Renting vs. Flipping: Which is the Better Investment?

Earning money through daily labor is known as active income. The money you make from your day job and/or from flipping houses is an example of active income. The money you get each month from your investments is known as passive income. That money keeps flowing in no matter where you are or what you’re doing. Owning a rental property and getting paid each month is one example of passive income.

The timescale for flipping a house is normally around six to eight months, and if you do things perfectly, you can make a lot of money on just one deal. Contrarily, renting is a buy-and-hold tactic meant to take advantage of long-term profits. Prior to choosing between flipping and renting, it’s critical to comprehend the distinction between active and passive income.

Flipping isn’t the same as investing.

This sentence can have you scratching your head. Although you can make a lot of money flipping, it is not the same as investing because you have to work for it. It takes a lot of labor to flip a house. You most likely supervise the project, work with contractors, get the city to accept your designs, purchase insurance, establish a timeframe and budget, and more even if you aren’t the one doing the actual work to fix up the house. Flipping a house requires time and effort, which is why it’s regarded as active income.

By definition, investment is the process of allocating funds or resources to a venture (stocks, real estate, businesses, etc.) in the hope of making a profit or generating additional income.

Learning everything you can about flipping houses and turning a profit is the best thing you can do before you become a house flipper and be prepared that the majority of your “free” time will probably be devoted to this endeavor if you intend to continue working your day job and flip a house on the side

The Benefits of Home Flipping

Like most things, there are advantages and disadvantages to property flipping. Knowing the special features of house flipping as opposed to renting will help you decide if this is a plan you should pursue and if the benefits outweigh the drawbacks.

Faster Investment Returns

Compared to buy-and-hold homes, your capital is committed for a shorter amount of time. As was already said, a house flip typically takes six to eight months to complete. Remember that this is a mean value. Expect to run into a few hiccups if this is your first time flipping a house, which could potentially prolong your timeline. The potential return on investment (ROI) increases with the speed at which you can flip a home.

Absence of Long-Term Asset Management

One of the main appeals of house flipping is that, after the renovation is finished and the property is sold, you can move on to the next flip (ideally with a lot of money in your pocket). 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 Home Flipping

Inconsistent Income This is where you need to consider the opportunity cost of flipping houses versus renting. Opportunity cost is defined as “what you give up in order to gain something else” in economics. Put another way, if flipping houses is your full-time job, you’re giving up a steady, consistent income from working in another career. Of course, flipping can generate income, but it’s crucial to assess whether it will generate more or less than your current day job because flipping generates active income, and income will cease as soon as you stop working.

Taxes:  The additional expenses associated with purchasing and selling, such as capital gains taxes, are part of flipping. When you buy and sell a property, closing expenses can mount up and reduce your return on investment. The highest income tax rates, up to 43%, are paid by self-employed people. Without going into too much detail, you should anticipate paying 15% more in taxes than you would normally pay.

The short-term and long-term capital gains tax rates differ significantly. You should anticipate paying a capital gains tax rate based on your earned or “ordinary” income if you have owned a property for less than a year.

Passive Income from Rental Properties

As was already mentioned, flipping houses is a quick and easy way to make a lot of money. Although renting an investment property often yields lower initial income, it does so steadily over an extended period of time. To put it another way, your rental property will provide passive income, particularly if you work with a property management service to discover and maintain great renters and the property.

The Benefits and Drawbacks of Renting

Having rental property can yield significant profits, particularly if it is owned for a number of years. For as long as you decide to own and rent out the home, you will receive steady income in modest quantities, even if you won’t get a big payout as you might from flipping a house. Let’s talk about the benefits and drawbacks of renting as opposed to flipping.

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.

Over time, the value of your property should rise.

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 rent 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. The aforementioned statement is particularly valid if you bought the home during a buyer’s market and sold it during a seller’s market. A seller’s market happens when there is a shortage of homes on the market, with a big number of individuals looking to buy or rent. This is the best moment to sell, since you’ll likely get more than your asking price based on supply and demand.

There are tax incentives for investment real estate, but not for flipping.

Owners of rental properties can also deduct costs like upkeep, repairs, transportation to and from the property, hiring a property manager, and a long list of other charges. However, paying off the asset’s depreciation is your single greatest benefit. You may be able to save thousands of dollars annually on taxes by using depreciation.

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. While your rental is vacant, you are obviously responsible for covering the mortgage.

When investing in a rental property, you need to account for and even expect between one and three months of vacancy per year and add that variable to your budget. If you can’t afford to pay, let’s say, two mortgages for three months out of the year, you’ll want to put extra money down before buying a rental property

Rental properties are not always passive.

There are limitations to this concept, though you could actively look for rental property bargains, investigate the top markets, oversee any maintenance or repairs to those properties.

To make your rental property a true investment, hire a management company to handle the day-to-day tasks, like finding quality tenants, securing rent checks, and responding to maintenance requests.

In conclusion

You can think about flipping a house first, 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. By utilizing your equity, this approach becomes a far more economical financing choice.