Flipping vs renting is a constant debate that rumbles on amongst real estate investors. This begs the question, is it better to rent or flip houses?
While there are multiple views on this, it’s best to get your information from an expert lender. That’s where we come in. We’re here to give you the right advice for the current market conditions.
Flipping Vs Renting Houses – What’s the Main Difference?
The main difference between flipping and renting is that they provide different types of income: passive and active.
Renting out a property provides you with passive income. Passive income comes into your account whether you’re working or not. If your property has tenants, their monthly rent will become a new stream of passive income. In other words, you can literally make money while you sleep! That being said, although you’ll still need to tend to your tenants during your waking hours, renting is still considered a passive income source.
Active income is money that you earn, for example, the salary you obtain from your job. Flipping houses is very much a job and a business that you have to be ‘active’ in.
Considering flipping houses while having a day job? Keep in mind that until you’ve flipped the property, your spare time is likely to be taken up with the demands of the fix and flip. That being said, if done well, the graft will be worth it!
The Pros of Fixing and Flipping Properties
To decide whether it’s better to rent or flip houses, we need to assess the pros and cons of each. First up, flipping.
There are many significant advantages to fix and flip investments, let’s take a look at them.
Can make large sums of money very quickly
As any experienced real estate investor will tell you, flipping properties can produce a large amount of active income in a short amount of time.
The majority of fix and flips are completed in a relatively short window of time — on average, and ideadly, between six to twelve months. With the right property and with the correct amount of planning, it’s possible to make a large return on your investment extremely quickly.
Check out our guide to maximizing your fix and flip property’s ARV (after repair value) to maximize your ROI.
Easy and quick to receive funds
Flipping houses can be a great way to begin dipping your toes into real estate, as funding can be acquired much easier through hard money loans, versus other types of investments.
Hard money lenders focus most of their valuation on the subject property when determining the loan terms and amount. On the ‘flipside’, traditional lenders – like banks and credit unions – base this on the borrowers credit rating, employment status, and a number of other factors. This closes the door for a lot of first time investors. Furthermore, the amount of red tape slows down how quickly you can get the funding, not ideal if your dream fix and flip property is in high demand. Whereas hard money financing can be in your bank account within a week.
Aso, conventional lenders won’t always be able to fund renovations, however hard money lenders are often already equipped with construction loan programs that are simple to add onto your loan structure.
It’s a short term project
As stated above, the average timescale of a fix and flip project is short at six to twelve months. This is ideal for investors who don’t want to manage property long term, as once you sell the property, the project is completed.
On the other hand, being a landlord and renting out a property is a long-term investment. You need to manage the tenant’s rent payments, the ongoing maintenance of the property, and try to find new occupants when renters move out.
Want more information about fix and flip financing? Check out our fix and flip loan program.
The Cons of Fixing and Flipping Properties
Despite the advantages of a fix and flip investment, there are also a couple of downsides.
Higher Tax Rates
When a property is sold for more than it’s purchased for, it’s subject to capital gains tax. The rate of taxation varies based on the time you held onto the investment property. Due to fix and flips being quick by their nature, this can result in high taxation.
This is because Uncle Sam classifies any investment you own for less than a year and sell for a profit as ‘normal income’.
That being said, there are some creative and perfectly legal ways to optimize your taxation rates. Check out our expert tax strategies for flipping houses to learn more.
Relies on the market
Flipping houses is always a risk. For it to be successful, you need the improvements you make to increase the property value sufficiently for you to make a profit. This relies on people buying what you’re selling and a real estate market that’s growing or relatively stable.
Moreover, if the market is stagnating and your property is not selling, it can be especially daunting if you have a set window to pay back your hard money loan.
If you find yourself in this situation, speak to your lender. If they’re an experienced hard money lender, they’ll be able to advise you on your options and help find an alternative.
The Pros of Renting
Now onto the pros of renting, which also has a lot of advantages to consider.
One of the biggest advantages of buying rental properties is the long-term cash flow.
If it remains occupied, your rental property is a great way of creating passive income, building wealth, and offering you financial independence.
As you grow your rental portfolio over time, you may end up in the position where you have enough passive income to exceed your expenses.
Appreciation refers to an increase in a property’s value over time. While this isn’t set in stone, the majority of properties increase in value the longer they’re held.
As renting is typically a long-term investment, as the property owner, you can potentially cash in on that appreciation over time.
Want more information about rental financing? Check out our rental loan program.
The Cons of Renting
Despite the obvious pros of renting, there are some disadvantages too.
Ongoing property management
Renting does not allow you to cut ties with the property in the same way flipping does.
Being a landlord is no walk in the park. There’s a lot of work in maintaining a rental property. You can circumvent this by hiring a property management team, however, their fees will cut directly into your profits. This means it will take longer for you to start reaping the rewards of your rental property.
Therefore, before deciding whether to buy a rental property, consider whether you have the time and patience to become a landlord.
Your rental being vacant is par-for-the course when it comes to owning rental real estate. This is when your property goes unrented. Of course, most landlords strive to keep their vacancy rates as low as possible. That being said, sometimes it’s simply out of your control – especially in times of economic downturn or low demand.
It’s important that you factor vacancy rates into your rental analysis and see if you have enough active income to cover it.
Flipping Vs Renting – Which is Better for You?
There’s no blanket answer of which real estate investment tactic is best for you.
Renting offers you long-term security, a pretty much continuous source of passive income, and allows your investment to appreciate over time. However, flipping allows first-time investors a way into real estate investment, large returns on a short-term investment, and quick and easy financing through hard money loans.
Whatever method you go with, surround yourself with the right real estate dream team and plan as much as possible. With a fool proof plan and the right people behind you, your real estate investments – whether it’s a rental or flip – are more geared for success.