BENEFITS OF FLIPPING PROPERTIES (ACTIVE INCOME) AND RENTAL PROPERTIES (PASSIVE INCOME) THAT CAN FETCH YOU GOOD INCOME.
Let us first distinguish between passive and active income while deciding between renting and house flipping. Passive income is the money you receive each month from your investments. No matter where you are or what you’re doing, that money keeps coming in. One type of passive income is receiving a monthly payment from the rental property you own. Active income is money earned through everyday work. As soon as you stop working, your income stops. An example of active income is the money you earn from your day job or from house flipping.
The Benefits of Flipping properties
Like anything else, there are benefits and drawbacks to flipping properties. By understanding the specifics of house flipping, you can decide if the advantages outweigh the disadvantages and if you should move forward with this strategy.
Quicker returns on investing: Your capital is committed for a shorter period of time than with buy-and-hold properties. A property flip usually takes six months to finish, as was previously said. Keep in mind that this is a mean number. If this is your first time flipping a house, expect some bumps along the road, which could make your schedule longer. The potential return on investment (ROI) increases with the speed at which you can flip a home.
Like anything else, there are benefits and drawbacks to flipping properties. By understanding the specifics of house flipping, you can decide if the advantages outweigh the disadvantages and if you should move forward with this strategy.
Absence of long-term property management: The fact that you can wash your hands and move on (ideally with a lot of money in your pocket) as soon as the remodel is finished and the property sold is a big lure for people who flip houses.
Finding renters, collecting rent, and keeping up with property maintenance are not your concerns. The difficulties of becoming a landlord are essentially avoided.
Drawbacks of flipping property
Varying Revenue: This is where flipping opportunity cost needs to be considered. “What you give up in order to gain something else” is the definition of opportunity cost in economics. Put another way, you’re forgoing a reliable source of income from a different career if your full-time job is flipping properties. Of course, flipping can generate revenue, but it’s crucial to determine whether the money you make from flipping will supplement or replace your existing day job. Flipping generates active income, and it will cease to flow as soon as you stop working.
Taxes: Flipping entails additional expenses for both purchasing and selling, such as capital gains taxes. When purchasing and selling a home, closing expenses can mount up and reduce your total return on investment. The highest income tax rates are paid by independent contractors.
Rental Property: As was already indicated, flipping can generate a sizable income in a comparatively short period of time. On the other hand, renting an investment property typically results in lower initial revenue but steady income over an extended period of time. To put it another way, your rental property will generate passive income, particularly if you work with a property management service to take care of maintenance and attracting good renters.
Having rental property can yield significant profits, particularly if it is owned for a number of years. As long as you decide to keep the property and rent it out, you will continue to receive steady income in lesser quantities, even though you won’t be getting a big payout as you might when compared to flipping a house. Let’s talk about the benefits and drawbacks of renting.
Benefits of Rental Property
Constant monthly income: Purchasing rental real estate requires a sustained investment. You would still get paid each month from your rental if you were hurt and couldn’t work. You can retire, accumulate long-term wealth, and achieve financial independence using passive income.
The value of your property should rise overtime: Inflation is good for real estate. Rents and cash flow will probably increase in line with inflation if you buy at the appropriate time and in the right location. You will accumulate more equity in your rental property the longer you keep it. Your rents may rise in tandem with the annual appreciation of your rental property
You can get a sizable return if you ever decide to sell the property. Buying during a buyer’s market and selling during a seller’s market are two times when this is particularly true. When there are many people trying to buy or rent, and there is a shortage of available housing, a seller’s market is created. This is the ideal moment to sell since, depending on supply and demand, you’ll probably receive a higher price than you asked for.
Drawbacks of Rental Property
Vacancy risk: All of this sounds fantastic, but what if I can’t locate good tenants and my rental property remains unoccupied for months? There is always some risk involved, just like with any other kind of investment. It might be challenging in some situations to maintain your rental occupied for extended periods of time. Naturally, you are in charge of paying the mortgage while your property is unoccupied. When making an investment in a rental property, you should factor in the possibility of one to three months of vacancy each year and include that in your budget. If, for example, you are unable to pay two mortgages for three months of the year, you should save extra money before buying a rental property.
Rental properties are not always passive: This concept of “passive income” is not without its limitations, though. You can be actively looking for rental property bargains, investigating the top markets, overseeing any renovations or repairs, etc. Think of your rental as a part-time job and an investment if you intend to manage the property yourself. Employ a management business to take care of the daily duties, such as locating suitable renters, collecting rent checks, and attending to any repair requests, so that your rental property becomes a real investment.
Two strategies for House Flipping
There are two primary approaches to house flipping. The first is when someone in financial difficulties purchases a home or apartment below market value and the second is purchasing a genuine fixer-upper. Investors that employ the first technique should look for homes whose owners are too leveraged, unable to maintain, or at risk of loan default. Investors considering fixer-uppers should be ready to shell out more money for up keep, repairs, and upgrades. The goal is to improve a property, turn it around, and sell it to raise its value. Therefore, it is advised to utilize flips to Make Money on a Rental Property
You can think about flipping a house first and then using the proceeds as leverage to buy and hold another rental property if you are currently unable to afford to buy one. Investors have the option to leverage other projects with their present one or borrow against their equity. This approach of financing is far more economical since it makes use of your equity.
