Buy And Hold? HML? Flip? Which Option Is Best?

[John Thedford]

As an investor, new or seasoned, we have various options for our strategy. Some may use a multifaceted strategy, and others may prefer a single avenue (though that may change over time).
I want to give a few ideas and thoughts about three strategies, their differences, and then find out what others would like to add.

My original foray into investing (in the last five years) was as a HML. Returns can be very high, and if done properly, risk can be minimized. The reason HML may NOT work for some investors is lack of cash. Also, state laws vary on HML. Some require licensing. Some allow great returns, and other states may not. The advantage of HML over flipping or buy and hold is, IMO, much less work. Start up your buy and hold portfolio, and you will deal with tenants, toilets, evictions, and more. Buy and hold is a LOT more hands on than being a HML. The biggest difference for HML and flippers if finding that steady stream of profitable opportunities to rehab and resell. HML can be a great way to make money with little time or knowledge. You may find a HML fund that pays a great return. They do the work, and you make the money. This isn't a bad way to make a living but you gotta have cash!

Flipping profits can be FAST and sometimes very high. They can far outweigh HML returns, but they are generally LOTS more work. Another downside to flipping is taxes. Flipping as well as HML income are both taxed as ordinary income. Buy and hold, and Uncle Sam will give you better treatment. Flippers can often find OPM to fund their ventures. Flipping can be a great way to build quick capitol to put to use in other manners, or increase your number of flips. One of my good friends is doing probably 50 flips a year and he is borrowing from me to work some of them. He makes a LOT more money than I do as a HML, but he has to work hard! He also have to find a stead stream of workable deals or he is out of business.

Buy and hold has the best tax treatment. One can often find OPM to build their portfolio. The downside to buy and hold is landlording, and the slow dollar as compared to the quick quarter that flipping may pay. There are other benefits to buy and hold. That 100K house you bought three years ago may be work 135K today. That money IS tax free if you continue to hold (but is not realized) or you can 1031 out and keep the gain tax free. Actually, it doesn't matter what something is worth UNLESS you realize the gain-it could drop like the 2007 RE market tomorrow and there went all your profit. Buy and hold is more "sexy" than HML or flipping, and you can drive past your house 100 times with different friends saying "look what i own":) There is nothing like playing Monopoly with REAL money and REAL estate:)

In closing, consider these three strategies, their pros and cons, and which one may work for you. As time passes, you may find yourself taking advantage of one, two, or even all three at the same time. There is no "right or wrong way" to invest in real estate, only what is right or wrong for each of us.

Here's to success!