Money can be managed, but when it comes to real estate, it is all about timing. House flippers face the all-too-common dilemma over selling or renting flipped houses after they have executed their rehab plan. This tough decision depends on your goals – long-term or short-term. Both happen to have their own advantages and disadvantages. Let us look at the details when it comes to flipping vs renting houses.
Renting vs Flipping Houses: What is the Difference?
Flipping housings requires continual active management and new transactions whereas rentals mean that the real estate investment will generate a passive income through monthly rent.
While active management in house flipping doesn’t require you to flip the house all by yourself, it does require you to be the CEO of the project. You find the property, get funding, execute the construction plan and sell the asset. You can look at lending parameters here.
Your income will depend on the velocity and volume of flips, and their level of financial success.
If your focus is on renting flipped homes, you only have to improve the house once and then look for tenants to earn monthly rent. Or in other case, you buy a flipped house from a professional house flipper and then rent it.
As the owner of the flipped house, you will receive continuous rental income until the house is vacant again or you decide on selling the flipped house.
In order to understand the pros and cons of each, let us take a closer look at renting vs flipping houses.
Renting Flipped Homes: The Pros and the Cons
Renting flipped homes has big advantages such as regular cash flow, property appreciation, tax benefits and recession security. Let us take a look:
Regular Cash Flow: Rentals are usually bought for long-term investment so that the property can provide passive income to the owner over time. This cash flow will contribute significantly to your financial independence and once you have enough passive income that exceeds your expenses, you can work on growing your rental portfolio.
Tax Benefits: As a rental property owner, your property taxes, mortgage interest, and other similar expenses are deductible over the duration of ownership of the property. However, while tax benefits depend on the number of rental properties you own, owning a rental property usually offers favorable tax benefits including depreciation.
Property Appreciation: Appreciation means that as a landlord, your property’s value may increase over time if you have been renting flipped homes for an extended period. As rental properties are a long-term investment, this, in most cases, allows the owner to gain tax benefits, cash flow, and also the possibility of an increase in the over time.
Recession Security: We have experienced economic downturns in the last two decades. Being the owner of a rental property will allow you to sustain yourself during an economic downturn because it would be the cash flow and not the value of the property that will support your real estate investment.
Long-Term Management and Property Upkeep: A word of caution here; as a landlord, you will be responsible for finding quality tenants. The rental property’s cash flow will be reduced by expenses such as maintenance and operation costs. Major capital projects can appear at a moment’s notice which requires squirreling away an emergency reserve account.
Vacancy Rates: It is quite normal to have the property vacant for some time and this period can last from a few days to even a few months. As a landlord, you have to keep the vacancy rates low, but unforeseen circumstances such as low demand, economic conditions, or high rent could lead the rental property to remain vacant for far longer. This affects your returns on the real estate investment.
Therefore, before investing in a rental property or flipping a house in the hopes of renting it, ensure that you have all the pros and cons in front of you. You can assess your returns on the property here.
Selling Flipped Houses: The Pros and Cons
Selling flipping houses has its positives and negatives. Let us walk through them:
Big Return: The major pro is that house flippers can make lots of money in one go in a short amount of time. Most house flips are completed in three to six months. Selling flipped homes usually results in a handsome profit. Time is of the essence here, however. The quicker the money is returned, the higher the return on investment. This also means that you can focus on more deals as well.
For instance, if you are selling five flipped houses per year, making $35,000 on every such flip, you could end up earning $175,000. If you decide to rent instead of selling the flipped house, realizing this level of profit will take much longer.
Short-Term Investment: In this case, you won’t have to focus on long-term management of the house, such as collecting monthly rent checks and dealing with tenants or evictions. As mentioned above, house flipping is completed in months; you can simply move onto to the next venture with some good amount of profit.
Of course, there are downsides to flipping houses, too. The main disadvantages include paying more carrying costs while not generating income compared to steady income with a rental, having your success dictated in part by the market’s whims, and unexpected expenses cutting into your profits.
Higher Taxes: Your property’s profits will be subject to capital gains tax, if it is sold for more than it is purchased. If sold in under one-year, the profit is subject to short-term capital gains as opposed to long-term capital gains. Rental property cash flow, depending on the vehicle it is held, are mostly taxed based on ordinary income rates.
Market Risks: In growing markets, property values may increase, but if the real estate market softens unexpectedly, the assumed value could decrease, putting the house flipper in quite a risky position.
Unexpected Expenses: Hired hands may quit without completing the work, take longer than expected or, worse, do a poor job of it. This could mean higher-than-expected expenses and hence could hurt the final return on your money. Therefore, new investors must always be prepared for unforeseen circumstances, including unexpected repairs and expenses in the first few flips. You can financially analyze a fix and flip property here.
Is Renting Better or Flipping?
Now that we have weighed the advantages and disadvantages when it comes to flipping vs renting houses, we have the question – is it better to rent or flip houses?
If you prefer regular cash flow, you must look at renting flipped houses, but if you are looking for quick money, then you must keep your budget right and sell!
The final answer lies in your time horizon and the type of returns you are seeking.
If you are new to the house flipping business, you can learn more about it here.