Are you considering getting into real estate investing? You may have heard about rental properties and house flipping, but which one is the better investment strategy?
I’ve partnered with a local flipper in Phoenix and have been in long-term rentals for many years. Flipping can be exciting, given the fast pace. 🏃♀️🚀🌟 But…. is that the right strategy for you?
In this blog post, I’ll explore the differences between renting vs flipping, the pros and cons of each investment strategy, and how to determine which one is right for your investment goals and risk tolerance. Let’s get started!
Key Takeaways
- Consider your investment objectives, risk acceptance, and desired income type when deciding between renting or flipping properties for a successful real estate investing strategy.
- Flipping houses offers fast returns but is a lot of work while renting provides steady passive income with potential property value appreciation and tax benefits.
- You can combine both strategies to maximize profits while minimizing risks.
Understanding Renting and Flipping
Real estate investing is an excellent way to build wealth and diversify your investment portfolio. Two of the most popular strategies in this field are renting properties and flipping houses. But what are the differences between these two approaches?
While the debate of flipping vs renting involves different strategies, renting focuses on purchasing and holding properties to generate passive income through tenants or guests, while flipping houses entails buying properties at a low price, making improvements, and selling them for a profit.
Each strategy has unique advantages and disadvantages, affecting how they generate income.
- Renting properties can offer a consistent income over time, and I like this strategy — especially if you are busy and don’t have time to focus on real estate investing full-time.
- Flipping houses is more labor-intensive but can result in quicker and larger returns.
To decide which is better for you, consider your investment objectives, risk acceptance, and personal preferences.
BTW…. here is a simple home fix I did. This is a bit of a combined strategy – wholesale deal and then long-term rental.
Renting Properties
Renting properties is a great strategy that revolves around the buy-and-hold method. You purchase an investment property and hold onto it. The real estate investor can generate a consistent passive income through rental fees from tenants or guests.
You can self-manage the properties like I did with my long-term rentals, but if you want a more hands-off approach, you can hire a property manager. The property management company or property manager supervises the property’s upkeep and deals with tenant issues.
Renting properties can be a solid investment strategy for those who prefer a more hands-off approach and desire long-term, continuous, passive income. Properties can vary greatly, and factors like location, property type, and local market conditions can significantly affect this strategy’s success.
For buy-and-hold investors, the past several years have been excellent. Market rents have risen in most markets, and low housing inventory has helped increase appreciation. Consider Phoenix as a case in point. In 2021, rental rates soared with a growth of over 27%. Although the growth rate slightly declined in 2022 and into 2023, rental rates remain significantly higher than in previous years.
Flipping Houses
On the other hand, flipping houses is a more active investment strategy, involving buying properties at a low price, making improvements, and selling them for a profit. This approach requires hands-on involvement, as the investor is typically responsible for managing the renovation process, budgeting, and ensuring the property is sold within a reasonable timeframe (usually around six months).
Flipping houses can be attractive for those who enjoy being directly involved and have the skills and expertise to improve properties for a profit. It is worth noting that flipping houses generates active income, as it requires the investor’s direct participation and effort in the process, unlike the passive income generated through renting properties.
Comparing Active and Passive Income
You’ll want to know the differences between active and passive income to choose between flipping houses and renting properties. Active income is earned through direct participation in a business or investment, such as flipping houses, where the investor is hands-on in buying, renovating, and selling properties.
Passive income, on the other hand, is generated without requiring direct involvement, as seen in the case of rental properties, where the investor receives rent checks monthly with minimal day-to-day management.
Each income type has its benefits and drawbacks. Though flipping houses for active income can yield faster returns, it often requires more effort. It also carries more risk, whereas renting properties for passive income doesn’t need as much daily management and gives you a steady cash inflow.
Active Income from Flipping
Investors find active income from flipping houses attractive because of its potential for high returns in a quick timeframe. If you have (or develop) the skills, expertise, and resources to actively participate in buying, renovating, and selling, you can maximize your profits from flipping properties. This type of income also allows for more flexibility in selecting properties to flip and can provide certain tax benefits.
But….generating active income from flipping houses is not without its hurdles. It can be a time-consuming process that demands considerable effort and participation, and there’s always a risk of expensive errors and unexpected costs. You’ll need to research properties, market conditions, and investment strategies to maximize the chances of success in flipping houses.
The flipper I worked with had been active in the market for about a year and had a keen eye for opportunities. He also did minimal renovation — these weren’t HGTV makeovers, but they got the job done, and he made hefty profits from his work.
Passive Income from Renting
Passive income from renting properties is a form of investment income and offers different advantages, including:
- A steady cash flow allows you to build wealth without constant hands-on management.
- Property value appreciation, as real estate values typically increase over time.
- Tax benefits include deductions for mortgage interest, property taxes, and insurance.
Despite its advantages, passive income from renting properties also has its drawbacks, such as:
- The initial investment required to purchase a rental property can be substantial.
- Investors may face ongoing costs for maintenance, repairs, and taxes.
- Generating passive income from renting properties involves finding quality tenants and managing tenant-related issues, which can be time-consuming and challenging for some investors. Here’s a little piece of advice from my own experience… set your rental guidelines and carefully screen your tenants.
Pros and Cons of Flipping Houses
Flipping houses has pros and cons. The benefits of flipping houses include the potential for quick profits and the absence of long-term property management responsibilities. This allows investors to focus on the buying, renovating, and selling process without the ongoing concerns of property maintenance, tenant management, and rent collection.
However, flipping houses also comes with its challenges like…..
- High costs
- Inconsistent income
- Tax implications
- A riskier business which involves purchasing properties that may require significant repairs and improvements.
- Navigating the uncertainties of the housing market.
These challenges stop some investors from pursuing this strategy. In my case, I partnered with a flipper because I didn’t have the time to manage these types of projects, but I loved the opportunity to refresh homes and make serious cash.
Advantages of Flipping
Flipping houses can be attractive if you are looking to make a quick profit in real estate investing. The strategy works by purchasing properties at a low price, making improvements, and selling them for a profit.
Investors can potentially see a significant return on their investment within a short period, typically six months or less. This active income strategy also allows investors to take advantage of their skills and expertise in the real estate market and their abilities to manage renovation projects.
Another advantage of flipping houses compared to renting properties is the lack of ongoing expenses associated with maintaining a rental property. Once a flipped property is sold, the investor can move on to the next project without worrying about ongoing maintenance, tenant management, and rent collection.
According to a comprehensive report by Attom, the statistics on property flipping in 2022 are quite revealing. It unveils that over 400,000 homes were successfully flipped, yielding an impressive average profit of $67,000.
Disadvantages of Flipping
Flipping houses comes with challenges and risks despite the potential for significant returns. One major drawback is the potential for high costs, including expenses related to purchasing the property, making repairs and improvements, and transaction costs.
The income generated from flipping houses can be inconsistent because it depends on the successful sale of the property. Selling a property fast and at the price point needed is influenced by the housing market and the investor’s ability to assess the property’s value and potential for profit accurately.
Another notable disadvantage of flipping houses is the tax implications. Taxes can be substantial and reduce the overall return on investment. When selling a property, it is important to factor in paying regular income taxes and capital gains tax. This will typically total 15% of the sale price. The duration of ownership of a property determines how much tax must be paid. Generally, if the property has been owned for less than a year, only your regular income tax percentage must be paid.
Pros and Cons of Renting Properties
Renting properties as a real estate investment strategy also has pros and cons. The advantages of renting properties include a consistent income stream, potential for property value growth, and tax incentives. You can generate passive income through rental payments by purchasing and holding properties, offering financial stability and long-term wealth building.
However, there are also potential risks and challenges associated with renting properties. These include:
- The risk of vacancy, which can result in lost income.
- The need to manage tenants and handle any tenant-related issues that may arise.
- Ongoing maintenance costs, such as repairs and property taxes, can impact the overall profitability of the investment.
Advantages of Renting
Renting properties provides a consistent source of income through monthly rental payments from tenants. This steady cash flow can be attractive for investors looking for long-term financial stability and wealth building.
In addition to the rental income, renting properties can offer the potential for property value appreciation. As real estate values typically increase over time, investors can benefit from the growth in property value, which can further enhance their investment returns.
Owning a rental property comes with tax benefits, such as the ability to deduct mortgage interest, property taxes, and insurance, which can further improve the overall profitability of the investment.
Disadvantages of Renting
Some of the primary risks associated with renting properties include:
- Possibility of vacancy: When a rental property sits vacant, the investor loses out on potential rental income, which can negatively impact the overall profitability of the investment.
- Finding quality tenants: Finding reliable and responsible tenants who will pay rent on time and take care of the property can be challenging.
- Managing tenant-related issues: Dealing with tenant complaints, repairs, and other issues can be time-consuming and stressful for some investors. Oh boy, do I have some stories here from owning apartment complexes!!!!
These challenges should be considered and managed by rental property owners to have a successful rental property investment.
Another disadvantage of renting properties is the ongoing maintenance costs that come with owning a rental property. These costs can include repairs, upgrades, and regular maintenance to keep the property in optimal condition.
You should be prepared to manage these ongoing expenses, which can impact the overall profitability of your investment.
Analyzing Investment Goals and Risk Tolerance
Assess your investment objectives and risk tolerance to identify the most fitting strategy between renting and flipping. Factors to consider between the two strategies include your preferred approach, capacity to undertake projects, and the differences in active versus passive income.
If you prioritize short-term gains and are comfortable with a higher level of risk, you may prefer flipping houses. If you want long-term, consistent income and are willing to invest in property management, renting properties is more appealing.
Short-Term vs. Long-Term Goals
Be clear about your short-term and long-term goals to set investment objectives and criteria. Short-term goals typically involve achieving returns within a year or less, while long-term goals focus on building wealth over a more extended period, such as five years or more.
If you have short-term goals, you may lean more towards flipping houses since this strategy can provide quick returns on investment. On the flip side, if you have long-term goals, you may lean towards renting properties since this approach provides consistent income and potential for property value appreciation over time.
Risk Tolerance and Investment Strategy
Assess your risk tolerance and investment strategy to help you decide between renting and flipping properties. Risk tolerance refers to your capacity to tolerate the potential losses associated with investing, while investment strategy refers to the plan you formulate to achieve your objectives.
Investors with a higher risk tolerance may be more comfortable flipping houses since this approach involves greater uncertainty and the potential for high costs. If you have a lower risk tolerance (like me!!), you may prefer renting properties that provide a more stable and consistent income despite tenant management challenges and ongoing maintenance costs.
Case Studies: Successful Renting and Flipping Investors
Successful real estate investors have chosen renting or flipping strategies to build their portfolios.
For example, some investors have succeeded by focusing on single-family rental properties, house hacking, or using the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat). Others have opted to specialize in flipping properties, leveraging their skills and expertise in the real estate market to maximize profits.
In each case, these successful investors have prioritized core investments, specialized in a particular field, and stayed updated on relevant industry information to achieve their objectives.
Combining Renting and Flipping Strategies
You may want to combine these strategies to form a diversified real estate investment portfolio. If you do both, you’ll have short-term gains from flipping houses, which you can then take that income and buy a long-term rental property.
To successfully combine renting and flipping strategies, research the local market, locate suitable properties (💥tip!! work with wholesalers), and formulate a plan for the best use of each property. Some ideas are:
Tips for Getting Started in Real Estate Investing
If you’re a newcomer to real estate investing –research the market, understand potential risks, and establish a budget before starting. You should also seek a mentor or connect with experienced investors for valuable insights and guidance as you begin your investment journey.
Consider the following for your financial strategy.
- Your budget
- Your income
- Your expenses
- The costs associated with investing in real estate, such as taxes, insurance, and maintenance
Research financing options like hard money, conventional, or DSCR loans and determine the most suitable for your needs.
Summary And My Experience
Renting and flipping properties offer unique advantages and challenges for real estate investors. Renting properties can provide long-term, consistent income and potential property value appreciation while flipping houses can yield quick returns with hands-on involvement.
From my experience, I’ve found that long-term rentals offer a reliable and steady stream of income. However, the larger paychecks typically come from selling these properties after they’ve appreciated in value or from flipping homes. 🏡That being said, the consistent income from rentals is certainly not something to overlook.
Regardless of the chosen approach, thorough research, networking with experienced investors, and sound financial planning are the steps to success in real estate investing.
Frequently Asked Questions
Is it better to be a landlord or flipper?
Flipping is likely the better option for short-term investors, whereas landlords may have more success in the long run. Ultimately, your needs and goals should be weighed when deciding whether to flip or rent.
What is the 70% rule in house flipping?
The 70% rule in house flipping is a guideline that advises investors to pay no more than 70% of a property’s after-repair value minus the cost of repairs to maximize their chances of making a profit.
Why is property flipping illegal?
Property flipping is illegal because it can involve fraud, such as false representations regarding the condition and value of the property, to make more money from its resale. Unlawful schemes may also be involved, necessitating consulting a real estate lawyer beforehand.
What is the average salary of a house flipper?
On average, house flippers can make up to $117,372 a year when looking at reported income for 2020 across the entire US. This is based on an average profit per flip of $68,847, or equivalently, around $69,000 annually for one deal per year. However, experienced house flippers can easily make more by completing multiple flips in the same year.
What is the main difference between renting and flipping properties?
The main difference between renting and flipping properties is that renting involves generating passive income from properties held over a period of time, while flipping involves buying low and selling high to make a profit.
Nic
Nic is an avid real estate investor who partners with her husband on hotel syndications. Prior to hotels, she owned apartment complexes and single-family homes. Her insider expertise makes her the ideal resource for those seeking to grow their income via property investments.