Buy and Hold for Cash Flow, or Fix & Flip for Immediate Return; What’s best for you? 

Published January 18, 2012

Have you ever been in a conversation with someone, thinking you were talking about the same thing, only to find out that instead, you were using similar language to describe two completely different ideas or events?  Well, that happens all the time when people talk about real estate investing and real estate investors.

Some real estate investments are based on long term value, while others are based on speculation that a property can be flipped to create a quick profit.  Obviously, they are both investments, but the investor’s strategy, as well as the target property to be acquired, are going to be totally different.  As a starting point, let’s look at recentCalifornia history as it relates to real estate investing.

For much of the last 40 years, appreciating real estate prices have rapidly outpaced lease rates.  Because of this, those who wanted to purchase for long term cash flow had to invest a very large down payment (generally beyond 50% of the purchase price) in order to create a reasonable monthly cash flow.  As a result, many long term investors in rental property were counting on two additional factors in order for their investment to make sense; 1) Appreciating value of the property and 2) The ability to Depreciate the property for tax purposes.

NOW, we are seeing a major change in the Southern Californiamarket.  For the first time in decades, economists are saying that the cost of renting is comparable to the cost of owning a home.  In fact, in many areas the monthly cost to rent is more!  Additionally, according to ChapmanUniversity, rents here in OrangeCountyare projected to rise at a 4% – 5% annual rate for the next few years.  At the same time, the acquisition cost (down payment and closing cost) and the monthly debt service (based on record low mortgage interest rates) have driven the cost of owning investment property much lower.  The bottom line is that now is a great time to purchaseSouthern California rental property as a long term hold.

Remember the old axiom, “Every dark cloud has a silver lining.”?  Well, the paragraph above describes a very silver lining for today’s cash flow driven investor.  The exact opposite was true for much of the last 40 years.  During that time we had several periods of extended double digit inflation inSouthern Californiareal estate values, making it very difficult for cash flow investors, but a field day for speculators.  As a result, Flipping property became a wonderful opportunity for many short term investors.  There were even popular television shows, featuring celebrity real estate investors showing their daily trials, tribulations and triumphs.  Today, however, Flipping property has become a much more risky venture.