If you’ve been considering real estate investing, you may have thought about flipping vs. renting and questioned which approach would provide you with the highest return on your investment.
The quick answer is that both of these investment kinds may be a great strategy to increase your income. But which is better, renting or flipping houses?
This article will compare the benefits and drawbacks of real estate investing vs flipping homes and explain how to choose which option is best for you and your financial objectives.
What is flipping a house?
When a real estate investor flips a home, they purchase it, make any necessary repairs or improvements, and then resell it for a profit. Your chances of generating more money increase with the speed at which you may sell the property.
So how exactly does one flip a house?
The ideal scenario is to purchase a property for less than market value, make necessary repairs or improvements, and then resell it for a significantly larger sum.
This approach is akin to owning your own company and often doesn’t need you to live on the property. You may theoretically earn more money by doing more flips and vice versa.
Who or what rents?
You are looking at a longer-term, more passive investment when you buy a rental property. So, don’t anticipate making money right now, but in general, your property could provide revenue steadily over a longer time frame.
This is an unearned income. You purchase a rental property and make sure it is in excellent shape from the beginning. Once a renter has been found, you collect rent each month.
Some owners of rental properties purchase houses to rent them out as vacation rentals, often advertising them on OTAs like Airbnb, Booking.com, Vrbo, or Expedia.
You may be wondering whether Airbnb is more lucrative than renting out real estate.
Location, rental fee, and occupancy percentage are just a few variables affecting a vacation rental company’s performance.
Although various vacation rental software solutions, such as Lodgable, make it simpler to manage vacation rentals and assist owners in building their companies, in this situation, the owners are often actively engaged in managing the properties.
What is the difference between renting and flipping a house?
The main distinction between renting and flipping homes is that renting generates passive revenue via a regular or monthly rent payment, whereas flipping homes need active management.
Flipping is considered active income, which is defined as generating revenue via regular, daily employment. It differs from other forms of investing in that it often takes a significant amount of work upfront before you can flip a property.
While you may not have to do the laborious tasks personally, you will likely need to manage the project and, for instance, get the required permits and permissions for certain activities from the relevant authorities.
When you flip a home, you only earn money when you sell it, but when you rent out real estate, you often have a reliable stream of revenue until the place is abandoned.
Which is better, renting or flipping houses?
We’ll examine some of the benefits and drawbacks of renting and flipping today to help you decide based on more complete information.
Positive aspects of flipping
a faster rate of return on investment (ROI)
You may potentially make a lot of money quickly by investing in real estate flipping as a company. The goal is normally to close a sale in three to six months, and if it succeeds, you may see a big return on your investment and generate a sizable profit.
fewer duties in property management
Since you don’t own the property for a very long time, you often don’t have to deal with the headache of collecting rent or dealing with problematic tenants. As long as the property is registered in your name, you will be responsible for paying the remodeling, marketing, insurance, and utility fees necessary to prepare it for renting.
The negative effects of flipping
Flipping could be dangerous.
You don’t have a consistent income when you flip houses, and the success of your investment depends on how the market does.
As a result, if the market is strong, you have a high chance of obtaining a big return on your investment since the property’s value may rise quickly.
The real estate market, however, becomes less predictable during tumultuous times, such as during periods of political upheaval or a pandemic, and your home may not appreciate rapidly. So if you attempt to sell it too soon, you won’t make any money.
You only make money when you flip property because, as was said before, flipping is considered active income. When you quit flipping, your revenue stops as well.
You may be subject to capital gains tax in the United States if you sell a property for more than you paid for it. Depending on how long you’ve held the property, you may have to pay more or less tax.
Compared to long-term rental properties, this investment often carries a higher capital gains tax. Compared to homes held for more than a year, capital gains tax on rentals is lower.
Making sure the home is in excellent shape and appealing to prospective purchasers is a crucial aspect of flipping. Working with contractors to remodel or enhance the property is often required.
There is always a chance that the improvements will cost more than anticipated, the contractors won’t produce what they promised, or the job won’t be done on time. Your profit margins can be impacted as a result.
Can you flip properties without any money?
Yes, to answer briefly. Several methods, such as private lenders, home equity, crowdsourcing, and wholesaling, may be used to finance your venture. These are only a few methods of getting access to other people’s money for property flipping.
For instance, private lenders often demand higher interest rates but may disburse money more quickly than traditional lending institutions, allowing you to move quickly to get a contract for flipping a property.
Another option is to take out loans with a shorter duration (usually between six months and two years) from lending organizations that focus on short-term real estate loans.
benefits of renting as opposed to flipping
Purchasing rental homes has several benefits. These include a consistent source of income, tax advantages, and a greater likelihood that the value of the property would rise over time.
continuous steady income
Once your house is rented out or your vacation rental company is profitable, you can often count on a reliable monthly or recurring income. If everything goes according to plan, this passive income may eventually grow to be more than what you spend maintaining your rental property or properties.
Property flipping revenue is subject to a higher capital gains tax rate than income from rentals that have been held for more than a year.
Tax advantages for landlords may also include the ability to write off expenses for upkeep and other aspects of property management.
Additionally, you are permitted to deduct the value of your property’s depreciation, which might result in annual savings for you.
Property value growth
Generally speaking, the longer you own a property, the more it will be worth. However, there may be exceptions, such as if the market declines or the neighborhood where the property is situated loses appeal.
Additionally, properties often benefit from inflation, so your rental income will typically rise along with inflation. The more equity you accumulate throughout owning a house, the more wealth you create.
Depending on when you purchased the property and the status of the market when you decide to sell it, you can realize a sizable profit.
What drawbacks are there to owning rental properties?
The largest danger here is if, for some unforeseen reason, your property remains unoccupied for extended periods. In the case of a seasonal vacation rental, for instance, this becomes an issue if the vacancy persists and you miss out on the regular passive income. However, it’s typical for a property to remain unoccupied for a few days or even months.
This often occurs when there is a decrease in demand, such as during a pandemic or when the rent is excessively costly. Realistic rental pricing and including prospective vacancies in the budget analysis for your rental revenue are the two most crucial ways to combat this.
Property management fees and maintenance expenses
Managing a rental home or vacation home is part of the renting process. Finding acceptable renters or visitors and maintaining the home in a manner that will satisfy your tenants or visitors are part of this. Make careful to include maintenance charges in your investment budget for rentals.
So, as you can see, deciding whether to flip a property or rent it out is best for you is not a simple choice, and there are many aspects to take into account before pursuing either of these alternatives.
Combining the two strategies is another potentially cost-effective choice worth considering, especially if you’re unsure which approach to use. For example, suppose you can’t afford to invest in a rental property. In that case, you might think about flipping a house first and using the proceeds to purchase and hold a secondary property because rental investors are permitted to borrow money against their equity.
Flipping and renting is the best choice for short-term investors looking to generate money fast.
But if you need a steady source of income and have more time and money to spare, you can think about investing in real estate as a rental.
You might potentially engage a property manager to handle the property management portion of the situation. Alternatives include using short-term rental software programs like Lodgable, which will make property administration easier.