Real Estate Investing: Rent or Flip?
As a longtime investor in the real estate industry, I’ve seen just about every opportunity come across my desk. From large commercial malls to tiny duplexes, real estate deals come in many different shapes and sizes. But for people looking to break into the world of real estate investing, two primary methods for making money have become the most popular. I’m talking about renting properties and flipping houses, both of which can earn significant returns if operated correctly.
While these two methods for making money in the real estate industry are both effective, they differ in a number of unique ways. I’ve earned a living using both of these tools and certainly have an opinion on which is easier and more effective. Find out what sets renting apart from flipping and why both are necessary in order to make a career investing in real estate.
Rental Properties
The biggest difference between renting properties to tenants and flipping houses is the amount of work that each strategy requires. Rental properties require less effort than flipping houses, since you’ll earn passive income each month you rent out a unit. While you’ll still have to put in the time and effort to make sure the property is in good shape, once it is rented out you can sit back, collect your checks and enjoy the cash flow.
In addition to cash flow opportunities, rental properties have certain tax advantages that can make this investing method quite intriguing. After purchasing a rental property, owners can deduct any maintenance and operational expenses, including property taxes, management fees and mortgage interest.
Unfortunately, there are a few downsides to purchasing a rental property. You will essentially be a landlord, which means that you’ll have to manage every aspect of the property. This includes finding quality tenants, fixing broken appliances and dealing with residents that aren’t paying rent on time. Remember that rental properties are a long-term investment, which requires a constant dedication to keeping the property in good shape and filled with renters. If not, you’ll likely experience high vacancy rates.
Flipping Houses
As someone who has appeared on the hit show Flipping Vegas, I certainly know a thing or two about buying houses with the intention of selling them quickly. With the potential to earn a large payday in a short period of time, flipping houses has become an extremely popular method for investing in real estate. While it may be the preferred technique among millennials, it does have its pros and cons.
Flipping a house presents an opportunity to make a large sum of money in one quick transaction. Compare that to the slow, but steady stream of cash that a rental property provides. By flipping multiple houses in a year, you can easily make more money than renting a unit to tenants in that same period of time. However, it does require active management and dedication and should be viewed as a job, not a hobby.
Additionally, properties that are sold for more money than the original purchase price are subject to capital gains tax. Typically taxed as normal income, these capital gains are usually at a higher tax rate when compared to rental properties.
Another con of flipping houses is the amount of work and money that goes into renovating the property, especially in a slow market. To improve the value of a house, it can take thousands of dollars and months of work. If the homes in a particular market are not selling, your renovated and ready to sell property could be difficult to get off your hands.
Which Strategy Is Right For You?
When determining which method for investing in real estate is right for you, there are a few things to keep in mind. If you are looking to make money quickly, flipping houses may be the appropriate strategy. But if your intent is to increase your cash flow and obtain a steady stream of revenue, buying a rental property is your best bet.
If you are currently unable to purchase a rental property due to lack of funds, you can start investing in real estate by purchasing and flipping a couple houses. Once you have the capital, you can then buy a rental property and will be able to utilize both methods for investing purposes.
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