Flipping vs. Renting

House flipping and renting out properties are two of the most popular real estate investing strategies. Both can offer great financial opportunities but come with unique challenges. Here’s a look at the pros and cons of flipping vs. renting to decide which approach best fits your investment goals. 

What Is House Flipping?

House flipping involves purchasing a property, making some repairs and reselling it for a profit. The key to success when flipping properties is to purchase a home at the right price and keep renovation costs under control. You want to make the home appealing to buyers while leaving plenty of room to turn a profit. 

However, the fix-and-flip investment strategy can be risky. If you underestimate your rehab costs, you can barely break even or, worse, find yourself upside down on a flip. 

Pros and Cons of House Flipping

Let’s look at the good and bad of the fix-and-flip model. 

Pros

• Potential for quick profits 
• Hands-on, rewarding work
• Takes advantage of market trends 

Cons

• Involves risks like unexpected renovation costs
• Requires a large amount of capital
• Subject to short-term capital gains taxes
• Managing the rehab can be time-consuming

What Is House Renting?

House renting involves purchasing a property and renting it out to tenants. It provides long-term passive income but could take years to pay off the home. However, you’ll enjoy steady revenue and can avoid the volatility of flipping houses. 

There are a few caveats. You must keep your rental property in great shape and manage tenant relationships. Any repairs are your responsibility. You’ll also need to ensure rental rates are competitive enough to attract tenants but high enough to generate a profit. 

There are some alternatives to finding long-term tenants for a single-family home. You could purchase properties in popular areas and list them as vacation rentals. 

While this approach does not offer steady year-round income, you can charge a premium per-night rate. You could generate significant revenue if the home is in a tourist hot spot. 

Another option involves investing in multifamily real estate. Some examples include duplexes and apartment complexes. The initial investment will be higher, but you could also earn more long-term revenue since you’ll have multiple tenants. 

Pros and Cons of House Renting

Understanding the advantages and challenges of renting out investment homes is important. 

Pros

• Consistent monthly income
• Long-term rental income and property appreciation
• Passive income with less hands-on involvement 

Cons

• It may take years to recoup your investment
• The initial costs can be high
• Managing tenant relationships is time-consuming

Comparing Flipping vs. Renting

Before choosing between flipping vs. renting, you’ll need to consider these four factors. 

Upfront Costs

House flipping generally requires higher upfront costs because you must purchase the property and fund renovations. 

You probably won’t be targeting homes that are in good shape. Instead, you’ll look for rundown properties you can get at a great price. Dilapidated properties typically don’t qualify for traditional financing, so you must pay cash. 

Rental properties may have lower upfront costs because they don’t need urgent renovations. While you may need to perform basic work like painting or replacing floors, you can spread out more costly improvement projects over time. 

While it’s possible to finance the purchase of rental property, at minimum, you’ll need to have some cash on hand to cover closing costs and your down payment. 

Property Management Requirements

With house flipping, property management is less of a concern. You want to sell the house quickly and won’t have to deal with tenants. Once you repair and sell it, the home is no longer your problem. 

Renting requires continuous management. Your ongoing responsibilities include:

• Tenant relations
• Maintaining the property
• Collecting payments
• Dealing with vacancies 

You’ll have to handle or delegate these tasks to a property management company. Outsourcing property management can save you time, but it will also cut into your profit margins. 

Returns on Investment

House flipping offers quicker returns. If you plan the purchase, rehab and sale properly, you can recoup your money within six months to a year. If the market is hot and you make smart investments, you could generate tens of thousands in profits from a single deal. 

Renting is a long game. It will take years to break even. However, rental properties can generate income for years and the homes in your portfolio will appreciate over time. 

Taxation

House flippers must pay short-term capital gains taxes. Your tax rate could be up to 25%, which can reduce your overall profit. 

You can reduce your capital gains obligations by using Internal Revenue Code Section 1031. This code covers “like-kind exchanges,” so you can roll some of the profits from a flip into another investment to reduce how much you owe in capital gains taxes. 

However, the process can be complicated, so you should consult a tax professional. 

Rental properties benefit from more favorable tax treatment. You can claim various deductions to lower your tax obligations. Some expenses that you may be able to deduct include:

• Depreciation: Allows for wear and tear of your property, such as the home itself or appliances and infrastructure (HVAC, plumbing)
• Repair costs: Expenses that keep the home in good working order but don’t add value
• Operating costs: Expenses necessary to operate the property, such as property management fees

Remember that you can’t deduct any upgrades that increase the home’s value. For example, if you must replace the water heater in one of your rental properties, that would be considered a deductible repair cost because it’s a necessity. 

However, installing a hot tub to make the home more appealing to short-term rentals would be considered an upgrade and couldn’t be deducted.

Should You Flip or Rent? 

Both house flipping and renting have pros and cons. When comparing each option, consider your goals and risk tolerance. Flipping can be a great option if you can tolerate more risk and want the opportunity for high returns. Renting is lower risk and may better fit your long-term investment goals.

Think about how much capital you have available and how long you can afford to invest your money in an investment property. You should also consider how hands-on you want to be during the process. Regardless of your path, investing in real estate can provide significant financial benefits. 

Frequently Asked Questions