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The Eternal Debate – Holding Vs Flipping
No matter how many property investing strategies there are, everyone of them will typically fall into one of these 2 categories. Holding and flipping. There is no absolute correct answer in black and white on which is better. The best approach to your investment depends on a lot of factors including market conditions and your overall objectives.
In case you find “flipping” a fancy word that you are not familiar with, it just means to buy property and create the conditions to sell quickly at a profit. You can do things to increase a property’s value like renovations, erecting extensions, building more rooms, etc. An extreme form of flipping can be observed from developers building and selling new launches. They buy a piece of land, create added value by building condominiums on it, and buyers buy from them at an extreme premium compared to the original land price.
Although flipping is commonly associated with speculators, they are not the same. Speculators buy and sell without adding value to the property. The only value they add is making the property they hold available for sale. On the other hand, flippers create added value by refurnishing a run down apartment to one that resembles a five star hotel.
There will always be a market for flipping. Frustrated real estate investors often play down the viability of flipping in Singapore especially now that there is sellers stamp duty. But there are always ways around rules just like a buyer can becoming a first time home buyer when he is clearly not one. If you are too lazy to get off your butt to find out how to navigate these rules, you are not really doing your job as an investor.
For flippers who have every intention to quickly do up an apartment and sell off in double quick time, market fluctuations are not really a concern as there is a very short holding period. The focus will be on increasing resale value and how long it takes for such a property to sell in the particular neighbourhood. When the market is hot, it becomes much more easier to sell.
Holding works in any market. Real estate values usually increases in value over the long term. There may be ups and downs. But if you have the capacity to hold onto it, you are very unlikely to lose money. This means that if you made a mistake in predicting short term prices, you can usually rectify your mistake by holding onto the property for a longer period when you realize your mistake. Inflation also drags prices upward along with it over time.
When to hold and when to flip?
The primary advantage of flipping is that you can cash in immediately rather than wait 10 years. For a lot of people, the quick gratification is appealing enough to flip rather than hold. You free up cash flow, get your hands on your profits, take a luxurious vacation and look out for the next target. When you hold onto too many properties to build equity, you face the risk of cash flow bottlenecks if your income is unable to maintain them. And in declining markets, this can be a nightmare scenario every investor wants to avoid. And since flipping does not require your full time long term commitment, you can flip as much or as little you want, whenever you want. The gist is that once you sell off your properties, you effectively wash your hands off it and move on.
The main disadvantage of flipping is that it is an income for a per-job basis. Once you complete a project, your income stops. This could work in your favour if you are one of those individuals who like to fully immense yourself with work and fully relax in bursts. Just remember that it will be difficult to accumulate wealth if you continue spending the profits you make. A current home owner will also tell a flipper that he is missing out on value appreciation since Singapore property values are rising like there is no tomorrow.
The main advantage of holding comes intuitively. It is an avenue of long term wealth accumulation. I guess no stakeholder in Singapore properties needs to be reminded on how explosive prices have been in recent years and how tenaciously vengeful prices are to cooling measures. Another advantage is that you can alleviate cash flow problems by cashing out your equity with a term loan. Once you fully pay off the property, you can look forward to a continuous stream of rental profits.
The big disadvantage of holding onto properties is that you are holding onto a less liquid asset. Unlike stocks that can be liquidated almost immediately, properties take time to get on the market and transact. The stress of managing weird disgruntled tenants can also be a deal breaker for a lot of potential landlords. There is also the small matter of continuous charges from agents to find new tenants, legal fees for tenancy agreement work, maintenance fees to upkeep the property, property tax, etc. Vacancies will frighten you like a horror flick as well.
Go for holding or flipping?
This really depends on your personal goals and how you view the property. Some questions to ask yourself to find out which strategy to use include:
Is a short term windfall or long term cash flow more important?
How will your taxes be affected with both strategies?
Will rental be able to feed the expenses associated with holding?
Do you have a strong cash reserve to withstand market shocks when holding?
Do you really want to get into the people business of managing tenants?
What is your personal outlook of short and long term market performance?
Flipping houses is extremely popular outside Singapore. A lot of real estate players started out by flipping and gradually move on to bigger projects. Some people just don’t like the matter of dealing with tenants. Some just see it as a side income or just an annual undertaking.
Markets move and sometimes it can create conditions clearly favourable to either of these strategies. Review your approach to each property and have an exit strategy in place.