Flipping vs. Renting: Is It Better to Flip Houses or Rent Them?

Want to build wealth through real estate? There are several ways for you to achieve this, with flipping and renting being two of the most popular options. In this article, we’ll compare these strategies and discuss their pros and cons so you can choose the one that best aligns with your long-term goals. Keep reading!

Summary:

• Flipping and renting are two of the best ways to make money in real estate, but you should carefully weigh each strategy’s benefits and drawbacks.

• Flipping provides faster and often larger (but riskier) returns, allowing you to earn a profit by successfully renovating and selling properties.

• Renting provides slower but steadier returns through monthly cash flow and long-term appreciation.

Both Make You Money, But Which Makes Sense for YOU?

Flipping and renting can both be profitable real estate investment strategies. The right choice for you will largely depend on your long-term goals, risk tolerance, experience, and the amount of time you have available to dedicate to your investments. Each strategy offers unique advantages and trade-offs: flipping requires active involvement and strong project management skills, while renting calls for more patience and a long-term approach.

Large Payout vs. Passive Income

Flipping provides large payouts when done right, but each project only pays once. With rentals, properties deliver ongoing passive income in smaller and more predictable amounts.

Big Tax Bill vs. Tax Benefits

Investors can make upwards of $40,000 per flip, but since most flip profits are considered “short-term capital gains,” they get taxed at your marginal tax rate. Rental properties, on the other hand, get much better tax treatment, thanks to depreciation, interest deductions, and expense write-offs.

Sizable Time Commitment vs. Minimal Time Commitment 

Flipping houses is extremely hands-on and may require as much time as a regular nine-to-five job. On the other hand, rental properties can be much more passive, requiring only a few hours each week—or even less if you have a property manager handling your property’s day-to-day.

Put just 5% down on your first (or next) investment property with Rent to Retirement!

House Flipping: Who Should Do It

Is house flipping the right strategy for you? Here’s what you need to know about flipping before getting started:

House Flipping Definition 

Flipping is the process of buying, renovating, and selling a property for profit. This strategy can provide fast and sizable returns, but it is considered high-risk and requires large amounts of time and capital.

You Have Real Estate Experience 

House flipping isn’t the most beginner-friendly strategy. Not only are there significant investing risks involved, but specific skills and resources are also needed for a successful flip. Some experience as a contractor, agent, or investor can go a long way toward your success. You’ll need to know how much houses and renovations cost, the kind of return you can achieve, and how to manage a team for your rehab project.

You Have Lots of Time (or Contractors) 

Flipping is extremely hands-on and can even require as much time as a regular full-time job. If you don’t have the time or experience to do your own renovations, you’ll need to have quality contractors you can rely on.

You Have “Deal Flow”

Flipping can provide fast returns, but a single flip won’t make you rich. What’s more, you’re unlikely to come across many flippable homes on Zillow or Redfin. Instead, you’ll need other ways of finding investment properties that are underpriced—like sending letters, cold-calling owners, and communicating direct-to-seller.

Rental Properties: Who Should Do It

Many investors prefer to own rental properties rather than flip houses. Here’s what you need to know about the strategy:

Rental Property Definition 

Renting is the process of buying and holding an investment property and leasing it out to tenants. This strategy provides not only monthly rental income but also appreciation as the home’s value increases over time.

You Want More “Passive” Income

A rental property can provide you with a long-term passive (or at least semi-passive) income stream. This type of investment can be especially valuable in retirement, when you might need consistent cash flow that doesn’t require a ton of work!

You’re Focused on the Long-Run

If your goal is to build long-term wealth, then rental properties are a great investment. While these properties won’t help you earn a quick buck, they can deliver consistent monthly cash flow, long-term appreciation, and massive tax benefits.

You Don’t Have a Ton of Free Time

Do you want an investment and not another job? Fortunately, rental properties might only require a few hours of your time each week. Better yet, if you hire a property manager or buy turnkey rentals—recently built or renovated properties with property management already in place—you’ll spend even less time on your properties!

Start building headache-free wealth with turnkey rental properties!

House Flipping Pros and Cons

Flipping is a high-risk, high-reward investing strategy. Here are some of the biggest benefits and drawbacks to keep in mind:

House Flipping Pros 

Want bigger returns and no tenants? Many investors choose to flip houses because of the following:

• Quicker (and Bigger) Profits: By forcing appreciation with renovations and then selling the property, flipping can lead to a much faster payday. Successful flippers can make anywhere from tens of thousands per flip to $100,000+, depending on the size and scope of the renovation.

• Repeatable: If you have the time, you can complete several flips per year. Experienced investors can flip multiple houses at once!

• No Tenant Management: Flips don’t have tenants. Buy and renovate a property, sell it for a profit, and collect a check!

House Flipping Cons

Flipping isn’t for everyone, as it involves significant risks and challenges:

• Serious Risk: There are several scenarios in which a flip can go south, like if you underestimate rehab costs or get stuck holding a property for too long. 

• High Taxes: With flipping, you’re often required to pay short-term capital gains tax at your marginal tax rate.

• Steep Barrier to Entry: Flipping requires a significant amount of both time and money. If you don’t want another job or don’t have access to large amounts of capital, the strategy might not be for you.

• High Initial Investment: Even if you’re borrowing from a hard money or private money lender, you’ll likely need a 20%+ investment property down payment.

Rental Property Pros and Cons

Rental property investing is the most common way to invest in real estate, but you should carefully weigh the pros and cons before getting started:

Rental Property Pros 

Rentals are some of the best real estate investments, as they offer the following:

• Long-Term Passive Income: Rentals may only require a few hours of your time each week and deliver ongoing returns through rental income and appreciation.

• Serious Tax Benefits: With rentals, you can claim depreciation, deduct interest, and write off other rental-related expenses!

• Low-Money-Down Options: Most investment properties require 20% down, but by house hacking (living in one unit while renting out the others), you could get a low-money-down, owner-occupied loan—or you could buy a turnkey rental with one of Rent to Retirement’s 5%-down loans!

• Cash Flow + Appreciation Potential: Rentals make money in multiple ways. Earn steady monthly cash flow as tenants pay rent, and benefit from potential appreciation as property values increase.

• Consistent Demand: If you buy in the right area, there will always be tenant demand! 

Invest in cash-flowing turnkey rentals with JUST 5% down!

Rental Property Cons

Buying rentals can be a profitable long-term investing strategy, but there are a couple of drawbacks to keep in mind:

• Ongoing Commitment: Holding rental properties requires ongoing management. This is much easier if you have a property manager or buy turnkey! 

• Lower Returns: Rental properties give you slower (but steadier) returns in the form of cash flow and long-term appreciation.

Can You Do Both? Yes! 

Want a combination of short-term profits, consistent monthly cash flow, and long-term gains? If you have the time and money to do so, you could flip houses and buy rental properties. One of the best ways to do this is to put a portion of your flip profits into rental properties. This way, you’re building long-term, sustainable, passive income while still maximizing your disposable income through house flipping!

Let’s Build Your Next Passive Income Stream

While flipping can be a risky venture, especially for an inexperienced investor, rental properties have a much lower barrier to entry. What’s more, if you buy a turnkey property, you’ll likely have very little maintenance and tenant issues to deal with—especially since these properties come with property management and tenants already in place when you close!

Flipping vs. Renting FAQs

What Are the Disadvantages of Flipping?

Flipping is considered one of the riskier and more difficult real estate investing strategies. You’ll need not only plenty of free time but also money, resources, connections, and experience!

Is Flipping Still Profitable?

Yes, flipping houses can be a very lucrative strategy for an experienced real estate investor. Completing multiple flips per year could even generate enough income to replace your W-2 job!

What Is the 70% Rule in Flipping?

The 70% rule is a guideline many investors use when analyzing properties to flip. It states that you should offer no more than 70% of a property’s after-repair value (ARV), minus any renovation costs. For example, if you’re buying a property that should appraise for $250,000 and requires $50,000 in renovations, your offer shouldn’t exceed $125,000 ($250,000 x .7 - $50,000).