Spring 2020

There are two key strategies property investors use to make money over the long term, ‘Buy and Hold’ or ‘Buy and Flip’.

The actions you’ll take as you set out as a property investor depend on which of these strategies you’ve decided to use.

Here are the differences, and some pros and cons.

• ‘Buy and Hold’ involves investing in a well maintained (‘tidy’) property and holding it for the long term – making money as properties increase in value.
• ‘Buy and Flip’ involves investing in a property that needs some work, doing renovations on the property, and then either selling it straight away, or holding it for the long term.

One strategy is not better than the other. They will both make you money over the long term. The question is: which is the right strategy for you?

Buy and Hold Investing

PROs

• It’s the least time-consuming
• It’s the most accessible
• It’s the least risky

CONS

• But it takes you longer to build equity

Why investors like ‘Buy and Hold’

There are three key reasons investors tend to like the ‘Buy and Hold’ strategy:

1. It’s the least time-consuming

‘Buy and Hold’ investing is typically a ‘hands-off’ strategy. This is because it doesn’t need you to do maintenance or repairs to the property.

Because the property investors who choose the ‘Buy and Hold’ strategy are looking for a hands-off investment, they’ll bring in the professionals to help them manage the investment.

At a minimum, this usually includes a property manager, who will look after and tenant the property for the investor.

2. It’s the most accessible

‘Buy and Hold’ investing is the more accessible of the two strategies. This is for two reasons.

This strategy needs the least amount of upfront money (capital) to get started. It also needs the least amount of background knowledge of the property or building sector.

Why?

Because when you execute a ‘Buy and Hold’ property investment strategy, you only need the upfront capital to buy the property.

However, when you execute a ‘Buy and Flip’, you not only have to buy the property, you also need money to upgrade and renovate it.

A bank won’t lend you that additional money, so you’ll need to already have that money on hand, as well as your deposit.

This is why ‘Buy and Hold’ is more accessible from a financial perspective.

On the background knowledge front, to execute a ‘Buy and Hold’ strategy, you only need to know how to identify the right type of properties to buy – and where to find them.

However, to execute a ‘Buy and Flip’, you’ll need to know all that and more. For instance, you’d need to know the types of renovations that will add to the value of the property, cost-effectively; how to carry out those renovations; and where to source building materials.

3. It’s the least risky

‘Buy and Hold’ investing is also considered the least risky. That’s for both the reasons I’ve mentioned.

A ‘Buy and Hold’ doesn’t need any extra capital for renovations, so less of your money is at risk when you invest in the property.

As well, some properties that make great ‘Buy and Hold’ investments (like brand-new properties) need smaller deposits from the bank to purchase. This also limits the amount of capital you have to risk to become a property investor.

Because there’s less background knowledge needed to execute a ‘Buy and Hold,’ you’re less likely to mess it up, or spend money in areas that don’t make the property go up in value.

The drawbacks of ‘Buy and Hold’

The main drawback of a ‘Buy and Hold’ property investment strategy is that it takes time for the property to go up in value.

This is because you are relying on the market to increase the value of the property over time – which is a ‘passive’ strategy. Passive means you’re investing and waiting.

‘Buy and Flip’ is more active and you have the chance to increase the value of your property more quickly in the short term.

What it takes to be successful as a ‘Buy and Hold’ investor

1. Buy a property that’s going to go up in value over time. Because 'Buy and Hold’ investors rely on the market to increase the value of the property over time, to run a successful ‘Buy and Hold’ you need to make sure your chosen property’s likely to go up in value over time.

This means investing in the right location and the right type of property, where both have the potential to grow.

2. Make sure you can hold the property over the long term

‘Buy and Hold’ investors rely on the property market to increase the value of their investment, so you need to make sure you can afford to hold onto the property over 10 or more years.

This is because – depending on how your property is structured financially – your investment may need a cash contribution into the property’s bank account each week.

If that’s the case for your investment and you can’t afford to keep the property for 10 or more years, then you may be forced to sell early. This would mean missing out on the gains that you wanted to get in the first place.

Who is the ‘Buy and Hold’ strategy right for?

Most New Zealanders will find that ‘Buy and Hold’ is right for them. This is because it needs no background or specialist knowledge, and requires the least amount of money to get started.

Why investors like ‘Buy and Flip’ investing

Ironically, the ‘Buy and Hold’ strategy is the path most Kiwis decide to go down, but the ‘Buy and Flip’ strategy is the path most Kiwis think about going down.

This is because it’s the most publicised investment strategy. Just think of all the renovation shows we see on TV and enjoy watching – The Block, Grand Designs and Changing Rooms.

And, to some degree, we’re probably inspired by other ‘turnaround’ shows, like Gordon Ramsay’s Kitchen Nightmares and The Hotel Inspector.

As good as the ‘Buy and Flip’ strategy looks from the comfort of our couches, you have to respect the strategy and understand what it needs to be successful at it.

Buy and Flip Investing

Pros

• Creates equity right away
• Greater personal satisfaction

Cons

• Projects go over budget
• Higher risk and easier to mess up
• Takes time
• Less accessible
• Limited location

What 'Buy and Flip' investing is

When you use a ‘Buy and Flip’ strategy, you’ll invest in a property that could increase in value with some building work, repairs, or cosmetic upgrades.

Investors can then either resell the property immediately after buying it, which is the ‘flip,’ or they can hold on to it and wait for it to increase in value over time like a ‘Buy and Hold’ investor.

The main difference between the two strategies is:

1. How active you are in changing the property – doing work on the property versus not doing work on the property, and therefore:

2. The type of property you invest in – one that requires work versus one that doesn’t.

Why investors like ‘Buy and Flip’

1. Immediate increase in equity

Successfully executed, a ‘Buy and Flip’ strategy is the quickest way to get immediate capital gain (equity) within the property. That’s because ‘Buy and Flip’ is an active strategy.

With this strategy, if you paint the walls on the inside of the property, or change the carpet, you can boost its value quite quickly.

If you’re looking to rapidly create a portfolio – and want to be an active investor – then this is the fastest way to build the value of your portfolio, without having to save for another deposit.

2. Personal satisfaction: Thinking it looks good

The other reason people think about going down the ‘Buy and Flip’ path is emotional.

We all like the idea of painting a room, ending the day tired and covered in paint. It’s a bit of a Kiwi dream – being hard at work while imagining our future gains.

One prospective investor once said to us: “I’m more excited about transforming a dunger and winning Resene Renovation of the Year, than making money … although money is quite exciting.”

We may not all admit it, but there is an innate romanticism about doing a ‘Buy and Flip’.

The drawbacks of ‘Buy and Flip’

1. Projects go over budget

Sadly, many (or most?) construction projects go over-budget and cost more than investors expected.

If you’re doing a ‘Buy and Flip’, overruns have the potential to make the entire investment unprofitable, or not worth the time you’ve put into it.

For instance, if you invest in a property that needs electrical work, it can be hard to know exactly what needs to be done to fix that before you buy.

Once your tradesman starts work on the property, they might find there other, unexpected issues that need more work, time, and money to fix.

2. It’s easy to mess up, and higher risk

If you’re not a professional, it can be easy to mess up building works, repairs, maintenance, landscaping or painting by doing it yourself.

There’s a risk that the work might not be done correctly, but there’s also a risk you might ‘over-capitalise’ on the property.

That’s when you do work on the property and spend time and money in areas that don’t increase its value.

3. It takes time and can be stressful

Most renovation projects need the investor to do many of the changes and improvements themselves. This is because without your own labour, many renovation projects wouldn’t be profitable.

This means that ‘Buy and Flip’ investors need to spend a lot of their own time, outside of work, to make the project happen.

This often leads to a lot of stress and late nights for the investor and their families.That might seem fun when it’s other people doing it on TV, but it’s a lot harder to do in real life.

4. Less accessible money-wise

A bank won’t lend you the money you need to renovate or do up a property. This means you’ll need to have this cash available before you start this strategy. This is capital needed above and beyond your deposit.

This means that a ‘Buy and Flip’ strategy is less financially viable for most Kiwis to start.

5. You’ll usually need to buy a property in your city

If investors usually do a lot of the repairs and maintenance themselves, it’s impractical for them to buy outside the city they live in.

This means they may miss out on better opportunities outside their home city.

For instance, investors in remote areas or small towns can always do a ‘Buy and Hold’ strategy, because there’s nothing stopping them buying outside the city.

But if they want to flip a property, they may find it difficult if there isn’t the right stock in their town. As well, it’s likely to be impractical to travel and do a renovation themselves in another city.

It’s not impossible, but it is less practical.

What it takes to be successful with ‘Buy and Flip’

1. Find a property that you can add value to with your skills.

The first step in a ‘Buy and Flip’ strategy is finding a property that needs the repairs and maintenance that you have the skills and budget to fix or improve, and that when those changes are made will increase the property’s value.

2. Learn about the construction sector

You’ll need some understanding of the construction sector, so that you can do the repairs and maintenance the property needs. If you don’t have this knowledge already, you can start learning. A couple of resources we recommend are:

• The Property Investor Chat Group NZ – a Facebook group which has many investors who like to talk about how to improve an investment property’s value.
• Property Apprentice – a New Zealand property education company that educates Kiwis (for a fee) about how to execute ‘Buy and Flip’ strategies themselves

Who is ‘Buy and Flip’ right for?

The ‘Buy and Flip’ strategy is a good option for people with a background in construction who have the skills, expertise and a background of doing renovations.

It’s also good for investors who want to be active and hands-on with their investments, and who have the time free to do that.

How much can you afford?

Go online to the free JUNO/Opes Property Investment Guide, to find out how much you can afford.

www.opespartners.co.nz/property-investment

Definitions:

Equity: Equity in your home is the difference between the market value of your home, and the amount you owe on your mortgage.

Passive investing: In property, refers to a buy-and-hold strategy for long-term investment, with minimal selling.

Active investing: In property, refers to an investor who takes a hands-on approach and will buy with the intention of renovating and selling at a profit.

JUNO’s content comes from sources that JUNO magazine considers accurate, but we do not guarantee its accuracy. Charts in JUNO are visually indicative, not exact. The content of JUNO is intended as general information only, and you use it at your own risk.