ongoing expenses involved. So keep that in mind. Investors are responsible for maintaining the property and making any necessary repairs as they arise.
Whatever exit strategy you choose, Navigator Private Capital is in your corner. Our loan programs are designed with the customer in mind and can be customized to your unique situation. Reach out to us to discuss the ins and outs of our flexible financing arrangements.