Ah, the fateful decision that every real estate investor must face. Am I rehabbing this property for a quick turnaround sale (rehab) or do I plan to hold it for an ongoing income stream (hold)?
If you are a real estate investor, it is likely you have asked yourself this question at least once. It is often said the profit on a deal isn’t made on the sale of a property, but on the purchase. Thus, it is important to have a strategy in place prior to investing in a piece of real estate.
So which strategy makes the most sense for you?
Deciding on a buy-and-hold or a buy-rehab-sell strategy depends on your region, your own personal and financial goals, the particulars of the investment in question, and a myriad of other factors.
In a recent
post in the U.S. News & World Report
blog The Smarter Investor
, Joel Cone details statistics, trends, and analysis pertaining to the real estate industry for 2015.
On the bright side, he writes, both existing and new home sales are projected to increase this year. According to Lawrence Yun, chief economist for the National Association of Realtors, the national median existing-home price will rise at a moderate 4 percent for each of the next two years, which could be good news for the buy-rehab-resell strategists.
But Yun also noted that while homeowner households have decreased by 1 million since 2010, renter households have increased by 4 million.
According to survey data collected by Auction.com, the hold-to-rent strategy was favored over buy-rehab-sell strategy nationwide but depends heavily on the type of investor, the property prices, and the region.
Executive Vice President of Auction.com, Rick Sharga, remarked that “Real estate investors appear more likely to flip a property in those regions where home values are higher. Higher prices can translate to a faster and potentially more significant short-term return on investment.” Sharga continued, “The hold-and-rent strategy seems most popular in markets where home prices are lower, allowing investors to charge a more competitive monthly rental rate and still produce reasonable returns over an extended period of time.”
Daren Blomquist, vice president at RealtyTrac, relayed some of the trends in the data his company has found. Rehabbers have become less active recently as home-price appreciation has slowed down and the volume of properties being flipped nationwide has reduced by approximately 50 percent in the last 2 years. However, Blomquist noted an interesting caveat. Although the volume of rehabbing has gone down, the average profit has remained strong. “The gross profit has stayed strong for the past three years in the 30-percent range,” he says.
So the question remains, should you rehab and sell, or hold?
Clearly there is not a singular correct answer, but we’d love to hear your opinions and experiences! Leave a comment below to weigh in on the debate.