Is it better to flip or rent out investment properties in the US housing market 2020? Flipping vs renting is a debate that has continued for a long time among real estate investors. While both are viable strategies for making money in real estate, flipping or renting each comes with its own pros and cons. So to help you decide, we’ve compiled a list of those pros and cons in one place.
What Is the Main Difference Between Flipping vs Renting Houses?
The main difference between flipping vs renting is that renting out, often referred to as the buy and hold real estate strategy, can earn you a passive income under the right circumstances, while the fix and flip real estate strategy generates an active income. Passive income refers to money that comes in every month whether you are working or not. On the other hand, active income requires active management, participation, and oversight.
When flipping houses, your earnings are limited to the number of flips you do. Even though you might not physically do the repairs, you will still have to find houses to flip, get your plans approved by the authorities, coordinate with the contractors, set a budget and timeline, buy the insurance, and oversee the project. And all of this will have to be repeated over and over again for you to keep making money. However, when you buy and own real estate rentals, you just need to put in some work up front and then collect rent every month. As long as you keep vacancies to a minimum, the income will keep coming until you sell the rental investment property.
What Are the Benefits and Downsides of Flipping vs Renting Property?
Pros of Flipping Houses
- Ability to make a lot of money quickly – The average timeframe for flipping a house is three to six months. Therefore, if done properly, you can make money flipping houses within a very short time. For example, if you completed five flips annually making $30,000 per flip, you will earn a cool $150,000. Making such a return on investment with rental properties would take a very long time.
- Short-term real estate investment – Though it involves dealing with a lot of different elements and even a lot of different people like real estate agents, contractors, and inspectors, at the end of the day, house flipping is a short-term real estate investment. Within a few months, the project will be done and you can move on to something else. You don’t have to be concerned about long-term management activities such as finding tenants, collecting rent, and handling evictions.
Related: 8 Best Practices for Flipping Homes for Maximum Return on Investment
Cons of Flipping Houses
- Inconsistent income – Though real estate investors can make a lot of money flipping houses, the income is not consistent. This could mean going for months dealing with negative cash flow.
- Higher taxes – When a house is sold for more than what it was bought for, real estate investors are required to pay a capital gains tax. This tax varies depending on the time the investment was held. Profits from flipping homes are taxed as ordinary income, which is usually higher than taxes on rental income.
- Subject to housing market vagaries – The strategy of flipping property assumes that making improvements will boost the value of the house enough to make a profit. However, real estate appreciation is dependent upon the prevailing market conditions. If the real estate market slumps, investors might end up flipping houses at a loss.
- Unexpected repairs can be costly – Unexpected repairs on distressed properties are some of the risks of flipping a house. Contractors might do a shoddy job, take longer than expected or leave before finishing the work. This could result in the loss of lots of money, thus hurting the final return on investment.
Pros of Investing in Rental Properties
- Cash flow – This is probably the greatest advantage of renting out a house. Since rentals are long-term investments, they can offer real estate investors passive income over time. Making money with rental properties contributes to building wealth and financial freedom.
- Tax advantages – Rental income property investors can write off expenses such as maintenance, repairs, property management fees, mortgage interest, and property taxes. In addition, they can depreciate the house over a period of ownership. Depreciation deducts a percentage of the home’s value over time due to wear and tear.
- Property Appreciation – This refers to the increase in an investment property’s value over time. In most cases, condos, multi-family homes, and single-family homes become more valuable the longer they are held. Property owners can, therefore, make a good profit if they decide to sell their income property in the future.
- Less risk in a recession – Even if the property loses value in a recession, cash-flowing assets like rental properties will continue generating income for owners.
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Related: Why Multi-Family Homes Are the Best Recession Proof Investments
Cons of Investing in Rental Properties
- Long-term property management – Not everyone can be a landlord. Advertising rental property, finding tenants, handling repairs, and dealing with evictions can be difficult. While you have the option of hiring a professional property management company and earning a passive rental income, it will mean cutting your profits every month.
- Risk of vacancy – Vacancy is a normal part of owning buy and hold real estate. The duration in which property remains vacant can range from weeks to months. A long period of vacancy will mean a much lower return on investment.
Related: 7 Tips to Avoid a High Rental Vacancy Rate
Flipping vs Renting: Which One Is the Better Real Estate Strategy?
Flipping vs renting out houses: Which is better and why?
The bottom line is that flipping houses is not investing but speculation. Real estate speculation involves undertaking risky financial transactions and expecting to make a return based on market fluctuations. Therefore, though flipping can make you lots of money in the short term, it can also backfire and leave you with heavy losses. Buy and hold real estate, on the other hand, is a long-term investment strategy. Though you might not earn much immediately when owning a rental property, you are assured of a consistent source of income for many years. Therefore, in the flipping vs renting debate, the verdict is that buying rental properties is the best real estate investment strategy for 2020 and beyond. However, before purchasing a rental, make sure you have what it takes to be a good landlord.
An Alternative Real Estate Investment Strategy: Flipping + Renting
When thinking about flipping vs renting, did you know you could decide to combine the two strategies? If you don’t have enough cash for buying rental property, you could decide to flip one or two houses to raise the required capital. As flipping houses means buying cheap investment properties for sale, it can fit your budget better. This allows you to enjoy the benefits of both renting and flipping houses.
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