Flipping Houses vs Rental Property – The Best Way to Invest in Real Estate

You can make money in any area of real estate.

But, it’s hard to be good at everything.

So, in order to be successful, you should focus on one thing and become exceptionally good at it.

So that brings us back to the question, should you flip or rent out your property?

That really depends…

I’ve done flips and I own plenty of rentals. Over the years I have become biased toward one area and believe it’s far better. But, I recognize the importance of both areas of real estate… So it really comes down to your goals.

In order to know what’s better to invest in, you need to understand your goals better.

Passive Income vs Active Income

To understand if you should flip or rent houses, you need to understand the difference between passive income and active income.

Passive Income is earned without much effort. Regardless of where you are or what you’re doing, the checks keep coming.

Active Income requires day to day involvement (work) in order to generate the money.

Eventually, we will all retire. In order to do that, you need passive income. Active income stops coming in as soon as you stop working.

So, I would ask you to answer the following questions

  1. Do you have enough money to retire now?
  2. If not, do you want to stay in your career field or switch fields (to real estate)?

Bonus: Learn the simple strategy used to create a 6 figure residual income

Hang on to those questions, we’ll come back to them.

Flipping is not Investing

Flipping vs Renting

House flipping is not “investing”

Thousand people are up in arms that I would even dare to say that. “Real estate investor” has become a catchphrase for all flippers. Stock market day trading is not investing so why would the real estate equivalent be considered investing?

Don’t get me wrong, you can earn a ton of money from it…but notice how I phrased that sentence – You can earn a ton of money.

Investing is the act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit.

Let’s quickly compare that to the definition of speculation.

Speculation is the practice of engaging in risky financial transactions in an attempt to profit from fluctuations in the market value of a tradable good such as a financial instrument, rather than attempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, interest, or dividends.

So, yes you put money and time into real estate with the expectation of obtaining profit, but a day trader puts their money into a stock and expects to get profit. People put their money in all kinds of things and expect to get a profit.

The reality is, you need to also put time and effort into making a plan, overseeing the project, and ensuring your vision can be achieved within the budget in order to earn money when it sells. A lot of these aspects are active income and would be considered work, not investing.

What is house flipping – flipping is a combination of speculation and working (project management).

You can make a ton of money flipping

Just to be clear, I’m not saying you shouldn’t flip. I’m just saying you should understand that it’s a business and not an investment.

You can earn a ton of money with flipping, There are people making millions doing it.

Owning Rental Property is Investing; Flipping is Speculating

Flipping is a combination of speculation and project management.

Buy and hold rental property is an investment based on underlying expectations of long-term capital gains, and dividends (rent income).

It’s really important to have this distinction because it will help us figure out what we want to do with our money and time. Like I said before, you can make money in just about any area of real estate, you just need to decide which area, and how much time to spend.

House Flipping vs Renting

Let’s get back to those questions. I’ll just go out on a limb and say, if you answered “yes” to question #1 then just take your extra cash and invest in some passive multi-family properties or other rental property. Unless you’re looking to start a second career.

Keep your job and invest in real estate

If you want to keep your day-job (I don’t know why you would want that), you still can be involved in real estate. Since you are already working full time, you will want real estate to be part-time which still leads you back to the same question – flip part time or invest in rental property.

If you have a job already, I personally would lean toward rental property. It’s easier and takes much less time to manage compared to flips. You can also use your income to get more properties whereas it’s harder to get loans without a job. It will earn you less at first, but once you start accumulating property you will be fine.

Quitting your job and becoming a real estate investor

So you don’t have enough money to retire now (question #1) and you hate your job and want to work for yourself or start your own business (question #2).

Should you flip or buy rental property.

The answer is simple – both!

You will need the flipping income to replace your salary. You will want the rental property to provide for your retirement.

I recommend learning about preparing financially to invest in real estate before you quit your day job (you may need that income to get your first rental or two).

The Pros and Cons of Flipping

A quick breakdown of the good and bad about flipping:

A Lot of Cash – Quick

Flipping can put a lot of money into your pocket and put it there fast. The better you are at flipping, the more money you put in your pocket….obviously, right?

Well, I mean it from a mathematical point of view. If you can earn even $5,000 or $10,000 per flip but can turn them over very fast, you can make a huge ROI.

Just for round numbers, if you earn $10k per flip and you take one year to do it, you earn $10k. If you increase the velocity of your flips, you can earn more per year even if you earn less per flip.

Let’s say you hire out some sub-contractors and now you are only earning $6k per flip, but now you can get it done in 2 months. That’s 6 flipped houses per year or $36k profit.

No Long-Term Headaches

Some properties are maintenance nightmares. They are old or just designed in a way that will cause it to always need excessive maintenance.

Other properties are in neighborhoods that just attract the wrong type of tenant – the one that causes problems, doesn’t pay rent, or robs banks (yea, I had one of those once).

Unless you are hardcore, you may not want to take these headaches on. It may be easier to sell the house for quick cash rather than take on these long-term problems.

You Have a Lot of Spare Time to Manage Projects

If you have a lot of spare time and don’t want to sit around, flipping is a great way to earn money, work in real estate, and take up your time. Realistically you could manage a few flips at the same time before you even need to hire an assistant or project manager.

Opportunity Cost of Flipping

This is an economic term for – “what you give up in order to gain something else.” Basically, by taking on a job flipping, you give up the opportunity to work full-time in another career.

You can make money flipping, but you need to consider if it will pay you more or less than your current career. Also, since flipping creates active income, as soon as you stop working at it, your income will dry up. Flipping is still a job.

Taxes on Flipping Income

Taxes are complicated so this cannot be construed as tax advice (consult with your accountant), but taxes on flipping income is generally taxed like self-employed income – and the self-employed pay the highest income taxes of anyone (up to 43%). I won’t get into the details of it, but you basically need to pay an additional 15% tax on top of all your normal taxes.

Rental Property is a Long-Term Play

We have already discussed how flipping can earn a lot of money in a short amount of time. Another side of this coin is that rentals tend to earn less, but they earn it consistently over many years.

Since you plan to keep the property for a long time, you will want to spend more time investigating the property before you purchase it, as you need to check both tenants and the physical property itself. Things you could brush under the rug for a flip will need to be addressed for your rental.

Rental Property is Passive Income

If you break your neck tomorrow and can never work again, this money never stops coming in. You may not earn so much as a flip, but it’s permanent income.

Naysayers may say that all properties will require some effort, which is true. But, you don’t have to deal with any problems or tenants if you don’t want. It’s simple to hire a property manager and it’s not even a big deal if you work the numbers in before you purchase.

Passive income is what allows you to be financially independent and retire. For me, rental property rental property created passive income and I was able to reach financial independence in 5 years.

Investment Property Has Tax Incentives and Flipping Does Not

Rental property is taxed as investment income and you also have a number of write-offs to help offset your taxes.

Investment income is usually taxed at 15% (or 20% if you make a ton of money). Compare this to the 25-43% on flipping income, and you are saving a ton!

Also, you can write off a lot of additional expenses with investment income. The biggest benefit is writing off depreciation, which can save you thousands each year in taxes.

Answer: Should I Rent Houses or Flip Them?

I’ve gone over the pros and cons of each. I believe that you can retire in 5 or 6 years if you focus on rental property, but flipping may be a necessary evil for you depending on your individual situation. So, a hybrid approach may be best for some people.

Buying rental property quickly sucks up your spare cash. Without cash, it becomes very difficult to buy more rentals.

Flipping is Your Business and Rentals are Your Investments

Treat flipping as a business and do not lose focus on the fact that flipping is a job. It requires constant attention, time, workers and employees, and effort but it can produce a lot of income.

If you constantly put all your money back into your job, you’ll find someday that you have a lot of cash but no passive income.

Use Flips to Generate Cash for renting property

Take your extra money and put it toward your investments to build up your passive income streams.

As you get more passive income, you can spend less time working. Eventually, you will be completely financially independent and you won’t need to work, though of course, you can still continue to flip if you enjoy it!

Never Lose Focus on The Goal of Financial Independence

By | 2017-12-02T18:38:16+00:00 April 6th, 2016|Categories: Real Estate|Tags: , , , , |20 Comments

About the Author:

An investor that reached financial independence at the age of 30, Eric has been seen on Forbes, Trulia, WiseBread, TheStreet, and other financial publications.

20 Comments

  1. Andrew January 10, 2017 at 10:24 am - Reply

    Eric,

    Your article essentially highlights the approach I’ll take once I start flipping houses. Those large chunks of cash will go a long way towards buying more buy & hold properties. It provides you the flexibility to possibly purchase a property all cash or spread your flipping proceeds among multiple properties to maximize your use of leverage. Each method has pros & cons, really depends on your personal risk tolerance.

    -Andrew

  2. Ryan April 21, 2017 at 2:36 am - Reply

    I’m curious and haven’t yet delved into the full details of the 1031 tax deferment, but from what I gathered from Gary Keller’s explanation is that you can defer paying taxes on a flip if you set up another property purchase within 45 days of the sale of the flip and close on the new house within 180 days, the whole process essentially sidestepping having to pay capital gains on what you profited.. If this is true, then flipping a house really allows you the ability to leverage more cash into purchasing a rental property that could generate more cash flow.. I’m just wondering why this wasn’t mentioned in the article. It’s possible I may be missing something to this concept.

    I suppose it’s true that at some point, if one decides to only flip houses and buys houses that are less than what the sale of the flip was, the difference would be taxed as capital gains, which imo is a bad move if there are better options available.

    • Eric Bowlin April 23, 2017 at 11:12 am - Reply

      1031’s apply to any sort of property, so it is not an advantage of flipping over rentals. Since both can do it, 1031’s wouldn’t be a consideration when comparing two options.

      On the other hand, I can think of a few reasons why I would rather do a 1031 on a rental instead of a flip, so this particular consideration may actually benefit rentals more.

  3. Laurel Santos May 10, 2017 at 4:19 am - Reply

    Great read! Never heard of flipping before but I must say that you really explained it. Thank you for sharing such helpful insights online. Looking forward to more helpful post.

  4. Gerry McGill Jr June 29, 2017 at 1:09 pm - Reply

    Enjoyed reading your article.I am 65 and always done rentals.As I am looking for a second career FLIPS will be the new thing.How about this thought”Buy homes in need of repair,REHAB them ,rent for a year/two and then FLIP.How about the tax consequences on this?Get max write offs and then sell OE “RENT TO OWN”As one makes more income “SOME OF THE BENEFITS OF PASSIVE INCOME ARE LOST”Perhaps flipping will allow one to recapture thse.Please advise.Thanks so much…

    • Eric Bowlin July 2, 2017 at 8:02 am - Reply

      Perhaps it’s splitting hairs, but if you keep the property for a couple years it would no longer be called a flip. Flipping is inherently a short-term venture and often uses short-term and high-interest loans to fund the deals. These loans are generally not available for that length of a project. Also, your rental income may get sucked up paying those rates.

      On the other hand, if you can get very low-interest rate loans, what is the point to sell it? Instead, I would refinance it, capture the cash and reinvest it into more rental property.

  5. PIA August 8, 2017 at 11:39 pm - Reply

    Hey,
    I think renting house is more beneficial than flipping house. Because flipping house is one time investment and renting house is long term investment according to lease terms. And there is no need to buy too much houses for renting them. And also we have all the authorities after renting our property.

  6. Hayden Stewart August 29, 2017 at 4:14 pm - Reply

    Great article. Thanks for sharing this!

  7. Paul Sharp September 9, 2017 at 3:50 am - Reply

    Renting your property is not all the time a decent choice. It actually depends on tenants; if they are sensible then it’s fine otherwise you may need to spend a lot to get back the last look of your property. But in case you are selling or renting your property to reverse mortgage, even then it can be a wrong decision as there are some better options available at stay and sell of homes kind of schemes.

  8. Ellie Davis September 25, 2017 at 2:57 pm - Reply

    I’m not exactly in this dilemma, but I have been trying to decide whether I should sell my condo or rent it out when I move to my new house. I like what you mentioned about how renting is more of an investment, while selling is more of a way to earn money. I think in the long run it might be more profitable to rent it out. I’ll definitely have to look into both options a bit more closely to make sure I’m prepared for whichever option I end up going with.

    • Eric Bowlin September 27, 2017 at 9:33 am - Reply

      I personally think that rentals are a much better long-term investment. But, if you’ve been living in the condo you have to consider that selling it is most likely tax-free. If you move and rent it out, then the equity becomes taxable in the future if you sell.

      You should definitely consult with a CPA about that and also weigh your long-term income vs your cash payout if you sell now.

  9. Tara October 2, 2017 at 2:44 pm - Reply

    HI Eric

    Thanks for the article.

    Have a few questions…

    1. What exactly do you mean by ‘multifamily’ Property? A house with 2 seperate units? Would a university house where you have 3 or 4 students renting count as multifamily?

    2. Did you or do you buy your rental property on a mortgage or cash in full?

    3. Would you say it’s better to buy 2 apartments on a mortgage or put a larger down payment on 1 place and pay it off before moving to the next purchase?

    Would love to hear your thoughts.

    Thanks

    Tara

    • Eric Bowlin October 12, 2017 at 2:59 pm - Reply

      Multifamily is technically anything with more than 1 unit. People in many parts of the country consider multifamily to be apartment complexes, but in other parts of the country people consider multifamily to be mostly 3-10 unit dwellings.

      I have mortgages on most of my properties.

      I can’t give you advice on how to invest your money, but I personally found it beneficial to have higher leverage and buy more property than to have lower leverage with fewer properties.

  10. Iris Black November 2, 2017 at 8:49 am - Reply

    Interesting perspectives. While a fix-and-flip approach calls for greater involvement (and, like you’ve mentioned, has an associated opportunity cost of your labor), a buy-and-hold approach locks in capital for a much longer period. So, finally the call is taken based on the availability of funds. If one needs to consider hard money loans for property purchase, fix-and-flip may be the wiser decision. Either way, the key is to identify properties with high potential for return.

  11. Ryan November 6, 2017 at 9:46 pm - Reply

    These are quite the discussion whether you should own rent your property or flip it up. Owning condominiums are better if turned into an income generating property known as the passive income instead of selling it out. But take note of the area and see if it is good for renting or you should sell it out.
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    • Eric Bowlin November 7, 2017 at 5:39 am - Reply

      Condos often are better rentals than a single family home. The great thing about it is most of the maintenance and expenses are included in the HOA fees leaving you with negligible maintenance on the interior. The problem with condos is that they are often very expensive per square foot and the rents in those areas often are too low compared to the price.

  12. Mark Padolsky November 14, 2017 at 1:42 am - Reply

    Thinking about becoming a better real estate investor? Keep up and read this article to know more about fix-and-flip real estate investment properties to rake in more profit!

  13. Cheetah OBX November 21, 2017 at 1:26 pm - Reply

    Good article! I find myself in this same dilemma right now(11/2017)…..I bought two(2) Town Homes that are in a good area(basically)….and for LESS than what they were build for 40 years ago!!! They are just the right size(2/1.5) with about 1000+/- sf……but….what I am finding is that since the “monthly lease amount”(I call it Leasing vs. Renting….I think rent is a negative work AND anything as long as a year….is considered a Lease. Anyway…..I am finding that I am ONLY getting “professional renters”…….just complete yet…..another eviction……sigh……I bought these to help with cash flow(42.96% ROI!)…..but when you are not getting any rents AND evicting AND having to get them redone(it only takes about 6 days!)……it’s not “fun” anymore……so….I had to hold….but I figure if I SELL them….I will walk away with about $160k…..and as you stated in your article…LOCATION, LOCATION, LOCATION…..you can have the cleanest, neatest property…..but….if it won’t attract good people……you are SOL!!!! As a side note….I have been completing CFD(Contract For Deeds)…….ie…..Land Contracts….they are GREAT!!! AND they elevate all the management issues of a straight rental…….just…..food for thought!

  14. Mark Padolsky November 23, 2017 at 8:43 pm - Reply

    At one point in your life, I am certain you have driven by a house or a property that looks distressed as if it is beyond repair. However, that is not always the case for a real estate investor who will always see the potential in the objects or abandoned properties you seem to take for granted.

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