“Flipping” a property—that is, buying a property then reselling it after some time has passed, usually after installing upgrades—is popular amongst beginner and seasoned investors alike. However, there are cases when it makes more financial sense to hold on to your property instead of flipping it.
The question of flipping versus holding does not have one correct answer. It all depends on trends and numbers.
Market Trends
When asking this question, far more important than national economic indicators are the conditions of your local real estate market. Deciding whether to flip or hold on to a property requires a thorough understanding of real estate trends in your area.
Factors like job and income growth, past and forecast trends in home prices, housing affordability, demographic shifts, pending legislation, zoning laws, future development plans—even the growing impacts of natural disasters—must be carefully scrutinized.
While by no means exhaustive, the following list provides some pointers:
- Hold on to rental properties located in stable markets, especially ones which have had solid tenants for several years.
- Consider flipping a rental property located in an area which has experienced runups in home prices for several years and that could be reaching peak value. Then, through a tax-deferred 1031 Exchange (link to Investors: Defining A 1031 Exchange), you could acquire a new income property in neighborhoods that still have room for further appreciation (link to Investors: Where Are The Best Local Places To Invest?).
- Consider flipping out of areas under rent-control and shifting your investments to unrestricted localities. Also, keep an eye on pending legislation intended to increase housing supply.
- Areas increasingly prone to damage by floods or wildfires could experience higher insurance premiums and deductibles in the future. Consider flipping in areas less susceptible to natural disasters.
- Neighborhoods experiencing growth in crime are likely to experience decreased demand and lower rental prices. Keep your finger on the pulse by frequently assessing the crime rate in your area.
- Keep a close watch on future development plans which could increase the housing stock and drive rental prices lower in the areas where you own income properties, and consider flipping those assets for real estate in areas with more restrictive zoning laws.
- A deteriorating school district, both in educational achievement and finances, can trigger an exodus of families seeking better schools for their children and depress the real estate market in the troubled area. Stay current on local school news.
The Numbers
All things being equal, deciding whether to flip or hold will require a thorough financial analysis. This means you should compare the profitability index of each set of numbers.
Our comprehensive online research has found the following tools to help you run such analysis:
Fix-&-Flip Analysis and Reporting Tool
Taxes
Incorporating the tax treatment of both flip and hold strategies is crucial to your comparative analysis. Click here for a summary and examples.
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Julie and her team of experts are ready to help you achieve your investment goals, and we look forward to helping you with any real estate investment questions you may have.
Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.
The information in this post is being provided for informational purposes only and not for the purpose of providing tax, legal, or real estate investment advice. No liability is assumed by Julie Tsai Law or Compass Realty with respect to such information.
