Flip it or rent it? It’s a tricky question to answer. While both are viable ways to earn income as a real estate investor, they have their own pros and cons. Passive vs active income, faster returns on money, bad tenants. It’s a long list. So, which is a better way to invest – flipping or buying rentals?
The Biggest Difference
The biggest difference between flipping houses and buying rentals is that flipping is an active job, while rentals are typically passive income vessels.
While you don’t have to do all the work yourself, flipping a house requires you to take a very active role. It’s more like running a business than being an investor. Your income is limited to the number of flips you do, and you only make money when you find, fund, and flip a house.
On the other hand, when you buy a rental property, you only do the work once and then receive a monthly rent check for as long as you own the property. If you have good tenants, that is.
Flipping Pros
If done right, you can make significant income in a short period of time. In theory, the faster you sell the property, the greater ROI you make and the quicker you can complete another deal.
Flipping Cons
You’ll pay tax, tax, and then some more tax. When a property sells for more than it was purchased for, it’s subject to capital gains tax. The capital gains tax rate varies based on the time the investment was held.
Renting Pros
Rental properties have some big benefits: tax benefits, cash flow, property appreciation, and a recession-resistant investment.
Renting Cons
Rentals have some downsides too. You’ll have to deal with tenants, potential vacancies, high property management, and ongoing maintenance fees.
What You Need to Know
While both have their benefits, remember there’s no blanket answer to which one is better. It’s based on the investor’s goals. Remember working with an experienced real estate agent can be the difference between success and an awful mess.