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PHIL HARDWICK — Buy and flip or buy and hold?

Phil Hardwick

Phil Hardwick

Dear Phil:

My husband and I have an opportunity to buy a rather run-down house in a nearby neighborhood. I feel like it is just too good an opportunity to pass up. We are undecided on whether to buy it and resell it as is, buy it and have a contractor make the necessary repairs or buy it and make the repairs ourselves. What are your thoughts and advice?

 

Answer:

The first thing to do is to make certain that it is indeed an opportunity too good to pass up. To get an idea if that is the case you need to get information about what the value of the property would be after you made the repairs and then subtract what it would cost you to acquire and update the property. That is an oversimplification so let’s delve into some of the considerations.

To get an estimate of the updated value you need to learn what properties in the neighborhood and similar neighborhoods are selling for, preferably on a square foot basis. You can contact a real estate agent familiar with the area, have an appraisal done on the property or do the research yourselves. Real estate websites such as zillow.com and realtor.com can be good resources for beginning your research. Your research should result in your feeling confident that the property will compete well with others after the renovation.

Cable channel shows such as A&E’s “Flip This House” and TLC’s “Flip That House” are invigorating the house flipping concept. The timing may be right in light of so many foreclosed homes on the market at what may be buying opportunities. If you have not already do so — and I suspect that you have – watch several of these shows to get an idea of the concept of flipping. Once you have done that, stop and beware. House flipping is not quite as easy as it appears on television.

Next, it is time to decide whether you want to hire a contractor or do all or most of the renovation yourselves. If you love doing the type of repair work required, then your investment, aka sweat equity, will produce the highest return on investment when you sell. For many people the remodeling and repair work itself is the reward. I know some people who would buy, repair and sell houses even if they broke even, simply because the love the work and the process. They enjoy learning about the latest trends in design and styles and applying them to kitchens, bathrooms and living spaces. They get personal satisfaction in bringing an old house back to life and presenting it to the current market.

If you do not love the repair work then hiring a contractor or acting as your own contractor is your best bet. Just remember that doing so will cost money and therefore increase your investment. On the other hand, quality repair work done by a good contractor may result in an increase in the value of the property more than your own work would do so.

Once the house is market ready you will be a flipper if you want to sell quickly and move on to the next project or you will be a holder if you want to retain ownership and become a residential real estate investor. If the latter is the case then you are in for a round of marketing and then ownership duties.

How long do you want to hold the property? Is it for a length of time or is it until you make a certain return on your investment? Some residential real estate investors pick a certain period of time or a certain date in the future to sell the property. For example, if you need money for college five years from now when your child graduates from high school you would probably choose a time certain to sell. On the other hand, you might have a certain return on investment, say 20 percent, that when reached will trigger your desire to sell. Sometimes fate will step in and trigger a sale. An excellent unexpected cash offer, a death in the family or a disaster, for example.

Marketing residential property can range from simply placing a sign in the yard to a full-scale promotional campaign. It all depends on your local market. You might want to consider advertising that you will be taking applications until a certain date instead of renting to the first prospect that comes along. That will give you some flexibility in renting to your most desirable tenant.

As an owner/investor your next decision is whether you want to manage the property yourself or hire a property manager. If you are not suited to property management, i.e. taking care of maintenance, dealing with tenants, etc., then you may do well to hire someone to do that for you. Be aware that doing so is another expense that will affect your overall return on investment.

In summary, after determining the updated value decide whether you are a flipper or a holder. If you are a flipper then decide whether you want to do the work yourselves or hire a contractor, then put the property on the market. If you are a holder, do the same thing and then decide whether you want to be the property manager.

Happy investing.

 

» Phil Hardwick is a regular Mississippi Business Journal columnist and CEO of The Hardwick Company LLC, which provides strategic planning facilitation and leadership training services. His email is phil@philhardwick.com and he’s on the web at www.philhardwick.com.

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