Short-term vs. Long-term Strategy
First let's talk about real estate flipping. Flipping real estate is typically a short-term strategy. The goal is to be in and out - to buy, fix, and sell a property as fast as possible. Real estate investing, however, is usually seen as a longer-term strategy with the goal of purchasing and holding property over a number of years. You can see that one of the first distinctions between real estate flipping and real estate investing is the buyer's exit strategy and their timeframe for doing so. Of course there's no right or wrong way to go about this, it's simply a matter of personal choice whether you want the fast cash now or the long-term wealth. However, there are other differences that come up when comparing these two strategies.
Hard Money Loan vs. Conventional Loan
When flipping real estate, oftentimes a short-term loan is taken out in order to purchase the property. This is often called a "hard money loan" and is typically based on the purchase price and potential value of the property as well as the repairs that are needed to bring it up to marketable condition. These hard money loans are typically very high interest rates, but since the cost of borrowing the money is already taken into consideration when purchasing the property, the high interest rate usually is not an issue. With real estate investing, more often that not, a traditional bank loan is used to purchase the property though sometimes some type of owner financing from the seller is also used. Either way, these loans typically have interest rates more in line with the current market, making them more appropriate for holding property over the long-term.
Capital Gains
We already mentioned that the amount of time a property is held is one way to distinguish these two strategies. Another difference, and directly related to that, is the overall impact that the length of ownership has on the flipper/investor. Usually when flipping real estate, the property is sold prior to two years and therefore the seller incurs capital gains taxes. Contrast that with real estate investing, where properties are usually held for two years or more, and where the seller has the opportunity to exchange that property for another without paying capital gains. Of course the tax laws are well outside the scope of this article, but the point is that there are some distinct advantages to holding real estate over the long term versus just quick turning real estate.
It's important to consider these distinctions and talk with your legal and tax advisers prior to any purchase you decide to make. That way you'll have the best information to decide what your likely exit strategies will be, and that's one of the most critical pieces of information to have in mind as you analyze potential deals.
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