A lot of investors contact me wanting to get into real estate investing and they always want to start with fix and flip because they watched a show on HGTV or DIY about fixing and flipping. In all actually, doing a fix and flips is very time consuming and if you have a full time job, then this might not be the best way to get into real estate investing.
So, is fixing and flipping more profitable than a buy and hold strategy? The average fix and flip investor earns approximately a 10% to 12% annualized “return on investment”. This is because when the market is over saturated with investors it become more and more difficult to find a property that will be profitable. There are a lot of properties on the market but not all of them are perfect candidates for a fix and flip opportunity. Therefore, when a good fix and flip opportunity comes on the market you are often times forced to pay a higher price and accept a lower return on investment. Remember, your profits are made in a fix and flip when you purchase and not when you sell.
If you are not willing to accept a lower return on investment, then you will be waiting months before you can employ your investments dollars and start earning a profit. The longer you wait to employ your investment dollars the lower your annualized return on investment. Also, if you are not a contractor or can’t determine the exact cost of the rehab work, then your fix and flip project might become less profitable due to higher expenses. Furthermore, if you don’t have your own cash and you have to use a “hard money” lender, then you will have interest costs that will lower your return on investment.
Due to increased competition, it could take you three months or more to purchase your first fix and flip deal, it could take you another month to complete the rehab work and another month or two to resell the property. By the time you make a profit, it could be six months or more!
If you purchase a rental property in an appreciating market (the market Phoenix is experiencing), then overall you will earn more money on an annualized basis than the average fix and flip investor. How is this possible? Well, if you purchase a single family home at $90,000 cash and rents in the area are $1,200 per month, then before taxes, insurance and HOA you are earning a 16% return on investment. This does not include the appreciation rate of the home.
For your net return on investment, lets say, taxes are $1,100 per year, insurance is $350 per year and HOA is $50 per month. This would be a 14% net return on investment ($1,200 – $92 taxes – $30 insurance – $50 HOA = $1,028 X 12 = $12,336 / $90,000). If the home is appreciating at a rate of 3% per year, then this is a 17% return on investment per year. Even better if the appreciation rate is higher!!
A buyer and hold investment strategy is much better than a fix and flip because the investment is a “passive investment” (if you hire a property manager) and your return on investment is higher. Also, you can take advantage of a 1031 Exchange or purchase the rental property with a Self Directed IRA to defer the capital gains.
Give us a call TODAY if you are interested in putting your investment dollars to work! 480-213-5251