When investing in real estate, there are a number of different ways that buyers and sellers can make money. The 2 most popular methods are Buy/Sell and Buy/Hold.
Let me break it down for you:
- Buy/Sell (a.k.a. "Flip" or "House Flipping"): Most people have heard the term "flip" before, especially if you watch HGTV. This is where an investor buys a property at a low price, and then rehabilitates the home with modern finishes. After the flip is complete, the investor then resells the home for a profit.
- Buy/Hold (a.k.a. "Cash Flow" or "Pyramiding"): Investing in rental properties is quickly becoming the most popular way to invest in real estate these days. This is where an investor buys a property at a low price (it may need rehabilitation, it may not), and then finds a reliable tenant who is looking to rent. If the investor pays for the home with cash, almost all of the monthly rent will be profit. If the investor takes a loan/mortgage against the home, the profit is the difference between the monthly payment and monthly rent.
"So which way makes the most sense?" Actually, it depends on the investor and what his/her goals are. I work with some investors who will only look at properties that can be flipped for a profit. I also have other investors who are only interested in rental properties.
"If I'm interested in real estate investing, how do I know which type is right for me?" What it really comes down to are goals. Are you in real estate investing on a short-term or long-term basis? Are you paying with cash, or do you need a loan/mortgage just to take on an investment project? Do you want a big score, or consistent income on a monthly/yearly basis?
These are the types of questions I ask before advising any investor on what might be best for them. This article should also help explain why more investors today are interested in Buy/Hold than Buy/Sell.