Are you thinking about joining the world of real estate investment? We don’t blame you. Investing in real estate has the potential to earn you massive wealth, become your own boss, and create the life you’ve always dreamed of. However, getting started in real estate investment can be tricky, especially deciding how you’d like to start. Two of the best ways to invest in real estate are owning rental properties or flipping homes and earning a profit when selling. Both reap their own benefits, but is it better (and more profitable) to flip or rent out a property?
In this article, we’re discussing exactly what goes into flipping vs renting. We’ll dive into the pros and cons of each and help you decide which path is right for you. Keep reading if you’re interested in investing in real estate but don’t know if you should flip or rent out a home.
House flipping is the process of buying a home or other type of residential property at a low price, fixing it up, and selling it for profit. When purchasing a home for the purpose of flipping it, it’s essential to ensure you’re not overpaying and to spend as little as possible on repairs and renovations. Since the goal is maximizing your profit, paying a small amount upfront means you won’t lose finances after selling the home.
Flipping a home is a big commitment, often requiring massive physical labor and a decent amount of cash to make it sellable. Even if you’re not personally flipping the home, you’ll need to oversee the renovations, coordinate with contractors, purchase insurance, set a timeline, and more. Home flipping must be considered a business, not an investment.
Owning a rental property is commonly called the buy-and-hold method of real estate investment since you purchase a property and hold onto it rather than sell it. Rental properties usually don’t require as much work upfront, but there’s still a list of responsibilities you’ll need to handle. As a rental owner, you’ll need to find tenants, collect rent, maintain the property, abide by local, state, and federal housing laws, handle evictions, and more. Of course, hiring a property manager can relieve you of these responsibilities, but renting remains a longer-term commitment compared to the fast-paced nature of flipping homes.
You must also pay property taxes and homeowners fees as a rental owner. Renting real estate is a long-term investment that pays off over time rather than a business.
Flipping vs renting is different in various ways, but there’s one primary distinction between the two: passive vs active income. House flipping is an active form of real estate investing, which means you’ll be actively involved in the process, primarily by conducting renovations on the property. The income stops flowing as soon as you stop the physical labor or sell the house.
On the other hand, when owning a rental property, you’ll be earning passive income or continuing to gain profit without extensive effort. While some of the money earned from rentals may go to a property management company or taxes, a consistent flow of income is still generated monthly.
If you’re looking to generate wealth through real estate, you may ask, is it better to flip or rent? The answer isn’t as simple as you might think; it’s dependent upon your unique preferences, how you’d like to earn money, and the amount of time, money, and effort you’re willing to invest. Consider these pros and cons of flipping vs renting when making your decision:
Take into account these top pros and cons of flipping homes:
The average house flip takes about 3–6 months and 12–18 months for beginners. While that sounds like an extensive amount of time, it can be well worth it once you sell the house and make a profit from all the hard work you put into it. The faster you can renovate the space, the quicker you’ll benefit from a return on your investment (ROI)—and you can put it towards your next flipping venture. Once you’ve flipped a few homes, you’ll become an efficiency expert and receive a higher ROI.
One upside of flipping houses is that it’s no longer your responsibility after you’ve put the work in and sold the property. That means the buyer handles repairs, ongoing maintenance, and new renovations, and you can start flipping another home for profit. You won’t have to worry about finding tenants, collecting rent, or maintaining the property. Flipping homes doesn’t require you to be a landlord or pay property managers to do the work for you, which is a big draw for numerous real estate investors.
Once you’ve flipped a home or two, you can use the profit you made to purchase a new house to renovate. Additionally, you’ll start to build a trusted network of contractors and connections as you go, ensuring your flipping experience gets easier over time. As you learn and grow, there’s a massive potential to become a professional at house flipping, making it your sole source of income and using the money to fund new projects.
Flipping requires a significant amount of capital upfront. You’ll need money to purchase and renovate the home, whether you decide to do it yourself or hire help. The cost of flipping homes can quickly add up and, if you’re not prepared, can drain your savings, preventing you from continuing the renovation and earning profit.
The housing market fluctuates constantly, meaning your flipped home may not sell as soon as you’d like it to or for as much as you priced it. Additionally, if you choose to make flipping your primary source of income, you’re giving up steady, consistent income from another job. Since flipping is active income, you’ll only be making a profit while you work. It’s essential to consider if you’re in a place to give up consistent income for the instability of profit earned from flipping homes.
As mentioned before, flipping homes can take months or even more than a year, depending on the time you dedicate and your experience. If you purchase a home that’s in really tough shape, renovating it will take even longer and cost more upfront. It’s also a massive undertaking of physical labor to flip homes. If you decide to hire contractors, you’ll be tied to their schedule and availability, meaning the flipping process could take longer if they’re busy with other clients.
Here are the pros and cons of owning rental properties:
Can you imagine receiving a check in the mail every month while you don’t exert any energy to earn it? Owning a rental property means it works for you—you’ll earn card-hold cash without the hassle of renovations, which flipping homes requires. You’ll earn consistent monthly cash flow as long as your rental is filled and your tenants are reliable. And the best part? You can keep your full-time day job with a steady paycheck. When thinking about flipping vs renting, consider if you want to earn ongoing passive income or are willing and able to receive active profit at an inconsistent rate.
The longer you own your rental property, the more likely it is to increase in value, as long as you stay up to date with repairs and maintenance. Your rental investment can benefit from inflation, which means rent prices will rise, and you’ll earn a higher ROI. If you sell the property after owning it for a few years, you can benefit from a substantial return, especially if you purchased and sold it at the right time. The best time to sell your rental property is during a seller’s market, which is a time when a large number of people are looking to buy or rent homes. If you sell your investment during this time, you’ll receive a massive return and can, in turn, purchase your next rental property.
If you’d like to increase your rental property value immediately, read this article to hear our insider tips for maximizing your investment’s potential.
One major thing to consider when comparing flipping vs renting is the tax advantages you’ll experience as a rental owner. Owning a rental means you can write off expenses such as repairs, maintenance, property management fees, and more, reducing your taxable income. Perhaps the most considerable deduction you’ll benefit from is writing off the depreciation of your asset, which can save you up to thousands of dollars yearly in taxes. In contrast, flipping homes typically provides few ongoing tax deductions since profits are taxed once the property is sold, often at steeper rates.
Whether you manage your property in-house or hire professionals, maintaining a rental property adds up. If you work with a management company, they’ll often charge you a percentage of rent and other additional fees. Not only that, but necessary repairs can become expensive, cutting your profits over time.
Renting properties sounds excellent and profitable, but what about keeping your rental filled with reliable tenants? Owning a rental is an investment risk you must be willing to take. Finding a tenant and filling your rental in specific periods may be difficult. While your property sits vacant, you’re still responsible for covering and maintaining the mortgage. When considering investing in a rental property, you must account for 1–3 months of vacancy per year and add that variable into your budget.
Marketing your investment can help you avoid having a vacant rental property. This article outlines a few strategies for properly marketing your property and keeping it filled with trustworthy tenants.
Since you’ll be paid monthly by renters instead of upfront by a buyer, it might take longer to earn back the money you put into your rental property. Rental ownership is a long-term investment rather than an immediate payoff like flipping. However, it can be worth it for the benefits of passive, consistent income.
The decision to flip or rent comes down to what each real estate investor is willing to do and pay and their unique financial goals. While flipping and renting are both profitable, how wealth is generated looks completely different. If you like taking on projects and enjoy the challenge of DIY house projects, flipping may be the right step for you. If you like the idea of collecting passive income over time with less physical excursion required, rental ownership could be the perfect fit.
Considering the initial investment you’ll need in flipping vs renting is crucial. When flipping a home, you’ll need a solid chunk of cash to buy the property and complete renovations. When selling the house, you’ll earn back the money at once if you can sell it for more than what you bought and put into it. When renting out a property, you’ll need cash to buy the home but will earn that money back slowly over a more extended period without the work of renovations.
So, what appeals to you more: the challenge and active income of turning a cheap property into a home or the steady cash flow and potential of owning multiple rental properties? The answer depends on your preferences and goals.
If you’ve compared flipping vs renting and decided that rental ownership is the path you’d like to take, why not make it easier for yourself and hire professionals to manage your investment? TrueDoor Property Management has been helping rental owners generate wealth and fill their rentals for over 20 years in Southern California. Our comprehensive home and apartment management services include prompt rent collection, aggressive property marketing, trusted tenant placement, ongoing care and maintenance of your investment, and more. We ensure your rental ownership experience is seamless from start to finish. With TrueDoor’s expertise, you’ll want to add more rentals to your portfolio in no time.
With offices in Orange County and the Inland Empire, we’re eager to serve real estate investors and maximize their properties’ potential. Contact us to experience a 5-star management experience and reap the rewards of rental ownership.
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