Renting vs Flipping: Real Estate Investing
If you’re looking to make a return on a real estate investment, flipping and renting are two ways to do so. It can be difficult to determine whether you should flip a property or hold on to it and rent it out; there is not always a clear answer. The best method depends on your individual situation, your available resources, your overall goals, and the current market for real estate.
Here we’ll cover the major differences, benefits, and drawbacks of each method, so you can determine which one might be right for you.
Active and Passive Income
One of the biggest differences between flipping and renting properties is that flipping provides active income, while holding a rental property can offer passive income.
Active income is money you receive in exchange for your labor. Making an hourly wage or a salary at a job is active income. Flipping properties offers active income because it requires labor to find a property, purchase and insure it, manage contractors or perform renovations, etc. Flipping properties isn’t just an investment strategy like buying stocks, it requires significant time and energy.
Passive income is money you earn from an investment continuously over time, even without performing labor. When you own a rental property, you continue to collect rental income each month as long as the property is filled. Of course, managing a rental property takes considerable time and effort, but in most cases, you should opt to hire a property manager to handle maintenance, property marketing, rent collection, and other associated tasks.
There are two major strategies for buying and selling properties to turn a profit. Most properties that are flipped combine both of these strategies.
The first strategy is buying a property below its market value. Properties are usually obtained below market value when the property owner can no longer manage or keep the property and needs to sell quickly, or when the property is overleveraged and at risk of going into default.
The second strategy is buying fixer-uppers, or purchasing a property and investing in significant renovations or updates to the property to increase its value.
Both of these strategies require finding a property with right opportunities for value enhancement, which is typically not something that can be done consistently in the long run. Flipping properties is usually considered a tactical strategy rather than a long-term investment.
- Fast return on your investment: With buying and selling properties, you get a return on your money in a relatively short time. The average time to flip a house is about 6 months.
- Can be a safe investment: In general, real estate investments are considered safer than stock market investments. Flipping a property is considered a safer investment because it keeps capital at risk for less time.
Cons of flipping:
- Taxes: A fast return of your money from selling properties can cause a sudden income boost that can raise your taxes.
- Costs: Flipping properties requires a high amount of cash flow for purchasing the property and investing in renovations; transaction costs can add up as well. This is a big consideration to make especially if you want to rely on flipping properties as your main source of income.
Holding and Renting Properties
Buying and holding onto a property is a common real estate investment for a variety of reasons; many people prefer to hold on to a property because it can serve more purposes than just an investment. A home offers a place to live for you or someone you know, or a place to stay for some months out of the year.
Pros of renting:
- Passive income: As stated before, renting out a property offers a steady ongoing income as long as the property is filled.
- Increase in value over time: In the long term, the real estate market continually grows, meaning the longer you hold on to a property, the more it will increase in value. This is especially true if you were able to buy during a buyer’s market.
- Taxes: Rental properties are taxed as investment income at a lower rate. You also will be able to write off expenses involved with managing the property, so renting out a property offers significant tax benefits compared to flipping.
Cons of renting:
- Vacancies: Your rental property will only generate income while it is rented, and vacancies are inevitable and unexpected. You need to be prepared to still pay the expenses on the property in the event that it remains vacant for some time.
- Management: All of the jobs involved with property management are time consuming and cost money. A strong property management company is necessary to ensure the success of your rental property.
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